According to Corelogic, data shows since the start of 2018 rents have risen at almost double the rate of house prices across the country. This appears to be great news for landlords and may be inspiring you to think about heading into the new year with one or more rental properties added to your investment portfolio.
The great thing about property investment is that when it’s done right, it’s an asset that can give you both cashflow and capital growth. If it’s something you are considering, here are my three essentials to consider:
- Know the risks
- Have a real plan
- Buy right
1. Know the risks
Property investment is often described as ‘safe as houses’.
People always need somewhere to live and rental properties in New Zealand have historically enjoyed moderate long-term growth.
Yet rental properties do require more work than other investments. As an advisor it’s my job to always look at both sides of the coin - balancing the gains with the risk involved.
Here are a few risks it pays to know about when it comes to rental properties:
- If you’ve used debt to buy, the lender may ask for that back at any point - you may not be able to sell or sell for enough
- If it’s mortgaged with the same bank as your house you could risk your home as well
- If the market has dropped in value, you may still owe the lender money after the sale
- Interest rates may increase, reducing your rental income
- You may not be able to find tenants
- Tenants may do damage, become unruly or become difficult to evict and the bond may not cover it!
- Repairs and maintenance costs may be higher than anticipated. Insulation, ventilation and heating are non-negotiable factors to consider
- Capital gains tax may be introduced. The bright-line test, applying income tax to capital gains, has been extended to properties bought and sold within five years
- Losses on rental properties are now ring-fenced, so they cannot be used to offset other income
Remember there are risks in any investment - people succeed when they aren’t scared to look at the risks but can look them face-on and figure out a plan.
If you still think property could be the right investment for you then onto the next step!
2. Have a real plan
You know what they say - if you fail to plan you are planning to fail! Do the math and follow these basic steps to move forward with confidence:
Step 1: Find out how much you can borrow (this is obviously my area of expertise and I’m happy to help!) Keep in mind ongoing maintenance costs as well as your loan repayments when you are considering what you can afford.
Step 2: Calculate your loan and purchase costs. These can include
- Loan application fee
- Valuation fees
- Statutory government charges
- Conveyancing and legal fees
- Lenders Mortgage Insurance (LMI) if you are borrowing more than 80% of the property value
- Relevant insurance, including building and landlord protection
- Repairs and improvements
Step 3: Investigate your investment loan options (again this is where I can help. Just call me the Loan Arranger. I can find the best loan set up for your specific circumstances even if banks have turned you down. Get in touch to talk through your plans here).
Step 4: Get loan pre-approval. This puts you in a strong position when that right property comes along.
Step 5: Find that right place and BUY RIGHT.
3. Buy right
My best advice here is stick to the basics. In the area you are looking in see what the typical type of property tenants like to rent. In popular suburban areas you will find things like a good sized section, garage, 3 bedrooms and reasonably modern (post 1960) homes are always going to be in demand.
Generally, more expensive houses have yielded better capital gains but poorer rental returns. Suburbs like Remuera, Orakei, Mission Bay Herne Bay and other prominent Auckland suburbs return the least in rent compared to their purchase prices.
Here’s a simple checklist to start you off finding a property that will be in demand
- Close amenities? Supermarkets, bus stops, attractions like parks and pools are attractive to potential tenants
- Appreciation potential? If you can add value simply this can be a big plus. Sometimes clearing rubbish or overgrown gardens and freshening up paint can create value with very little expenditure
- Good heating and insulation? This is now legally essential so make sure you will provide a warm and dry home
- Things need fixing? Broken windows, cupboards hanging off hinges and chipped paint are not a great time for anyone. Get the property to a good standard and attract good tenants who will treat the house well!
- Reasonable rent? Just because it is an investment does not negate the need for fair and reasonable rental pricing. Better to have a longterm tenant who can afford the payments than having it sit empty trying to squeeze out a few extra dollars! Get advice from real estate agents or property managers or delegate the job to those professionals as they will know exactly where your place should sit in the market.
I hope this is helpful for you! Let me know how your search goes and do get in touch when you are ready to make the next move!
The Finance Marshall
0508 843 627