The hardest step for all new residential property investors is the first one: the research. Buying an investment property involves a lot of extra research we wouldn’t normally consider when purchasing a property to live in. It’s a lot to take in, we know.
To help you navigate this step, we’ve created this introduction to the property investment world so you can walk into it with eyes wide open, ready to hit the ground running.
If you’re on the fence about buying a rental property, it’s worth weighing up the pros and cons of real estate investment and asking yourself some serious questions upfront.
As of 1 January 2019, investors need to provide a 30 per cent deposit on an investment property loan1 or a combination of equity and deposit that equals 30 per cent.
Tip! Use this calculator to assess how much you can borrow.
Can I use KiwiSaver to buy an investment property? No. Buyers can only access their KiwiSaver for their first home purchase and, in some exceptional cases, as a second-chance home buyer, provided they meet all the criteria. In both cases, you must live in the home. You cannot use KiwiSaver to purchase an investment property.
In addition to your deposit, keep in mind that you’ll still need to have cash on hand to pay for your due diligence and legal costs—the same as any normal property purchase. This can include:
Loan-to-value ratio (LVR) is a tool to assess the health and debt levels of your property portfolio. In short, it is your combined loan debt divided by the combined value of all your asset/s. Here it is expressed in a formula:
LVR = Remaining loan amount(s) ➗Total home(s) value
For example: If you have two properties, say one house valued at $600,000 and an apartment valued at $400,000 (combined total of $1,000,000), and $300,000 remaining debt across your home loans, you have an LVR of 30 per cent across your portfolio.
A high LVR, usually over 90 per cent, is a sign that a property portfolio is overstretched. In New Zealand, banks will rarely loan to investors who have an LVR over 70 per cent2.
There’s more than one way to pay off a property, and the type of mortgage you choose can affect the size of your repayments and how long it takes to pay off your home. Here’s a quick summary of the most common loan structures in New Zealand:
This is the most common type of loan structure in New Zealand. They are usually set for 30 years. At the start of the loan, you’re mostly paying off the interest and finish up paying mostly principal towards the end of the loan.
Tip! Here’s a handy tool to work out your repayment costs.
In essence, a revolving credit loan rolls your home loan, income deposits and day to day expenses into one credit account. Because of your home loan, you are essentially in overdraft mode with a credit limit. For example, you take out a home loan of $500,000 with a credit limit of $510,000. As your income is paid into the account, you pay off your day to day expenses and whatever is left goes towards paying off your loan. If you spend $5,000 on everyday living expenses and then receive an income payment of $8,000, this income will pay off your $5,000 of living expenses while the remaining $3,000 will go to paying off your loan.
An interest only loan is a temporary loan that allows you to only pay the interest of your mortgage, rather than the interest and principal (the amount you borrowed). Your repayments are less, which gives you more disposable income, but you don’t make any headway in paying off the loan itself. In New Zealand, property owners can have this type of loan structure for up to five years3.
In addition to your mortgage repayments, also take into account ongoing rental property expenses for:
When assessing a rental, also look into the return you’ll make from rent fees, AKA your rent forecast. To quickly assess a property’s rent forecast, look at the average rent yield for the suburb and the style of property it is (house, apartment or flat). The higher a property’s rent yield is, the greater its potential for return.
As a guideline, the average rent yield across all property types in Hamilton is 4.6 per cent, while the average rent is $409 per week ($21,680 per year)4.
If you want to run a cash positive property, take into consideration all the ongoing costs mentioned earlier and whether your rent fees will cover those costs. Also take into account the time your property may be untenanted while you search for tenants and conduct any maintenance or repairs.
Lastly, if you are seriously considering a property, it is a good idea to get a rent appraisal for a more accurate idea of what rent return to expect.
Below is a list that covers some of the most important aspects when selecting a residential investment in Hamilton.
