Should you buy an investment property?

With low interest rates and the property market booming, you might be considering putting your money into an investment property. But what are the key steps involved? Sharon Cullwick, executive officer of the New Zealand Property Investors’ Federation, explains. 

Step 1. Find your experts

Speak to your accountant and find out if it’s in your best interest to buy an investment property. Speak to a lawyer about the structure (look-through company, family trust, company or individual name) you should be buying in for the best tax advantage. Mentors or experienced property investors can be helpful too, especially when it comes to realities and downsides of the business.

Step 2. How much can you borrow?

Talk to a mortgage broker to find out how much you can borrow for your investment property. You could also go through your bank for a mortgage, but a good broker may be able to get you a better deal. Stay updated too around how much deposit you'll need.

Step 3. Decide what you want

Think carefully about your reasons for wanting an investment property. Is it yield (extra cash)? Do you expect the rent will cover your mortgage? Is it so you have an asset to sell later in life? Capital growth? What is your strategy?

Important things to think about are:

  • The time and energy you have to offer
  • Maintenance required
  • Type of property 
  • The new Healthy Homes Standards
  • Will you manage it yourself or will you get a property manager
  • Does an investment property suit your investing risk appetite and personal situation?  

Step 4. Do the numbers add up?

Ideally you’ll be looking for an investment property that will have a good return, where rent will cover the expenses and mortgage, eventually leaving you with a freehold investment you can sell in the future. But sometimes the reality is different. There can be years with absolutely no capital gains so don’t rely on this to make your fortune. Is the rent enough to cover all the outgoings? Do you have a plan in place if your property gets trashed, a tenant gets behind in rent, or the property ends up vacant for an unexpected period of time? 

What are the actual costs of buying an investment property? Include accountant fees, bank fees, mortgage costs, interest costs, rates, insurance, property manager, maintenance, and costs of getting the property up to the Healthy Homes Standards.

Step 5. Start looking at properties

Work out specifically what you want and only spend time looking at those properties. The best way is to use a spreadsheet to evaluate properties.

Step 6. Managing your asset

Tenants, love them or hate them, are your customers. Who will look after them? You or a property manager? If you decide to look after them yourself, become educated as mistakes under the new Residential Tenancies Act 2020 are enormous and could easily absorb any profits you expected to make. If you decide to go with a property manager, are you prepared to manage them? 

Step 7. What’s your exit strategy?

You don’t want to be selling when everyone else is selling - or be forced to sell -  so plan now. If you sell within a certain time period you will be taxed any capital gains under the brightline test. What will you do if values drop by 15-20%? 

Step 8. Keep educated

Stay up to date with residential tenancy laws by becoming involved in your local Property Investors’ Association. The Tenancy Services website is also helpful.

Good luck with your investment.

Published 3 February 2021

Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser. All content is correct at time of publication date.