'BUY LAND - THEY'RE NOT MAKING IT ANY MORE'
- MARK TWAIN
Property investment has always been popular in New Zealand. While buying your home is a heart decision, buying an investment property is a head decision, with just one criteria – does it make sense and will it generate a profit, as an investment?
Property investment is a practical way to develop future financial security by using the equity value of your home, or other capital, to buy additional residential or commercial real estate.
If you are using equity, this is the dollar difference between the value of your property and the amount of debt. The equity grows over time as property values increase and you pay off debt.
For anyone interested in property investment, the equity in a home is what most people will use.
Leveraging this makes sense but it’s not a walk in the park. Property investment is hard work, takes dedication, an eye for detail and the right support from advisers.
If you are keen on finding out more about property investment here are some key points for starters:
Seek advice on how much you can afford and what’s realistic without over extending – for most the minimum deposit needed is 40% of the property’s value
Establish a plan answering what type of property, location, size, price and return
Work out net rental rate of return (aim for 6%) and don’t forget the ongoing expenses such as rates, maintenance and potential vacancy weeks with no rent
What’s the potential for increase in capital value?
Think about demand for property in certain places – near transport nodes, large employers such as hospitals, Universities, town centres
Research – you will need to look at lots of properties to find one to suit your criteria
Invest long term – remember buying and selling within two years has tax implications
Property investment isn’t just for the wealthy, it can be for all homeowners.
At Switch Home Loans we help people work out if it’s possible and then develop a detailed plan to buy their first investment property and then may be a second one, and more.
How can my home help me buy an investment property?
Over time your home loan debt will decrease as you pay off a small amount of it every month and your home’s value will increase, although this may not be consistent. The difference between the value and debt is called equity. This can be used to secure lending and buy another property, as long as your debt to equity levels meets the lending criteria at the time you want to buy.
What’s the ideal rental yield for an investment property?
The rental yield is the annual rent, minus all expenses such as rates, maintenance and weeks when the property is empty, compared to the debt. Ideally you should look at 6-8% over the lifetime of the investment in that property. At the start, the return may be lower but over time it will increase as rents go up. In addition to rental yield, you also need to take into account the capital growth of the property which will be a capital gain when you sell.
Sadly, nobody has a crystal ball but we can help you make the decision whether property investment is right for you.