Property Investment in NZ
Investing in property is all about securing your financial freedom. Like most journeys in life, there are lots of different means of getting to where you would like to be, and many pitfalls along the way, but the more you know, the more prepared you will be and the better the choices you can make.
The team at Erskine + Owen have helped thousands of Kiwis on that financial freedom journey, and we would like to help more. So, to get you on the right path to intelligent property investment, we have created this “Property Investment NZ Guide” that covers some of the main points you need to consider before setting out.
In our guide, we cover 5 main areas of property investment in NZ:
Property Investment strategies
- Buy and Hold, the most common strategy property investors in New Zealand use. We will look at the pros and cons.
- The Buy and Flip strategy – this involves buying, improving and reselling property and we’ll look at the advantages and disadvantages of this approach.
Borrowing to buy
We will look at the types of loans available to you and how they can be structured.
- The minimum deposit required for investment property in NZ
- LVR or the loan-to-value ratio which is a measure of how much the bank will lend compared to the value of that property
- The option of using your home as the deposit for your next investment property
Where to buy investment property in NZ
Where do you start in property investment?
- Which cities are the best places for property investment?
- What are the factors you should consider before investing?
Finding the right investment property
After examining investment strategies and discussing areas across New Zealand, we will then look at how to pick the property type that aligns with your goals.
- Growth vs yield
- Property types
- New builds vs existing homes
Avoiding costly mistakes
Getting the right team around you is key, so we will look at the role of various professionals and how they can help carry the load and keep you abreast of any new investment property rules.
- Mortgage brokers
- Buyer agents
Buying an investment property in NZ
Property investment can be a rewarding experience. It is a viable strategy for growing wealth and creating a passive income. It is the single largest form of investment in New Zealand and an ingrained part of Kiwi culture. Which property investment strategies you choose to follow depend on your available time and how much time and money you can invest. I think that it is fair to say, however, that the ever-changing landscape has meant the path has become trickier of late and that property as an investment should be seen as a long-term plan, now more than ever.
Recently we have seen a shift in New Zealand’s property market. In the last thirty years of ever-declining interest rates, house prices in New Zealand have gone ballistic. We are now seeing a cooling real estate market – some economists have called it a reset – driven by inflation sitting at a 32-year high, the removal of tax deductibility on investment properties, changes to lending criteria, rules on the minimum deposit for investment property, and higher interest rates.
That makes it a tougher environment. Successful property investing calls for careful planning that does not begin and end with just choosing the right property. There is a lot to think about when it comes to your investment strategy.
As a property investor, where can you put your money?
Property Investment Strategies
Buy and Hold:
This is the most common strategy property investors use in New Zealand and it involves purchasing property, renting it out, holding on to it for the long term and making money on it as it increases in value. With a ‘set and forget approach’, hopefully, you will not have to do too much to the property; renovations and maintenance can be kept to a minimum.
You could opt for a bright, spanking new home that can be rented out straight away, such as a new build. You could buy an apartment, townhouse, or family home or you could purchase what are known as houses of multiple occupancies (HMOs) where each room can be rented separately. Once the property is rented, you will primarily make money from the property going up in value.
‘Buy and hold’ is the least time-intensive investment strategy and is, therefore, more realistic for those who have family, jobs and busy lives. It is also very dependent on the chosen property achieving sufficient capital gain. You need to invest in the location and type of property with growth potential and you need to be able to afford to keep that property over the next 10 or so years for the capital gain. If the property is sold within 10 years of buying, under the bright-line property rule, you will have to pay income tax on the sale.
Buy and Flip
This property investment strategy focuses on building equity, and though the potential for returns is good, it can be risky. To objective is to create immediate capital gain or increase the value of the property through building work, repairs or cosmetic upgrades. Once renovations are completed, the property will theoretically be worth more and can be on-sold. This is a strategy often used by investors who are willing and, more importantly, able to complete most of the repairs and maintenance themselves.
The downside of this approach is that renovations can be stressful and often cost more than budgeted. Once tradespeople start, unanticipated issues with roofing, plumbing, insulation and electrics might be discovered, requiring more time and cost and thereby making the entire investment unprofitable, not only in terms of your time and energy but also by ‘over-capitalising’: you’ve spent time and money in areas that don’t increase the value of the property. As you would ideally buy and sell in the same market, the time between purchasing, renovating, and selling is often short, so there is limited opportunity for large capital gain.
Which investment strategy is best?
