Residential Property Investment

The basics of residential property investment

Buying investment property is a decision not to be taken lightly. It is a large financial outlay normally accompanied by an equally large mortgage, which in turn must be serviced. Consider:

1. Read about investing in property: as a first step before even considering investing in residential property, it is prudent to educate yourself as much as possible on the topic. Read widely; there is a wealth of material available, much of which is free of charge. There are many magazines, free guides, books and New Zealand investment property websites devoted to the subject.

2. Assess your personal situation: consider whether buying New Zealand investment property is right for you. There are several other forms of investment available, some of which are far less time consuming and carry less risk. The risks and returns of property investment fall toward the higher end of the scale (that is, potentially higher returns with higher risks). Higher returns may allow you to reach your financial goals quicker, however this must be weighed against your personal circumstances to determine if it is viable, considering the level of risk. An individual without a secure income, or one who is older, may likely be more cautious in their approach to investing.

3. Consider diversification: a good way to lower and spread your risk is through diversification. This is a basic principle of investing which places your money in different forms of investment, so that if one performs badly it does not entail a bad performance for your whole portfolio. In relation to residential investment property in NZ, this can mean one of two things; either investing in different classes of asset as well as property (such as shares, fixed interest and cash), or alternatively diversifying within the residential property sector by spreading your portfolio over several areas and sectors of the market.

Advantages and disadvantages of investing in residential property

You may experience advantages, including:

• Capital gains can be made as the value of the property increases.
• A mortgage operates as a compulsory savings programme for many people.
• Some expenses are tax deductible, such as interest on your mortgage and depreciation on the property, allowing you in some cases to pay less personal income tax.

There may also be some disadvantages:

• Properties could be vacant for periods of time, or 'bad' tenants could cause stress, high maintenance costs and loss of income.
• Interest rates could rise making mortgage repayments much higher.
• House prices may not rise and may even decrease.
• The time involved in dealing with a residential property investment could become unreasonable.

Income, growth and rental returns

Kiwis make residential property investments both for income (in the form of rent) and for growth (in the form of capital gains). As a rule, it is recommended that the rental returns from an investment property plus any tax advantages should cover the costs of ownership - rates, insurance, maintenance, mortgage repayments and the like. However, with many people today taking out large percentage loans (90% and above), it is not always possible to make this equation work, so mortgage repayments are commonly supplemented out of personal incomes. Capital gains cannot be relied on; it is not a good idea to buy a property solely on the expectation of an increase in value. Better to consider its income compared to expenses - the rental yield. In simple terms the rental yield on a property is the percentage return on the value of the property after expenses (excluding mortgage costs) but before tax. This is a useful way to compare several rental properties to see which one is right for you; however it must be noted that overall returns will include tax advantages and possible capital gains over the long term.

What to look for when buying New Zealand residential investment property?

Some basic factors to consider when investing in property in New Zealand are:

• Think of the kind of tenant you want to attract (where you buy and what type of property bought will greatly influence this).
• Modern kitchen, bathroom and laundry facilities will add value.
• Proximity to shops and public transport is a bonus.
• Outdoor areas, parking, fencing and other features must be considered.
• Location (the old cliche 'location, location, location' still rings true, however realise your entry costs will be a lot higher in premium locations).

Looking for more information? Find New Zealand residential property investment in the NZS.com directory.

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Business images from Flickr: Sky Tower, New Zealand Flag and Wellington Buildings.