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Buying An Investment Property – Love The Investment, Not The Looks!

 

Property investment is a popular option for Kiwis looking to secure their financial future and increasing their wealth. Before you start the search for the ideal property it is important you know what you should be looking for! Here are our “Golden Rules” of property investment:

  •     Approach the purchase as an investor, not as a home-owner
  •     Do your sums
  •     Don’t overcapitalise
  •     Do your market research

Approach the purchase as an investor, not as a home-owner

If you’ve reached a point where you’re looking to invest in property, chances are you’ve already looked around at property in order to find yourself one to live in. Choosing an investment property requires you to forget every romantic notion you have ever had about welcoming family dinners and window boxes full of flowers. Repeat after me: this house is not your home! 

One of the traps investment buyers can fall into is really wanting to ‘love’ the property. When looking at purchasing property for investment, you really need to switch your mind-set to avoid investing in a property on which you’ll make little return. Investment requires a cold, hard, unemotional look at the basics: rental potential and yield (explained below!).

Do your sums

While you’ve got your cold, hard, unemotional head on, let’s talk crunching numbers! Though we’re always told that things are “safe as houses”, there is potential for property investment to go wrong. It is vital that you do your homework and due diligence before investing in investment property. This includes looking at what yield you will get from the property and whether it’s worth the investment. All manner of considerations need to come in here, but basically you want a return on your money that’s worth all the potential hassles of investment property ownership. If you’d get more leaving money in the bank – do so! 

So…let’s use a property’s yield as our starting point. We can hear you wondering “how do I calculate yield”? Basically, to calculate yield, you calculate the rental the property could provide and then find out what percentage of the purchase price that rental income is. So, if you buy an apartment for $400,000 and expect to rent it for $450 a week: $450 x 52 weeks is $23,400, which is 5.85% of the purchase price. Therefore your yield on this property is 5.85%. 

Bear in mind that yield is a measure of a property’s earning potential, not a guarantee of what you can expect from the property. It doesn’t take into consideration things like repairs, insurance, rates or times when the property is not tenanted. You’ll have to decide what is the minimum yield you would accept from an investment property and select appropriately. 

It’s also important to have your ‘finger on the pulse’ with respect to the mortgage on your property. If you know that interest rates have dropped, take advantage of it by reshuffling your debt. You could even change loan provider and refinance your mortgage if there is good reason to do so. Despite costs and break fees, you may find that you are better off in the long run, and so it pays to ‘shop around’ for the best rates, or have a trusted mortgage advisor on stand-by if you have a larger investment portfolio. 

Another aspect to consider when doing your sums is taxation.  From 1 October 2015, IRD introduced a “bright-line test” in respect of purchasing property.  Under this new rule, you will pay tax on income earned if you buy and sell a property within a two year period, unless certain exemptions apply.

Don’t overcapitalise

Overcapitalising on an investment property can ruin all chances of making any money. By "overcapitalising" we mean improving a property beyond its resale value.  We refer back to our first golden rule – it doesn’t necessarily matter if it’s pretty. There are times when putting capital into an investment property is the right thing to do, but it is vital that you work out whether the investment is going to be worth it over time. If your $200,000 property rented at $300 per week requires $50,000 of investment to increase rent to $350 a week, you need to assess whether it’s worth it. Again, those handy yield sums come in handy here.

Scenario A – leave the house how it is:

$300 x 52 weeks is $15,600 – or 7.8% of the purchase price.

Scenario B – invest $50K and rent for $350 a week:

$350 x 52 weeks is $18,200 or 7.28% of the purchase + investment cost.

Obviously rental income is something that you really need to consider. Which leads us to our fourth golden rule…

Do your market research

It’s really important to be aware of what similar properties in the area are being rented for, and whether there is a demand for rental property. You need to have an indicative figure for rent before you can assess whether the property is a worthwhile investment. 

Again, assessing the yield of a property is a handy starting point. It may well be that a property in a cheaper suburb could provide a greater return on your investment than a property in a more expensive suburb, and reduce your upfront costs in the process! Win-Win!

Build a great relationship with your mortgage broker (preferably one with property investment experience), accountant and lawyer, and they can give you the options to best suit your particular circumstances.  A fantastic resource that is also worthwhile considering is membership of your local Property Investors Association.  The knowledge and advice available from people who have been investment property owners for a number of years can be invaluable.

Disclaimer: The information on this page is general information only and must not be relied on as legal advice. Legal Beagle is not a law firm or a substitute for a law firm. We are unable to provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defences, options, selection of legal documents or strategies. 

 

 

 

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Legal Beagle is not a law firm or a substitute for a law firm. We are unable to provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defences, options, selection of legal documents or strategies.
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