Property investment
Before you take the plunge into the world of property investing, you need to know that it’s the right choice for you.Here’s some information to help you with the ins and outs of residential property investment and what to expect when researching, buying and managing your properties.
- What is residential investment property?
- The advantages of residential property investments
- How to make money in residential property
- Equity
- Choosing the right type of property
- Important things to consider when investing in property
- Getting started
- Managing your investment property
What is residential investment property?
It’s important to understand that there are different residential property types, depending on the specific house or building. For example, there are no lawns or gardens to maintain with an apartment, and the tenants may be quite different from those living in a house. In addition, we may lend different amounts of money depending on the property type.
The advantages of residential property investments
Control
[Sourced from ‘The Complete Guide to Residential Property Investment in New Zealand’, published by Random House]As a property investor, you have control over most parts of your investment:
- You decide if the purchase price, rental yield and potential for capital growth are acceptable, and how much cash you’re going to put in, if any.
- You decide how you’ll structure your loan(s).
- You decide if and how you’re going to improve the property’s value and its rental income to achieve the rental return you want.
- You decide if you’ll manage the property yourself or pay a property manager to do it for you.
- You decide how you’re going to maintain the property and whether you’ll repair it yourself (if you can) or get someone else to do it.
You must know about and consider factors that are out of your control, such as interest rates and rental and housing market changes, and decide how you’re going to deal with them.
You’re in control, which is great. But you’re also responsible for making sure it works. Consider yourself the managing director of your property investments, even if your empire amounts to a small one-bedroom flat.
By acknowledging that you’re in charge and accepting responsibility for success or failure, you’ll be more likely to seek out good information and take your investment seriously.
This doesn’t mean you have to do everything yourself, but it does mean you have to take an interest in what’s going on. Residential property is not a passive investment.
Two borrowing options
If you need to borrow money to buy your investment property, you have two options:- If you have enough equity in your own home, you may be able to use it to secure a loan for an investment property – so you may not need a cash deposit.
You can read more about equity, how it’s built up and how it can be used to buy investment property in the 'Equity' section. Whether it’s possible will also depend on our lending policies and criteria.
- As you’re investing in residential property, you may be able to borrow up to 90% of a property’s value depending on our lending policies. Note you will have to pay a low equity premium and provide us with a registered valuer’s report if you borrow more than 80% of the property’s value.
Security of bricks and mortar
When you invest in residential property you’re buying a physical asset. Unlike other investment types, such as unit trusts or shares, the security of this bricks-and-mortar investment can provide some comfort and security to investors.Tax benefits
New Zealand offers several tax benefits for investing in residential property. For example, expenses you incur to generate your rental income may be tax deductible.Two forms of return
Property investment provides two forms of potential returns that offer short- and long-term benefits: rental income and capital gains. Read on to find out more!How to make money in residential property
Rental income
Rental income is the money your tenant pays you to use your residential property investment – weekly, fortnightly or monthly.Two measures are commonly used to compare investment properties or calculate the returns from rental income:
- Gross rental yield: The rental income received relative to the value of your investment property. It can be a useful way of comparing different investment properties, or your actual investment results with your goals.
- Rental return on investment: The rental income received relative to the equity in your investment property, or the amount you’ve invested in the property. The amount of your investment is distinct from the value of the investment property as it represents the amount of your deposit. The remaining value of the investment property is the amount you would need to have borrowed to buy it. When calculating your rental return on investment, 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.
How rental income can contribute to your loan repayments
One of the benefits of investing in property is that you can use your rental income to make, or at least contribute to, the repayments on your residential investment loan.If your financing costs and other investment property-related expenses are greater than your rental income, you may find yourself in a ‘negative gearing’ situation. While this has risks, it can also have advantages – read on to find out why.
What is negative gearing?
