Here’s what you need to know
about investing in property
By: Jess Thornton, July 2019
Investing in property can be overwhelming for beginners, but it’s easier than you think to start an investment portfolio that works hard to give you the best returns possible.
Investing in property comes down to a numbers game, so you have to shop with your head and not your heart. You need to know the maximum amount you can pay for a property, likely rental return, how much cash flow is required to cover the mortgage repayments, and when you can expect to start making an income from the rent payments.
For keen investors looking to build an investment portfolio, it’s important to search for a solution that matches both your needs and budget.
Start with what you’ve got
Investing is all about building a portfolio that will make an income. Before delving into the world of purchasing property specifically for investment, you could start by making an income from the property you already own or live in.
For renters, check your lease agreement to see if there are any restrictions regarding subletting. Services like Airbnb allow you to rent out a room, part of your home, or your entire home while you are away.
Some successful Airbnb properties can accrue more income overall than a long-term lease on a house or apartment. While bookings may fluctuate, charging per night can be a lucrative way of profiting from your property if you have the know-how to manage and promote your property.
Rentvesting is a term used to describe the property investment strategy that involves renting where you want to live, and purchasing an investment property elsewhere, where it makes the most financial sense.
Rentvesting might the option for you if you are keen to start investing in property, but aren’t ready to commit to living in the same place for years ahead, or can’t afford to buy where you’d like to live.
If you choose to rentvest, you can travel or maintain flexibility with your current lifestyle while benefiting from a rental income on your investment. Plus, you’ll have the security of owning property if you do decide you’d like to live in it.
If you do choose this option, as a landlord, you’ll be expected to ensure the property adheres to the new healthy homes standards which aim to improve heating, insulation, ventilation and drainage, reduce moisture and stop draughts. This includes having a fixed heating that is able to heat the main living area to 18 degrees Celsius and both ceiling and underfloor insulation.
Choosing the perfect property
Regardless of whether you’re looking to purchase a property to live in, or to invest in, there are some characteristics you should be on the lookout for in any property that you plan to purchase.
It’s important to invest in established or developing areas with good infrastructure, schools and public transport to ensure it will be an enticing option for tenants or future buyers.
Properties with high ceilings and a functional layout can be tailored to your tenants’ taste, so a property that is classic and practical makes for the best investment.
With these characteristics in mind, it’s time to consider your investment goals.
Investment goals: the long and the short of it
If you’re investing in the long term for rental yield, the money you will earn from a tenant, the best type of property to purchase will be dependent on the area in which you choose to invest.
You need to have a strong understanding of the supply and demand in the area you want to buy, as it’s important to choose a type of property that is not saturated in the market. If tenants have too many options they are in the position to drive a hard bargain for the price they want, or, go elsewhere.
In February 2019, a 5.6 per cent the rise in national rent was close to double the increase in property value (3 per cent). However, some of the highest rental yields can be found outside of the city centres, with the West Coast sitting at 20 per cent, 19.5 per cent in Otago and 13.8 per cent in Southland.
Currently, the supply of rental properties around the nation is not keeping up with demand, meaning landlords can demand top dollar rental prices from tenants. Average rental prices are sitting at $560 per week in Auckland, $525 in Wellington and $460 in Otago.
At the auction for investment properties, it’s important to have a good understanding of the rental prices on similar properties in the area to make sure you don’t pay too much. To work out the potential rental yield on a property, divide the prospective yearly rental income by the purchase price.
For short term investors the goal is to buy low and sell high to create a surplus of value, and to sit positively (or at least breakeven) when it comes to balancing rental yield and other costs. The rise in value of a real estate property above its purchase price is called capital growth.
If you sell your property, you may need to pay tax on any profit you make. From 29 March 2018, if you sell a property within 5 years of buying it, you will be required to pay tax on any profits resulting from an increase in value, unless you bought it as a family home or long term investment property. In New Zealand, properties bought with the intention of re-sale, or for those with a history of flipping homes, a tax on profits will apply.
The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Resimac. The above is general commentary only and is not advice tailored to any individual’s financial situation. We recommend seeking advice from a mortgage or finance professional before implementing changes relating to your finances.