Guide to buying an investment property in NZ

Property investment is often described as ‘safe as houses’ and as a low risk investment, but there certainly are risks. It’s important to be aware of these so that you can minimise them wherever possible:

• If you’re renting your property out, your tenants may unexpectedly vacate and you may experience periods of no rent so you’ll have to cover all the expenses.

• Interest rates, insurance premiums and other expenses may increase, making it more difficult to pay your mortgage and keep the property.

• As we saw in 2021-23 house prices can go down. If prices go down right after you purchase you could find yourself in a situation where your mortgage is worth more than your property.

• There is a chance that, for whatever reason, you may need to sell the property after it drops in value - resulting in a loss (and possibly having to pay tax according to the bright-line test).

• Large unexpected expenses can crop up as a property owner, especially if you own an older property.

There are several ways to minimise these risks. Buying well, not overextending yourself, having a rainy day fund, good insurance and attracting reliable tenants are just a few.

Before you buy, spend plenty of time thinking about why you want to own an investment property.

• For most, an investment property will be a vehicle to build wealth over 10, 20 or 30 years through to retirement.

• For others it might be a way to turn a quick profit (this approach requires more skill and may be riskier). Keep in mind if you buy and sell a property within the Brightline period that is not your main home you may have to pay tax under the bright line rule, and if the IRD deems that you’re trading in property you may still have to pay tax on any income earned.

• Some may want a combination of these two approaches.

Whatever your reason for investing is, keep it in mind throughout the entire process and let it guide all of your decisions. For example, if you’re looking for a long term investment to fund your retirement it may pay to buy something low maintenance that won’t cost you a fortune to own (like a townhouse or a newbuild).

If you’re a little lost it’s a great idea to get impartial financial advice from an expert before you start your property hunt. Speak to a financial advisor or mortgage broker  and other property investors who’ve been successful and join groups like the Property Investor’s Chat Group on Facebook. 

Read books about property investment in New Zealand and read about people who’ve done it successfully. Learn as much as you can before you get started to avoid any big mistakes.

You should talk to a mortgage broker or lender as soon as you’re seriously considering buying an investment property. To get started you can ask yourself these three questions. 

Most banks and lenders require a minimum deposit of 40% deposit to buy an investment property in New Zealand, so this is a good number to aim for. In other words, if you want to buy an investment property worth $500,000 you’ll need a $200,000 deposit.

If you already own your home and have more than 20% equity in it there’s a chance that you may be able to use that equity to finance the deposit. This would mean increasing the lending on your existing home to borrow your deposit.

Hot tip: It’s not always necessary to have a 40% deposit when buying an investment property. If you buy a new build you may be able to buy with as little as 20%. Non bank lenders may also offer you lower deposit options for existing properties but they may come with higher interest rates and fees.

When you apply to any lender they’ll ask for details around your take home pay and your regular expenses. They’ll use these details to assess whether you’re likely to be able to afford your mortgage repayments or service your home loan.

If you have very little disposable income, or servicing the mortgage will be tight, chances are your application will be declined. Keep in mind, the bank will consider potential rental income as income when assessing your application but they will consider this at a heavily discounted rate.

As is the case with buying any property, you’ll have to be prepared to pay legal fees for managing the transaction and bank fees for establishing your loan - plus the cost of a building inspector and possibly a valuer, if necessary.

After you purchase the property the rental income may not cover the mortgage repayments, repairs, maintenance and property management expenses so you may have to cover the difference with your own income.

We all know that the point of investing in property is to make money, but how exactly do investment properties turn a profit? Broadly speaking there are two ways:

• Rental returns: your tenants or AIrbnb guests pay to stay in the property then this money is used to pay the mortgage and cover expenses. Any extra income additional to what’s needed to cover expenses can be put into other investments or paying down the mortgage on your investment property.

• Capital gains: when your property increases in value after you buy this is called a capital gain. It’s important to note that an increase in value isn’t realised until you sell the property and receive the additional funds. However, if your property increases in value you may be able to use that additional equity to borrow and buy more investment properties.

These are the two ways investment properties can generate income but how can you find, purchase, hold and manage properties in a way that maximises those profits?

The best, quickest way to turn a profit from any property investment is to buy well below market value. To buy a property below market value you need to be patient, talk to a lot of real estate agents, be willing to miss out on a property if you can’t get the right price and be ready to negotiate. Often the best opportunities to buy under market value come when vendors:

• Need to achieve a quick sale for whatever reason.
• Do not use a real estate agent or use an inexperienced one.
• Want to sell off the market without advertising the property. This reduces competition, increasing the chance that you’ll buy under market value.
• Are developers who are struggling to sell their project and are under time or cost pressures.

It’s also possible to buy under market value by knowing something that other potential buyers and/or the seller don't know. For example, if a property was getting re-zoned for densification in the future, which could increase the value of its land.

Improving the condition of your investment property can both increase its value and increase the amount of rent you can charge for it. These improvements could include adding a room, changing the floor plan to improve liveability, renovating kitchens, or making cosmetic improvements such as painting or replacing carpets and blinds. In some cases you could even subdivide the land and build another property on it but this requires considerable money, time and knowledge.

If you don’t have the time, knowledge or skills to improve your investment property then it may be better to simply buy and hold. Using this strategy you simply purchase a desirable property in an area where people want to live, then plan to hold it for 10, 20, 30 years or longer while renting it out.

If you buy smartly you may be able to find a property with a rental return that covers most (or in rare cases) all of your expenses. When you reach retirement age you can either keep receiving rental income or sell and use the cash to fund your lifestyle.