Negative gearing is the potential tax advantage of residential property investment.It refers to the period, generally during the initial years of owning the property, when expenses are higher than rental income – for example, because of initial upfront expenses such as repairs and legal fees and because, generally, you pay more interest during the initial years of a standard principal and interest-reducing loan. Once you start making headway on repaying the principal, you pay less interest.
An interest-only loan increases the tax-deductible expenses associated with residential investment property over time because you’re not repaying any principal. So an interest-only residential investment loan may be a good choice when following a negative gearing strategy.
Capital gains
Capital gains is the second form of income for property investors.You achieve capital gains when the value of your residential investment property increases compared with its original purchase price or value. This is why it’s important to try to buy properties below their market value.
As property values tend to increase over time, returns from capital gains may take longer to achieve than rental income returns. You should consider the increase in your property’s value in relation to the time you’ve owned the property, and your original investment in it.
Combining rental income returns and capital gain returns – your average annual return on investment,
As an investor you may aim to buy properties that can provide both types of investment return. Different properties will provide different levels of capital gain and rental income. It will be up to you to decide on your investment goals and the most suitable properties.The impact of leverage on your investment return
[Based on content from ‘The Complete Guide to Residential Property Investment in New Zealand’, published by Random House]‘Leverage’ is one factor that can accelerate your investment return. It’s about buying rental property using borrowed money instead of paying the full purchase price with your own money. The more you borrow, the more you’re said to be ‘leveraged’. If your property goes up in value, the more you’re leveraged, the higher the return on the actual money you’ve invested.
Talk to an ANZ Mobile Mortgage Manager or visit any ANZ branch for more information on leverage, and to check that you’re using the right amount for your investment property and your own financial position.
What is equity?
Equity is the difference between a property’s value and the amount of outstanding lending required to buy it. So if you sold your property and repaid your loan, your equity would be the amount left over.Your equity in a property therefore increases or decreases with rises and falls in your lending and property value.
How is equity built up?
- With a reduction in total lending:
Say you’ve bought a property for $250,000 with a loan of $100,000, and you decide to make a $20,000 extra repayment. This increases your equity by $20,000. This reduces the outstanding lending to $80,000 ($100,000 - $20,000), so assuming the property is still valued at $250,000, the equity is now $170,000 ($250,000 - $80,000). - With an increase in the property’s value:
Say you have recently done some alterations to this same investment property, and you’ve heard that property prices in the area have been increasing. You get a registered valuation to gain a more current view on your equity position. The registered valuation comes out at $280,000 (an increase of $30,000), which effectively means that after the alterations and general market house price increases, your equity in the property has increased by $30,000. Assuming your outstanding lending is still $80,000, your property’s value is now $280,000 - so your equity has increased to $200,000 ($280,000 - $80,000).
Using equity for residential investment lending
You can use the equity in another property to partly secure a residential property investment. However, to buy a property, you’ll need a deposit and may need finance.Generally the deposit will need to be at least 10% of the property’s purchase price or registered valuation and you can use the equity you’ve built up in your own home to go towards your purchase. Note you will have to pay a low equity premium premium and provide us with a registered valuer’s report if you borrow more than 80% of the property’s value.
Choosing the right type of property
It’s important to buy a property that suits you personally and financially – for example, a property that requires an appropriate amount of involvement and maintenance, and the desired return.Your investment goals should guide you to the types of residential property you should focus on. You should also consider things like the time you’re prepared to spend on your investment property every week or month, and your skills as a renovator or handyman.
Our free ‘Getting ahead with home ownership’ CDROMs can help you to decide on the type of property that’s right for you. You can order it online, by contacting an ANZ Mobile Mortgage Manager or visiting any ANZ branch.
Important things to consider when investing in property
[Sourced from ‘The Complete Guide to Residential Property Investment in New Zealand’, published by Random House]Successful business people consider their risks in business and put mechanisms in place to minimise those risks. The same principles apply to property investing.
It’s important to consider the risks you’re prepared to accept as a property investor, and how to minimise or eliminate other risks – and to assess your risk profile regularly, as it will change as your circumstances change.