The key is to be patient, and smart, do your homework and ask the right questions to determine what the right investment strategy is for you. Expert advice can help you fully understand the financial commitments involved and the options that best suit your investment aspirations and there is where the help from the expert team at Erskine + Owen can be so valuable.
Borrowing to buy
Interest rates and home loans
Twenty years ago, interest rates were seen as the only mechanism to control house prices, but as that didn’t always work so well, the Reserve Bank of New Zealand introduced loan-to-value ratios (LVRs) as an additional method of control in 2013. A loan-to-value ratio (LVR) measures the value of a property against the size of the mortgage on that property. For example, if the property is worth $250,000 and you have a deposit of $50,000, the LVR will be 80%. ($250,000-$50,000) ÷ $250,000 = 80%. Borrowers with LVRs of more than an 80 per cent mortgage are seen as stretching their financial resources and vulnerable to a recession or an increase in interest rates.
As an owner-occupier, banks will lend for a new home if you have a deposit of at least 20 per cent, i.e., an LVR of 80 per cent or less, and you can demonstrate that you can service your mortgage. The amount of deposit an investor needs to buy an existing property under the loan-to-value ratio is currently 40%.
New built homes bought directly from a developer, however, are exempt from LVR restrictions. New Zealand has a housing shortage and as a way to encourage developers to build new properties, the rules don’t apply. Banks are therefore lending on a case-by-case basis and most lenders are willing to lend up to 80 per cent of the value of the home upon completion, some banks will even approve lending up to 90 per cent.
Use your home as the deposit for your next investment property
You can also fund the deposit for an investment property by using the equity from an existing property, be that your own home or by using the ‘Bank of Mum and Dad’.
Equity is essentially the difference between the current value of your home and the amount you owe the bank and although you may only have had $100,000 worth of equity, for example, when you bought a property, as that house has gone up in value, the increase in value – capital gain – is all yours and can be used on an investment property. If you have paid down enough debt, you can use the equity within that property as your deposit. You can increase an existing mortgage, potentially up to 80% of your property’s current value. You’ll effectively be unlocking cash within your home and then putting it in an investment property as a deposit, so it goes to work for you.
Through the ‘Bank of Mum and Dad’, you may be able to use the equity within their home. Their mortgage can also be ‘topped up’ to create a cash deposit to help you buy your own home or a rental property.
Where to invest in property in New Zealand?
Before buying your next property or starting your investment portfolio, you need to clearly define your reasons for doing so. Are you buying it because you’re interested in holding it for the short term and then flicking it, do you want to wait for capital gains, do you plan to hold on to it for family to live in or are you wanting to create positive cashflow for your retirement?
You need to know what you want from your investment before you go hunting. Knowing which investment strategy is right for you combined with your budget will help you decide what to buy and where. Successful investment in property is all about buying with minimal emotion and ensuring that your long-term goals are backed by robust calculations.
Factors that can influence rental returns
Renting out a house is a great way to create a stream of passive income, so you don’t have to rely on your salary, drawings or superannuation income. When analysing a target city, you should compare rents with house prices. You do not want to purchase a property where the rental yield is so low you have to top up the bank account with thousands of dollars a year while you try and hold the property for long enough so you can achieve capital gains.
The more desirable a property’s location, the more interest it is likely to get from prospective tenants. But location isn’t all about being in the most expensive area. Regardless of where your property is in the country, you will be able to charge more the closer your rental property is to key amenities such as schools, workplaces, shops, public transport, parks and hospitals. The number of bedrooms, whether it has open plan living, outdoor areas, garaging, views, or parking are all factors that impact rental prospects.
So where are the best places for property investment in NZ? If the strategy is for capital gain, the key is to look for investment properties below their market value, or in areas where you think house prices will increase due to rapid population growth or the development of new infrastructure. Look at Auckland as an example. Between 2000 – 2019 the city’s population grew by 25% placing a huge demand on housing. It also has good employment and higher incomes. However, as the average rent is just over $600.00 per week and the average purchasing price for a home of that size is just over $1,000,000 the rental yield (we’ll explore this further) would be much lower than from a home in Christchurch where tenants pay around $500.00 per week on a $650,000 median price property. In addition, if you do buy in Auckland, you will need more investment to get the capital gains, as the property is more expensive.
Tauranga for example has seen huge growth in recent years. Young families and professionals are flocking to beachy suburbs and average household incomes have increased by over 4% per year. Rents have responded to demand and have seen a year-on-year increase of close to 10% while supply has dropped. According to Trade Me, it is now the most expensive region for renters in the country.