This is an obvious and much-touted attribute of real estate investment. Firstly, consider who will rent the property. For example, a property in the Hillcrest area will likely appeal to university students, lecturers or even people wanting to get into the Hillcrest High School zone. Does the property you are considering appeal to this group? Consider also the property’s proximity to key attractions and other amenities a tenant may find desirable. For example, in addition to being close to the University, students may find being close to shopping and public transport desirable.
As a property owner, the less maintenance and repairs you have to undertake, the more cost-effective your property is. When assessing a potential rental investment, look for low-maintenance features such as brick or uPVC cladding, small sections of grass (or no grass at all) and durable flooring.
Capital gains can come as a function of a growing market or because buyers perceive a property or location is moving better than the rest of the market. This is particularly true where a property has a unique attribute that is growing in demand but can’t be expanded. Properties with lake or river views and in popular school zones are good examples of this trait.
It is also worth researching any upcoming city development and (re)zoning projects. These could have a significant impact on the sale appeal of a property down the track. For example, the new Waikato Innovation Hub is likely to make properties in Hamilton’s eastern suburbs highly prized. Whereas, a new highway set to be built along the edge of your property may have the opposite problem.
Our experience tells us that properties with desirable configuration are popular with tenants. Improving 'tenantability' improves occupancy and therefore increases investment returns over the long term. We suggest selecting a property with mass market appeal, including considering the indoor/outdoor connection.
Often the easiest improvements are the cosmetic ones and they often lead to significant gains in value and rent. When buying, consider ways that you might improve the presentation. Alternatively, buying a home that is immaculately presented can save downtime at the beginning of a tenancy and get income flowing immediately.
This is often overlooked, but buyers are beginning to appreciate the value of privacy. The sanctuary of a person’s own space is as important to most tenants as it is to the majority of buyers.
This is becoming more important to tenants. If it is expected that a number of people will live at the property, consider where off-road parking will be created. Plan for this, as if it is left to tenants it can be detrimental to the long-term maintenance of the property.
We also expect you’ll have your own due diligence criteria for LIMs and specialist inspections. Contact us to discuss purchasing your first property investment with Lodge or to speak to one of our property experts.
The answer depends on what your goals are as an investor, the type of tenants you’re hoping to attract and the amount of maintenance you are prepared to do and organise.
It is considered best practice among investors to diversify your property portfolio with a mix of capital gain and rental yield properties. This ensures you have a healthy income to cover your ongoing property costs while your capital wealth slowly grows over time.
Over the last few years, we’ve seen a boom in high density living on the Hamilton market and their popularity in both the homeowner and rental market continues to remain strong.
Highest areas of demand:
Under the Residential Tenancies Act, all rental properties must have working smoke alarms and at least 70mm of insulation under the floor and in the ceiling. However, the recently announced Healthy Home Standards is set to increase the rental standards in New Zealand in a bid to make rental properties healthier for families to live in.
These new standards will come into play for private landlords and boarding houses from 1 July 2021, while the rest of New Zealand’s rentals has until 1 July 2024 to catch up. According to the new standards, a rental property must have:
If you choose to self-manage your rental be aware of your responsibilities as a landlord, which include:
In addition to the list above, being a landlord comes with many legal obligations, such as ensuring the property:
Be aware that while you may own the property of your tenant, it is still their home and as such, they also have a right to:
Don’t think you have the time or mental space to be a landlord? It doesn’t mean you should bow out of property investing. Hiring a property manager is a cost-effective way to meet all your obligations of owning a rental. They’ll handle the day to day running of your rental(s), giving you the space to focus on what matters to you. Whether that’s planning your next property purchase or renovating a current property to grow its rental yield, the choice is yours.
In addition to the information on this website, we encourage you to come and speak with one of our property specialists before you start out. You’ll work out whether yield and capital gain investments are better suited to you based on your own financial situation and propensity for risk.
1. Reserve Bank of New Zealand, 2019.
3. ASB, 2019.
4. QV.co.nz, April 2019.