Property investment can be exciting or stressful. When values and rents are declining, it’s comforting to know you’ve reduced your risks because you clearly identified them and took steps to minimise them. The following information highlights risks you may not currently appreciate or be protecting yourself against.
Interest rate increases
Fixed rate home loans can help you to manage debt and offer some insurance against interest rate rises, but you should always allow for higher interest rate payments.If your cash flow situation is so poor that a 1% or 2% interest rate increase would force you to sell the property, think carefully before committing to it. When considering a property purchase, do an interest rate risk analysis. For example, the extra cost of a two percentage point rise in interest rates (say from 7% to 9%) on a $200,000 home loan is $4,000 a year. Could you absorb this cost or would you be forced to sell?
Low or negative capital growth
You need to be prepared for the property market going up and down. If you’ve owned a property for only a few years, you may need to ride out the downturns.When you buy a rental property, make sure it’s in an area with a better than average potential to increase in value, over the next few years at least. Base your decision on factors such as economics, lifestyle and demographics.
Tenant failing to pay rent
As with damage to your property, your best defence is good tenant selection and active property management. Keep a close eye on rent payments – if they’re missed, contact your tenant immediately. If you can’t resolve the matter directly with your tenant, the Tenancy Tribunal may be able to mediate a resolution.Demographic changes
Are there demographic changes happening? Consider factors such as the ageing population, population movements (south/north drift) and changing lifestyles, as they can all affect your investment over time. When planning your investment strategy, consider these changes and their effects in 10, 20 or even 30 years’ time.Loss of primary income
If you lost your primary income source, how would your property investments be affected? If the potential consequences are high, you may like to consider income protection insurance.Review your financial position and set your property investing goals
[Sourced from ‘The Complete Guide to Residential Property Investment in New Zealand’, published by Random House]Goal-setting is important in most aspects of life and it’s true of property investment. Without a clear direction you’ll find it difficult to co-ordinate your efforts in establishing an investment that matches your lifestyle, financial and life situation, skills and aspirations.
To begin with, ask yourself why you’re investing in property. Is it to generate an income, is it to build wealth, is it a form of savings for retirement, or is it a combination of all these?
- Do you have an investment period in mind? For example, you may want to retire in 20 years’ time and provide a retirement income through property.
- What value of property do you want or need over this time? To answer this, consider the income you want from property.
- What type of property will you buy to meet your goal? Five two-bedroom flats or three three-bedroom houses, or something else?
Write your goals down so they are quantifiable within a timeframe. Remember, it’s all about equity and cash flow, not necessarily the number of properties you own.
Property investment strategy
[Sourced from ‘The Complete Guide to Property Investment in New Zealand’, published by Random House]Establish a strategy for achieving your goals and the rules you’re going to follow. Ask yourself:
- what are my location requirements?
- what rental yield will I require?
- what minimum equity (10%, 20%, 50%, etc) will I maintain?
- how will I organise finance?
- what type of property will I buy?
- what ownership structure will I use?
- who will be my target tenant market?
Select your property investment team
Your property investment team is one of your greatest assets as you grow your property portfolio.Think about your investment team in the same way you’d consider any other team. You’re the selector and coach; your aim is to select the best players who can work together to get the job done.
Your team will include permanent players and players you keep on the reserve bench for when they’re needed. Taking the time to research your team carefully before you start investing will save you time and money in the long run.
The permanent players in your team will include:
- your ANZ home loan specialist
- your accountant
- your lawyer.
Your team might also contain the following reserves:
- Real estate agents
- Registered valuers
- Property managers
- Tradespeople
Your ANZ home loan specialist will help you finance your residential investment properties. They can help you to choose the ANZ Residential Investment Loan that will best suit you and your investment goals and, as your financial requirements change, help you arrange any changes you require.