New Plymouth has been returning good rental yields – house prices are cheaper than in our main centres and there is a shortage of rental properties.
Compare this to Wellington and Auckland which have seen a marked increase in the number of rental properties on the market, and a recent drop in rents.
When choosing a property, the most important thing is to ensure it’s a warm dry home in an area where people will want to live. Not only will this save you in renovation costs to comply with the healthy homes act, you will also be providing tenants with a safe and warm home while making the returns you want.
Finding the right investment property
Whether you are looking to invest for capital gains or rental yield will determine where you focus your search for rental property.
What is rental yield?
Rental yield is the amount of money you make on an investment property after subtracting overall costs from the rental income received. The higher the percentage, the better your return on investment.
Gross rental yield is the annual rent you earn as a percentage of the property’s market value. This is the income return on your investment before any expenses, such as outgoings or possible rental vacancies are taken into account. Although gross rental yield is simple to calculate and lets you easily compare properties with different values and rental returns, you need to be aware that a property may have a high rental yield but also have high maintenance costs, which may make the rental return lower.
Net yield or rate of return is the income on your investment after all outgoings are calculated and taken out. Add up all the fees and expenses of owning the property.
To calculate gross rental yield:
- Add up your total annual rent
- Subtract the total expenses from the annual rent
- Divide your annual rent by the value of the property
- Multiply that figure by 100 to get your percentage
Interest on your investment loan isn’t usually included when calculating net rental yield as it relates to your financial situation as opposed to the cost the property generates.
When you know the rental yield of a property, you’re better placed to understand if it is the right place for your investment goals, or if you could earn a higher rental yield with a different property.
The capital growth rate is the amount the property goes up each year reflected as a percentage of the value property.
It is not advisable to always chase yield at the cost of capital gain. As an investor, it’s usually wise to buy investment properties that can provide both types of investment return, because capital growth is what ultimately gets you to your wealth goals.
Yield is absolutely critical to the survival of your investment portfolio as you can’t use capital gains to pay your mortgage every fortnight, but it’s not the key to building wealth through property.
To achieve a good yield, you usually have to compromise on capital growth as high-yielding properties are more often in the provinces or smaller towns. Ultimately, there are fewer people wanting to buy these properties, and less demand means price growth is slower, therefore lower capital gains.
Different investment properties will provide different levels of capital gain and rental income. Ideally, you would want to find a high capital growth investment that is affordable. Rather than chasing yield for yield’s sake, you’re better off chasing capital growth with enough rental yield from that property to make it serviceable. It’s up to you to decide on your investment goals and the most suitable properties to achieve them. Doing that, however, is much easier with the help of an expert property investment team like Erskine + Owen on your side.
As an investor, you can choose from three primary types of investment properties: commercial, residential and vacant land.
Buying a block of land is usually a passive long-term investment that requires much research and a good strategy. You need to consider things such as location and zoning, size, shape and topography, and available infrastructure or restrictions. Bare land tends to go up in value quickly because developers want it, particularly in a rising market. Generally speaking, putting as much of your money as you can into land in a high capital growth area delivers good capital growth.
However, that only works if you’ve got lots of money and you can afford to service the interest on all the debt or you can buy the land outright, but as investors looking to build wealth, not many of us can afford to do that.
On the plus side though, expenses such as rates, insurance and maintenance costs are relatively low, there are no tenants to have to deal with, prices can increase quickly, and you can develop the land yourself or sell it to a developer.
Commercial property investment
Offices, factories, retail spaces, and day-care centres, for example, are referred to as commercial property. With these investments, you could earn a much rental higher return than for most residential properties, which generally have higher growth. On the plus side, renting a property to a business is less complicated in some ways than renting to individuals. Commercial tenants usually have to maintain the property and cover insurances, and commercial property lease agreements will often contain a fixed annual rental increase clause. Also, as leases are generally longer, rental income is more stable and you’re less likely to have to deal with headaches that come with problem tenants in residential property such as all-night parties, pets and damage.
On the downside, lenders are inclined to view commercial property as a higher-risk investment so getting a loan can be more complex. For residential loans, banks will look at your personal income. For commercial loans, they look at the potential income of the property – rental earnings against the costs to run the property. Interest rates may differ from those for residential properties as they are calculated on how much perceived risk is involved in the deal. You will generally need a deposit of around 30-50% and a loan on a commercial property will normally be across a shorter term than a residential property, say 10–15 years.
