Should you invest in Property in 2021?
Property investment is a way to make your savings grow. If you can afford to buy a second, third or subsequent property, your tenants will pay much or, all of the mortgage and other costs as you slowly build up capital gain in the background.
It’s a great way to set up your retirement. Investment properties can give you passive income – that’s money you earn even when you’re not working. Or you can sell the properties in retirement and supplement your New Zealand super with the money.
At the Property Ladder your property mentor will cover how to buy right, manage your property and tenants, and many of the legal and tax issues involved. Armed with information you can become a successful investor from the beginning.
THE BASICS: YOUR FINANCES AND STRATEGY
- MORTGAGE: Investment property mortgages are often the same products offered by banks to owner occupiers. Investors, however, often choose to pay interest only, rather than interest and principal. Monthly repayments on interest only are lower, which means the rent is more likely to cover your costs. Some investors choose a revolving credit mortgage, which is like a giant overdraft, because it makes it easier to withdraw capital for new properties. Investors can sometimes struggle to get loans from banks and turn to non-bank lenders such as finance companies, which often charge a higher interest rate, but can be more flexible in their lending rules.
A broker can help you through the pre-approval and loan application at no extra cost to you. They can also avoid dangers such as “cross collateralisation”, which is where banks get you to sign an agreement that links all your properties together. If you can’t pay your mortgage, the bank can then choose which of all your properties to sell first, including the one you live in.
- STRATEGIES: This is the first thing that your Property Mentor will do with you. Your goal setting and your strategy is a plan of what you want to achieve in property investing and how you will go about it.
You may be a “buy and hold” investor who buys long term. You might buy a property where tenants rent by the room, which is listed as short-term rentals on the likes of Airbnb. This attracts different tax implications from IRD. Smart investors prefer terraced town houses because this is the highest rental demand.
WHAT TO BUY
An investment property will be very different to your own home.
Where to start? We research the capital growth areas, for a property. When Investing we need to consider the local economy. Is the town going up economically, or down? Is the population going to rise or fall? These factors will affect the rent you receive.
- THE PROPERTY CYCLE: Property goes up in value (and occasionally down) in fits and starts. It’s not a straight line.
CHOOSING A PROPERTY
The basics of choosing an investment comes down to Price Point. This sets the budget and which properties will provide an ROI. the type of property, the location, and your price point. You’ll be looking for a property that commands good rent in relation to what you paid, and preferably good prospects for increasing in value over time. You can’t always get the best of both in one property.
- LOCATION: Just like your own home, location is important, but you need to think like a tenant. Being close to employment is a selling point. If you’re buying in a smaller town that has one major employer, consider what could happen if that employer closes. If the tenants are young, they may want to be close to the centre. Good transport links can be a real selling point.
Apartments are popular with first home buyers, renters and investors. Photo / Fiona Goodall
- PROPERTY TYPE: You’re setting up a Business. Investors buy properties that need work to bring it up to rentable standard. You’ll pay less relatively for a do up. As a first timer, however, you might want to buy a property with the work done to reduce the learning curve. Buying brand new off the plan only requires 20% deposit. Second hand property requires much more deposit, and much higher costs for repairs and maintenance.
- DOING YOUR HOMEWORK: When buying a rental, we will take you through the “due diligence”, That means investigations about the property’s physical structure as well as potential issues such as difficulty to mortgage or insure. Always make sure that your property is insurable before you sign the sale and purchase. Don’t buy an expensive lemon.
DOING THE NUMBERS
Too often first-time investors fall in love with a property. Investing, however, is business and the property needs to make sense financially. After all you don’t get emotionally attached to your bank account.
- RENT LESS COSTS: We do the numbers with you to review, the following;
The rent should cover your outgoings including mortgage, maintenance, insurance, property manager, and rates . Quite often, however, you might need to top up the rent from your own pocket to cover those expenses.
- MAKING A PROFIT OR A LOSS: You’ll hear negative and positive gearing talked about in property investment circles. A positively geared property makes a profit after expenses are deducted from the rent. A negatively geared property makes a loss. Sometimes investors structure their investments so that on paper they make a loss.
MANAGING THE PROPERTY
Buying the property is only one part of property investing. Finding tenants is something that we endorse should be outsourced to a Property Manager. You can claim the expenses with it. Don’t try to manage an investment yourself. Know the Tenancy Agreement is a huge and can be an expensive minefield. Do you really want calls about a light bulb that needs replacing. Remember, you’re running a business.
- DIY management versus using a property manager: For some investors tenant management is a nightmare, and they end up losing thousands of dollars from unpaid rent or property damage. If you manage your own property, you’ll need to be available 24/7 to deal with emergencies and be on top of rent payments, inspections and other issues arising. Some landlords pay a professional property manager to do the day-to-day tenant/property management. It will cost around 8 to 10 per cent of the rent for a manager to handle tenant selection, prepare tenancy agreements, do inspections, handle tenant enquiries, deal with Tenancy Tribunal matters, and organise repairs, which you pay for separately. We recommend you use property managers who are members of the Property Managers Institute of New Zealand (PROMINZ). Many property managers work from real estate agencies and are members of the Real Estate Agents Institute of New Zealand (REINZ).
Property investment is a business, and you need to pay tax on your income.
- TAX EFFICIENT: One of the reasons that Kiwis love property investment so much is that it’s tax efficient. That means you could pay less tax overall than if you invested in other ways.
- SEEK ADVICE: Tax isn’t straightforward. First you need to “structure” your property investment in the best way possible to ensure you minimise your tax bill, legally. You can own properties in your own name, with someone else, or in a family trust. But these aren’t the most tax efficient structures in which to own properties. A property accountant or lawyer can advise on how to use other options to your advantage such as limited liability partnerships and companies.
- CAPITAL GAINS AND THE “BRIGHT-LINE” RULE: Building capital is one of the key reasons to buy investment property in New Zealand. Unlike many other countries we don’t have a capital gains tax (CGT) in New Zealand, so you won’t usually pay tax on gains from properties owned for the purpose of rental. If, however, you’re a property trader, buying and selling homes in quick succession, you’ll pay income tax on your capital gains. In the past traders tried to fly under the radar and pretend to be investors. The government has cracked down on property trading in recent years, however, bringing in what it calls a “bright-line property rule”. If you buy and resell within five years, you’ll pay tax on your gains. Other tax rules that could catch you out include the “associated person” rule. You pay tax on the sale of a property if you had an association with (such as being married, related to or working with) a property dealer or developer when the property was bought or a builder or in the building business when significant home improvements started. Download the IR361 from the Inland Revenue Department for more information about tax and your property transactions.
A good chunk of becoming a successful property investor comes down to psychology.
There are many emotions to overcome if you want to be successful. That might be your risk tolerance. Some people are too risk averse to even buy an investment property in the first place. Or once they’ve bought, they find they just can’t sleep at night once they become an investor.
Finally, property investing can seem like a whole lot of hard work. It is. If you can nail it, your financial future is likely to be secure. If you want a property mentor or coach to guide you. Get in touch today.