INVESTMENTS

Property Investment

Real estate is the traditional favourite for New Zealand investors. Here's why, and how you can make the most of property investment too

Why Residential Property Investment?

Leverage

Real estate is one of the few investments where you can simply borrow funds to invest more than your available capital, and increase your overall return on investment.

Control

You have control over most parts of the investment asset. This includes control over whether you or someone else manages the property, renovations or improvements, and how you structure the lending for the property.

Rental Income

Income in the form of rent can be put toward repaying a mortgage, or it can build your passive income, or both.

Tax Advantages

Even with recent taxation changes, property is a tax-efficient way to invest, especially for new properties.

Security

Buying an investment property means you’re buying a physical asset you can literally touch. Many people can be more comfortable with this when compared with a range of other investments.

Become a Professional Property Investor

If you're already invested in real estate, you might be aiming to become a professional property investor. Even if you're not aiming to be a fulltime property investor, you surely want to be a successful property investor.

For Professional Real Estate Investors, Calculations Are Crucial

A key step to successfully investing in property is to do so with minimal emotion and ensure that your long-term goals are backed by robust calculations.

This is especially important as you grow an investment portfolio of properties, as minor differences in calculations can have big impacts when amplified across several properties. Part of the reason for this is to meet everchanging lender requirements to buy more properties.

Costs can easily make the difference between an investment property purchase being a good opportunity versus a long-term drain on finances. To help identify this, two common measures are:

Gross Rental Yield

Gross rental yield is the rental income received relative to the value of your investment property. To calculate gross rental yield, divide the annual income from the property by the purchase price and multiply by 100 to get the percentage rate of return (yield).

Rental Return on Investment (ROI)

Rental ROI is the rental income received relative to your equity or investment in the property. It's important to factor in the costs associated with the borrowing required to buy the investment property, along with the other expenses incurred from maintaining and managing it such as rates, insurance, property management, and upkeep. To calculate Rental ROI:

Determine the total rental income per year and subtract total expenses associated with the rental property for the year (such as mortgage repayments, insurance, rates, maintenance etc.). The resulting figure is also known as the ‘net operating income’.
Divide this by the total amount invested (your equity or investment in the property). Also include the cost of any improvements you’ve made.
Multiply by 100 to calculate the percentage Rental ROI.

Property Investment and the Potential for Capital Gains

Capital gains are the second benefit from any property investment you make, after rental income. You achieve capital gains when the value of your investment property increases.

In most cases, capital gains in New Zealand are untaxed, which is a significant benefit of investing in property in this country, and one of the reasons real estate has been so popular among Kiwi investors.

Returns from capital gains depend on movements in the housing market and usually take longer to achieve than rental income returns. Keep in mind that while property values tend to increase over the long term, they can go down as well as up. One strategy for achieving capital gain is to look for investment properties that you may be able to purchase for below their market value, or in areas where you think house prices will increase because of factors such as rapid population growth or the development of new infrastructure in the area.

Combine Rental Income and Capital Gains

Different investment properties provide different levels of anticipated capital gain and rental income.

Apartments and townhouses often provide great income yield, that is, a higher rent received relative to their price. Alternatively, if capital gains is the main focus, consider standalone homes in emerging suburbs, preferably in-or-near centres which are expected to see the most population growth in coming years.

Whether you're eyeing steady rental returns or aiming for substantial capital appreciation, the key might lie in a strategic blend of the two. It’s up to you to decide on your investment strategy and determine the most suitable properties to achieve that strategy.

How to Leverage Equity in Investment Property

What Is Leverage?

In a property investment sense, leverage is the term used to describe when you buy an investment property using funds you have borrowed - most often from a bank - instead of using your own. Property investors have easier access to more leverage than investors in other asset classes. In other words, the banks are more willing to lend money against property than any other asset.

The more you borrow, the more you're said to be "leveraged". Leverage is one factor that can accelerate your investment return. If your investment property goes up in value, the higher the return on the actual money you have personally invested. On the other hand, it also increases the risks if your investment property or properties go down in value.

How to Calculate Useable Equity for Property Investment?

Home equity is the difference between your existing home’s value and the mortgage, the amount you still owe against it. Put simply, it’s how much of your home you truly ‘own’.

Many property investors use their existing homes to secure the deposit for an investment property.

To learn more, you can calculate your own useable equity, or book in a complimentary initial consultation with one of our financial advisers who would love to assist you create and sustain wealth.

Negatively Geared Property Investment

Negative gearing is when your property expenses (such as interest repayments on your home loan, council rates, insurance, and so on) are higher than your rental income.

Negative gearing often happens during the early years of owning an investment property. In effect, you are making a loss on your investment, though typically this reduces with time as the mortgage is steadily repaid, and as rents rise. Eventually, the property will pay for itself, then soon after it will start paying you!