Getting into commercial property takes a fair bit of research: different kinds of commercial property will have different returns and expenses. For retail spaces, you may have to pay for fit-outs and wear and tear could be high, while the yield on a warehouse might not be quite as much as you expect. As with everything, you will need to research your market carefully before you dive in. This is where the property sourcing agents at Erskine + Owen can be so useful.
Houses, apartments and townhouses are all residential properties and have various advantages and weaknesses. Let’s look at them.
Houses as an investment
A standalone home generally has a larger floorplan than a townhouse and more land. This gives you options for renovation potential, thereby increasing capital growth or increasing the rental and also your yield. They can also come with the potential for subdivision or being able to add a minor dwelling, again increasing capital growth or rental yield. All this potential means standalone homes are more expensive, but they often increase in value faster than other forms of residential property, particularly when you factor in the emotional purchasing of owner/occupiers that can push prices up. Higher purchase prices also come with higher deposits, so can be out of reach of some newer investors in certain regions. As we’ve discussed earlier, the rental yield will also be lower because while you might get more rent from a standalone house than an apartment, for example, the purchase cost is so much greater and houses are usually more expensive and harder to maintain than apartments or townhouses.
The question, therefore, is what is your investment strategy? investing in property is all about choices, trade-offs and asking the right questions, which is where expert advice is so valuable in determining what is right for you.
One of the benefits of investing in a townhouse is that they are relatively inexpensive when compared to a standalone house. Recent figures show that they were literally half the cost of a home and land package in Auckland. As such, you could potentially buy two townhouses in different cities and property markets for the cost of one standalone home. You could effectively be increasing your rental yield while spreading your risk by not having all your equity tied to one property.
Buy wisely and townhouse owners can also expect a growth in capital value as they are built in central suburbs in main cities where demand is high and they are close to key amenities, such as schools, workplaces, shops, public transport, parks and hospitals. In saying that though, in Auckland, townhouses without carparks, in particular, have become increasingly more difficult to sell.
Townhouses are normally smaller than standalone houses, built on a smaller plot of land and more often than not, they are conjoined – multi-dwelling properties with houses attached to each other. This means you will be sharing one or two walls with neighbours. Rental income will normally be lower, but they don’t tend to require too much maintenance. Yield therefore can be higher as they are more affordable to purchase. But beware, townhouses often come with a residents’ association because of shared walls, services, driveways or car parks and residents’ associations come with fees for the maintenance of any common areas and rules, both of which could affect your yield and your capital growth.
Apartments are more affordable than houses, so present opportunities if your budget is limited. They generally also offer good cash flow or high rental yield making them a good option for investors who are more interested in cash flow, rather than long-term gains in the value of their property.
However, they do come with some downsides, as with everything. As separate residences within one conjoined building, apartments come with body corporate fees for the shared cost of common areas, such as lifts, pools and landscaping. Body corporate fees vary in price, so the more facilities the apartment building has, the higher the body corporate amount for the whole building. Maintenance fees can also be quite high for older apartment buildings as they can require more work. If you have inadvertently bought into a leaky apartment building, be very aware banks will not lend any money for building repairs and you have to pay the bill whether your own unit is leaking, or other parts of the apartment building are, even the common area like the carpark.
On the bright side, the body corporate will take care of this maintenance for you which means apartments often come with fewer headaches than a standalone house. Body corporate fees are also based on the size of the apartment: if you have a larger apartment, the more you have to pay in body corporate fees. You need to include these fees in your calculations when you work out the net yield.
Secondly, as an apartment owner, you do not own the land and ownership is not freehold. Therefore, capital growth is quite limited. Banks have a reasonably conservative stance on apartment mortgages. To reduce potential risk, banks require anything up to a 50% deposit, despite the normal LVR being 60%. The higher deposit is more common if the apartment is small or is 2 self-contained apartments, each with its own kitchen and bathroom, but sold under the same title as one property. This is because these properties have less resale attraction.
Like everything, the price of apartments is driven by supply and demand and with Auckland’s Unitary Plan we can expect to see an increased supply of higher-density housing, such as apartments and terraced houses, being built, particularly in Central Auckland.
Buying new builds
New builds have either just been built or will be built soon if you’re buying off the plans. The Reserve Bank’s LVR (Loan to Value Ratio) restrictions on investment property deposits do not apply to new builds, so investors do not need a 40% deposit. In addition, as a landlord of a newly built rental home, you will still be able to deduct the interest costs of the mortgage on your investment property from your tax bill. You will get a two-decade exemption from the law change to tax deductions on interest on rental properties the government announced last year. This means you could potentially pay $30,000 – $40,000 less in tax than you would on an equivalent existing property over 10 years.
