A rental property is one of the most exciting investments in New Zealand. It’s a tangible investment – one that you can touch and feel, so it’s often more appealing for Kiwis than shares, which can be fairly invisible. Owning an investment property is one of the most effective ways to build your own wealth, and with the number of renters rising, it is a great time and opportunity to dive into the world of investment if you are in the position to do so.
We have put together a guide to help you navigate the investment property process.
Gather your Deposit
Lenders typically require a larger deposit for investment properties than homes for living in. You’ll most likely need a deposit of 30%+. This is because the Loan to Value Ratio has tighter restrictions for investors than other types of home buyers. It’s important to note that you cannot make a Kiwisaver withdrawal to purchase investment property. Kiwisaver withdrawals can only be made if you intend to live in the property for at least six months.
You can save for your deposit in various ways. Assess your budget and see where you can cut down expenses. Can you reduce your shopping habits or takeaways and coffees out? Take advantage of NZ Compare to compare your broadband, power, mobile and other money-related bills. With NZ Compare’s range of websites, you can compare the plans available to you, side-by-side, and find yourself a better deal. Getting into the habit of regular comparison is a powerful way to save hundreds of dollars over a year!
Establish your Strategy
Most home buyers seeking investment focus on either capital gains, or rental yield. Determine which strategy you will undertake.
What is capital gains? A capital gain is the profit you make when you sell a property for a higher price than what you paid for it. This is common for those who buy property to flip (renovate) and sell.
What is rental yield? The rental yield is the total rent that a property could earn over a year. This is typically presented as a percentage of the property’s value.
Start Small
As cool as it would be to purchase a large clifftop property with a tennis court and pool, start smaller and work your way up the ladder over time. If you live in your own home, you could even start with creating a granny flat under your house as a smaller, easy way into property investment. Just make sure you do your homework around granny flats and get approved by the council.
Get A Conditional Approval
Also called pre-approval, a conditional approval is a crucial step in the investment process, and will give you a ballpark figure of how much you can potentially borrow. This means, when you move onto the house hunting stage, you can focus on property within your budget.
Talk to Experts
A major investment like property will come with lots of challenges and new territory. It’s always a good idea to seek advice from a qualified and reputable lawyer, financial advisor, and mortgage broker. For example, a lawyer will make sure your offer is drawn up in a way that ensures you are protected. And if you decide to take a hands-off approach to your new role as landlord, a property manager can help
Here is a list of experts you can chat to to build your knowledge of the investment process, and understanding of who and what you need on your team.
Mortgage broker: Provide tailored advice and connections to more lenders, helping unlock more opportunities and more deals so you can find the best loan deal available to you.
Lawyer: Make sure the loan documents and offer documents are written and laid out properly, someone who will have your back.
Property manager: Navigate you through the process of acquiring tenants and taking care of the property. This is a great option for those wanting to take a hands-off approach to being a landlord.
Accountant: keep track of your budget and expenses and help you navigate the home loan process.
Lender: bank or institution that will provide you the loan to purchase the property. You will repay the loan over the course of the mortgage.
Other things to take into consideration
Insurance: You will need both house and renters insurance. House insurance will protect you and your home in the event of damage such as to a fire or flooding. Renters insurance for landlords will protect you against renter-related damage and loss of rental income.
Test: The home will typically need to pass a healthy home inspection and will likely need other tests conducted to reduce your risk, such as a methamphetamine test.
Start Property Hunting
Finding an investment property is going to come with different criteria than a home you purchase for living in. After all, you are buying a home with other families and households in mind. So there are a few things to consider when on the hunt.
Make sure you consider location.
- Is it close to schools, public transport, shops and restaurants?
- Population. Who lives in the local area?
- Are there lots of young families, or is the community mostly older folk?
These factors can affect the type of property that people rent and how much they can afford to pay.
Consider the Economy
- Does the area have a strong local economy? You are more likely to get the best rental price growth and capital gains in an area with a thriving and growing economy.
- Is it near local employment! Potential tenants will want to rent close to their place of work. A conveniently located home makes it more desirable for tenants and boosts the property’s value!
Government’s Healthy Home Standards
- Does the property meet the Government’s Healthy Home standards?
- Does it meet the standards for heating, insulation and ventilation?
- Does the home require a lot of work?
Consider Tax
Owning a rental property comes with its gripes, including taxes. Any income generated from rent is taxable, meaning you must complete a tax return annually.
Also bear in mind the brightline test. This is the tax that is acquired if you sell the property too soon as an investor.
Take Advantage of Money Compare
Take advantage of Money Compare to compare different interest rates. It’s a great way to find a better deal than perhaps your bank offers. You could save hundreds of dollars on your home loan by making the simple habit of comparing. Simply jump on Money Compare, and browse the list of lenders and their interest rates. If you find a plan you’d like to apply for, a quick click will take you to the beginning of the application process.
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