Written by Martin Donnelly
Many of us have realised that the value of our home has increased at an amount above our annual earning capacity. Add to this the strong demand for rental properties and having the tenants funding the mortgage and there is no surprise why many of us invest in residential rental properties. It is not uncommon for young New Zealanders to commence a rental portfolio and gaining the applicable tax benefits prior to investing in their first home. There are however, prudent criteria to be determined before committing as no form of investment is free of risk.
As with all forms of residential real estate, the first thing to consider is location.
Some questions that an astute investor should be asking around location are - which locations have seen the largest growth? Has that growth been been maximised? What suburbs are the next to benefit from the wave? Is the supply of properties limited naturally by geographic features such as harbour edges, motorways, topography etc? What transport links are available or on the planning board?
It pays to invest in the dominant style of property for the area you are looking in i.e. villa, bungalows, townhouse. Buy what ever is the predominant style rather than an ‘orphan’ which won’t have the same general appeal (remember when state or estate was a negative term?). Those who take the risk of buying into an area in ‘transition’ are usually the ones who reap the greatest returns. Many baby boomers will remember when Freemans Bay and Ponsonby were seen as rough areas to be avoided.
Decide how much you are willing or capable of doing to the property in terms of minor renovations and upgrades. Consider the type tenants occupying surrounding properties- ‘student flats’ may be ideal properties to sit on for four or five years whilst the area becomes ‘gentrified’. Is there added value to the property long term such as having a legal separate ‘sleep-out’, or is the property potentially sub divisible long term. Remember, all decisions around investing and managing should be based upon considered criteria.
an investment property should never be purchased on an emotional basis - this is not a place for you to live.
It is also well worth considering having your investment property managed by quality, professional Property Managers. A good Property Manager will retain an arms-length relationship with tenants and have the ability to to select and vet suitable tenants with a positive track record.
It is vital that professional advice be sought around the ownership structure. Converting the home in which you live is not an option as the IRD will consider the purpose for which it was purchased when deciding upon taxation liabilities and benefits. Remember also, if the property is sold within 2 years, any capital gain will be taxed. Property values and rents fluctuate with economic changes. You must be able to ride out any negative financial conditions, particularly during the early days, when your equity in each property will be at its lowest. Kiwi’s naturally have confidence in bricks and mortar, but remember, no form of investment is without risk -define and quantify the risks and you are well on the road to becoming a successful residential property investor.