New builds require less maintenance, you are less likely to have to fork out for new plumbing, giving you more consistent cash flow.
On the flip side, we’re looking at a perfect storm of rising interest rates, tighter lending laws, inflation, and the market is changing. Building costs are increasing at the same time as sales are slowing down. Add in the supply-chain-related delays, and labour shortages and construction firms are going under.
Many developers’ cash flow is tied to sales, so there’s a lot of uncertainty affecting those builders without effective management and planning. Valuations can also drop before buildings are completed, causing off-the-plan properties to not value up to what people paid for them. You must do your research on any developer and their record for delivering homes on time before signing anything. You also need to fully understand what is and isn’t covered in your building contract so you can protect yourself from the unexpected and the unscrupulous.
How to avoid costly mistakes
Buying a house is a process that can certainly benefit from having an expert on your side, so getting the right team to advise and support you is crucial.
If you are uncertain about how much you can borrow, or are unsure about your eligibility to borrow, the first thing we recommend you is to enlist the services of an experienced mortgage broker. As the borrower, this service is free and mortgage brokers can help you figure out what you can and can’t do. They provide impartial advice on which banks will lend on different property types.
By clarifying the mortgage process, mortgage brokers can take the stress out of it. They can talk through your goals and look at how best to achieve them by exploring options and finding the approach best suited to you. Mortgage advisers deal with thousands of people buying properties and have experienced every possible scenario. As they are directly in touch with the banks, they know the lending criteria for every lender in New Zealand and what documents you will be asked for, so you will not waste precious time applying for loans from banks whose criteria you don’t meet.
A mortgage broker will make the loan application process easier and faster, and they can help you get the right loan structure, add value, and even work out the quickest ways to pay down your mortgage and save on interest payments. Their experience can save you money on your home loan and they can help as life circumstances change.
Buyer’s agents work on your behalf as the buyer, whereas a real estate agent selling a home has an obligation to their vendor. This means a buyer’s agent will be impartial and offer their honest opinion on the homes they show you or inspect on your behalf. Unlike a real estate agent, they can advise clients against purchasing an unsuitable property; they can help circumvent the scenario where you might be swayed by emotion toward a wrong decision.
Great for providing insights into the local market, they can save you time and advise you on what to watch out for and they may also steer you in the direction of a financially viable property you may not have otherwise considered. They know where the opportunities lie and for what price. A professional buyers’ agent will work with you to create a customised plan of your financial goals and then research properties until they find the right ones for you. Expert at property sourcing, they are seasoned, skilled negotiators and can also manage the entire purchase, including property inspections, sourcing LIM reports and even attending auction on behalf saving you time.
Having an expert lawyer on your side when purchasing property is essential. Residential conveyancing law is a specialist field and regardless of whether you are buying or selling, you need expert advice when dealing with legal documentation, such as the sale and purchase agreement. Having a lawyer navigating these agreements and the clauses within is vital. This is particularly so when buying a new build. You must have a good lawyer on your team so you fully understand what is and is not covered in your building contract.
To ensure that the contract is fair, reasonable, balanced and acceptable for both parties, they will pour through the fine print of things like sunset clauses that allow either party to walk away if certain requirements are not met. Although these exist to offer security, they can sometimes be manipulated as some less scrupulous developers have been known to do. A lawyer can amend a contract or add to the agreement. Once you sign, the contract is legally binding, so you want to ensure you’ve done your best to avoid any pitfalls which is why we reiterate that you should consult a conveyancing expert to ensure you absolutely understand the contract you are signing.
Talk to expert property investment companies
At Erskine + Owen, we can work with you to help you navigate challenges in the property market. Why not take advantage of our knowledge and experience? Times of economic uncertainty is a great time to call upon the skills, contacts and experience of our property investment team. We’re not new to property investment in New Zealand. In fact, being founded in 2006, Erskine + Owen is one of the longest-standing property investment companies in Auckland.
To discuss your situation, especially if you are feeling a little overwhelmed by the prospect of rising interest rates, simply get in touch. We’ll work with you to understand your needs and find a smart way forward. The key to building lasting wealth is sound advice and continued support so you can make informed decisions on your investment goals and then find the most suitable properties to achieve them.
Need Help With Intelligent Property Investment?
Fill in the form and we will be in touch to discuss the next steps.