To contact an ANZ home loan specialist, phone us on
Decide on the best ownership structure for your investment
The ownership structure you choose for your residential property investments will depend on your own circumstances and goals. Things to consider include:
- flexibility over time
- simplicity – a complex ownership structure isn’t always necessary
- the ability to introduce other participants
- the growth of your property investment portfolio
- taxation
- the ability to exit.
Research the property market that interests you
Now that you have goals and a team, you’re ready to start looking seriously at the property market.The property market is made up of many smaller markets defined by particular areas or types of property. You need to decide on your geographic area, identify some properties and conduct a basic ‘rental income return on investment’ analysis.
There are many ways to find properties that match your criteria, such as through newspapers, real estate publications, agents’ lists and websites. Aim for a reasonable list of properties that, at first glance, appear to fit your criteria. If you’re looking in a city, your list may contain 30 or 40 properties; if you’re looking in a small town you may only have five or six properties.
To do a basic cash flow analysis, you’ll need to know:
- the assumed annual costs of managing and maintaining the property
- the property’s assumed purchase price
- the income you expect to generate from renting the property
- the approximate annual cost of the loan you’ll need to buy the property.
The first three points are reasonably straightforward. To determine the annual cost of the loan you’ll need, you can use our loan repayment calculator.
Visit the best properties – research and think like a property investor
When you’re inspecting a property you need to think like an investor. Look for opportunities to add value and cut costs, and pay careful attention to the maintenance the property requires. Ask many questions about the surrounding neighbourhood and the property’s history. If you find a property that you believe is suitable, research it in detail, including thorough document searches that your lawyer can do on your behalf. These documents include a land information memorandum report, a property file, and the local district plan as it applies to the property.Undertake more detailed investment analysis on the property
As you’re arranging finance, you’ll be able to analyse the property from an investment perspective. You can also make some assumptions about likely capital gain to determine your average annual return on investment. It can be a good idea to do a detailed analysis of all of the properties you visit. If there are two that are suitable, you can decide which is the better investment and focus on it.Buying at auction?
It pays to attend a few auctions before you consider bidding yourself, to see how they’re run and how the bidding works.If you decide to buy an investment property at auction, you need to know before you attend the government valuation, your maximum price and what’s included in the sale (eg chattels). You also need to be 100% sure that you have enough finance available, because you can’t make your offer at auction ‘subject to finance’.
If your bid is successful, you’re committed to signing a contract and paying a deposit at the end of the auction.
If the reserve price is met or bettered at auction, the vendor is obliged to sell.
Managing your investment property
Choosing a tenant
[Sourced from ‘The Complete Guide to Residential Property Investment in New Zealand’, published by Random House]- Don’t offer the property to the first acceptable tenant unless it’s a tight rental market. First and foremost they must be good tenants.
- Don’t tell people the property is taken until the successful applicant has signed a tenancy agreement. They may be presented with another offer and change their mind.
- Remember you can’t discriminate against tenants on the basis of race, gender, age, religion, marital status or whether they have children – and that tenancy agreements with people under 18 must be ratified by Tenancy Services before the tenancy starts.
- Get the bond payment straight away so you have two weeks’ notice should your tenant change their mind before moving in.
- Lodge the bond with the Tenancy Services’ Bond Centre within 23 working days.
- Arrange for the rent to be direct credited to your bank account.
- If you have a group-flatting situation, insist the tenants make just one rental payment to your bank account rather than pay individually.
- Just before, or as the tenant physically takes possession of the property, go around together and inspect the property. Note, any damage or imperfections on a property inspection form, which both parties should sign.
- Take photographs or a video of the property at the beginning of the tenancy for the best record of its condition. Use the date function of the video.
- Give the tenant a tenancy information letter or booklet. Include useful information such as your contact details, what you expect from them as a tenant and what they can expect from you as a landlord, which day is rubbish day, contact details for an emergency plumber or builder, and how to operate appliances such as dishwashers.
- When conducting inspections, look for items that need repair as well as checking how the tenant is keeping the property.