Tax Treatment of Negative Gearing

Previously you could offset property losses against your income tax in the same tax year. This was changed to the ringfencing approach, where these losses are carried forward and can only relate to the property, or properties, which incurred them. In this way, when the property eventually makes a gain, it will have tax credits applied to it.

Tax legislation and regulations ares subject to frequent change, and further changes need to be considered by property investors. Though as there is a shortage of properties in New Zealand, any new property developments will continue to receive more favourable tax treatment than existing properties. This is to incentivise the construction of more housing. This is one of the reasons we often encourage investors to buy a newly build property.

Finance for Investment Property

When you're getting started, obtaining funding from a bank or other source is usually the easiest part of the lending process.

Though once a pre-approval for lending is obtained, many people don’t think about how they structure their property investment lending, for example, whether they should be principal and interest, interest only, or revolving credit. Often, a modest sum on a revolving credit account can be good for property investors because rent payments could come in and immediately offset the interest accruing on a loan, while most of the remaining lending is fixed to take advantage of the lower interest rates on offer for fixed term borrowing. Techniques such as this can be especially important to help grow your property investment portfolio in time.

To make the most of property investment, and protect yourself from certain risks, there are also plenty of other considerations for property investment financing. These include separating your property investment portfolio (sometimes called 'split-banking') and using different methods to unlock equity in one property to purchase another.

Your Property Investment Financial Adviser

Here at Become Wealth it's our job to get you wealthy, or to keep you that way. Investments in real estate can be a great part of your overall wealth creation and sustainment plans, and for some people property investment may even form their entire investment portfolio.

Navigate Complex Rules Related to Property Investment and Tax

New Zealand's property market is subject to regulations and legislation which frequently change. Our team can can help investors understand and comply with these rules, and rules that are likely in the future, to ensure a smooth investment journey.

Real Estate Tax Optimisation

Tax considerations are an important part of investment decision-making. Even so, tax should never be the most important consideration with any investment.

New build properties present tax advantages, and even though taxation policies can and will change, new build properties will probably retain tax-privileged status in some form or another. There is broad consensus that as a country we need incentives to build more residential real estate to alleviate New Zealand's shortage of housing. When it is appropriate for your personal situation, a financial adviser can introduce you to reputable developers specialising in tax-advantaged new build properties, ensuring investors access quality projects with a track record of success.

Risk Mitigation with Property Investment

All investments, including in residential property, come with risks. A seasoned financial adviser provides expertise in risk assessment and mitigation, aiding investors in making informed decisions to safeguard their financial interests.

Build a Winning Team

When it comes to property investment, plenty of people fail alone, but nobody succeeds alone. To make the most of your property investment journey, you'll need a range of professionals, including those who specialise in property-related law, property management, accounting, valuer, a mortgage broker and so on. Experienced financial advisers, like the team here at Become Wealth, can help you build the winning team by connecting you with a network of trusted professionals.

Integrate Real Estate

Every investor has unique financial goals, a unique starting situation, and commonly different attitudes toward the financial risks which need to be taken to achieve their goals. A financial adviser tailors investment strategies to individual needs, optimising portfolios for both short-term gains and long-term stability.

To help ensure you get the best wealth creation or sustainment advice possible, our team also advise on non-property investments such as shares, funds, and KiwiSaver Schemes. That means they'll integrate your property investment strategy with the rest of your life, and other assets. It also means they can objectively assess whether property investment suits you, and if not, suggest an altogether different investment instead.

Property Market Insights

Over recent decades, all New Zealand real estate has experienced significant value increases. Most commentators agree that returns from New Zealand property over the next couple of decades will not be the same as the last 10 or 20 years. It's also unlikely that increases in value will occur in all regions. Some regions, suburbs, and property types will be more in demand than others. This demand drives property values, and rental demand.

Staying ahead in this environment requires real-time insights. A financial adviser keeps investors abreast of market trends, helping them seize opportunities and navigate potential challenges.

Take a Professional Approach

As property investment is such an interesting subject, many of your friends, relatives, and colleagues will readily share their own property investment tips and tricks. While these people may mean well, and may even be successful property investors in their own right, this is no guarantee of success as it relates to you achieving your personal aims in the ever-changing property market. This is where a professional financial adviser can provide an objective and considered view based on logic and reason to help you remove emotion and focus on what you want to achieve.

What Next for Your Property Investment Journey?

Whether you're just starting our, or are looking to add to your existing property portfolio, the financial advisory team at Become Wealth are standing by to assist.

To book your complimentary, no obligation consultation, call 0508 232 663 or leave your details and query below. We'll respond within a weekday.

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