- Keep a close eye on rent payments, especially in the first three months. Check rents have been paid the day they should have been. (Telephone and Internet banking facilities help.)
- Write a welcome letter after you’ve received the first rental payment. State that you’ve received the payment and assure them the system is working. This also shows you’re on the ball.
When a tenant leaves
[Sourced from ‘The Complete Guide to Residential Property Investment in New Zealand’, published by Random House]- Don’t accept the bond as the last rent payment. This is your security if you find a problem with the tenancy or property. If you allow the tenant to use the bond as their last rent payment, you’ve given away your security.
- Write a letter to the tenant, thanking them for being a good tenant and confirming the date they are leaving, the condition you want the place left in and when the property inspection will take place.
- Conduct a property inspection together once all the tenant’s property has been removed.
- Release the bond money when you’ve checked everything.
- Give the tenant a written reference and ask them for one on your performance as a landlord. In a tight rental market, you can use this to help secure new tenants.
Maintain and improve your property
After buying your property, plan any intended improvements or renovations. Often small, inexpensive improvements can make the property more appealing to tenants or easier to maintain.Consider large renovations if you can show they make good financial sense. For example, adding a bedroom could result in rental income higher than the cost of borrowing the extra money to do the addition. Remember to discuss major renovations or building ideas with your property investment team.
Most alterations require a building permit, which your lawyer can help with, and you’ll need your accountant to ensure that all costs are tax deductible (capital expenses are not tax deductible). You’ll also need the support of your ANZ consultant to arrange the finance. Lending criteria,terms and conditions and fees will apply.
Improving your property should result in a higher valuation, so arrange for a new valuation once you’ve completed any major work. It should show an increase in the property’s value, so an increase in your equity. You can then borrow more money against the new equity to put towards buying another property.
Your goal should be to bring your property to a point where it’s running to its optimum capacity - that is, that it’s generating the greatest amount of rental income and/or capital gains possible, while costing you the least amount of money each year to maintain.
Tips for improving your return from residential property investments
[Sourced from ‘The Complete Guide to Residential Property Investment in New Zealand’, published by Random House]It’s important to buy property in a location where you expect higher than average capital gains (for reasons such as a good local economy, an increasing population or a low land supply for new development), unless you are after yield.
To make money through property purchases you need to buy wisely and choose a property:
- in a location with potential for improvement.
- that provides a high yield.
- that can be bought at a reduced price.
- that has the potential for improvements that increase its value.
The best way to increase the property’s value (and your income) is to increase the rent, by adding features tenants desire and are willing to pay for. Examples are a garage or carport, an extra bedroom (adding to the building, reorganising existing rooms or adding a sleepout), carpet, fence, security alarm and whiteware. Just making the place clean and tidy can give you a price advantage over other rental properties.
Improvements are best considered (and budgeted for) before you buy the property. When adding value, make sure the extra cost will achieve a high return on your investment.
Keep good records and plan for your next investment
Before rushing out with your successful investment formula and buying more properties, it’s important to remember that the more properties you have, the more organised you have to be.Be organised from the beginning. For residential investment property, this means keeping careful records of all the money you spend on your property and all your correspondence with your property investment team and tenants. Set up a good filing system so you can quickly and easily find receipts for your accountants, lease agreements for your lawyer and bank statements for discussion with your ANZ home loan specialist.
Investing in residential property can be a rewarding experience if you’re committed to learning about the process and have a good team to back you up. You can begin building your team straight away by discussing your position with an ANZ home loan specialist. You may already have enough equity in your home to start investing in residential investment property. ANZ lending criteria will apply.
Our free ‘Getting ahead with home ownership’ CDROMs has more detailed information. You can get a copy online, by contacting an ANZ Mobile Mortgage Manager or visiting any ANZ branch.
This material is for information purposes only and you should obtain professional advice relevant to your individual circumstances. While ANZ, part of ANZ National Bank Limited, has taken care to ensure that this information is from reliable sources, it does not warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any liability arising from your use of this information.
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