Property investment in New Zealand continues to be a hot topic, despite tighter loan to value restrictions aimed at investors, and stricter lending conditions that have been put in place to ease demand and slow house price rises. Savvy investors with a growing property portfolio stand to benefit from excellent capital gains and a sound investment for future wealth. However, there are some risks and it’s important to balance these with the benefits of property investment. Here’s a brief look at some of the benefits of property investment, as well as the risks.
Retirement savings and future wealth
If you’re relying on your New Zealand superannuation alone to comfortably retire, you may be in for a bit of shock. Currently, the NZ super is $437 per week after tax for a single person, and $336 each for a couple. With the rising cost of food, petrol and rent, it’s hardly surprising many New Zealanders are turning to property investment as an alternative option for bumping up retirement savings.
The returns from property investment are twofold: firstly, from rental income paid for by tenants which, in most instances, is used to pay down the mortgage and other rental expenses; and secondly, from capital gains over time.
Once the property is paid off, any rental income becomes profit, providing you with a decent income. And, as property is most likely to increase in value over time, once it’s sold any capital growth it earns could provide you with a comfortable nest egg for retirement.
While there several tax benefits to investing in residential property – such as tax deductible expenses relating to your rental income - it’s important you’re familiar with the tax implications around selling of investment properties for capital gain. Government’s bright-line test means that if you sell a residential property you have owned for less than 10 years you may have to pay income tax.
Accelerate returns by leveraging
Leveraging means using someone else’s money – in this case the lender’s finance – instead of your own to buy an asset – such as an investment property. When determining whether or not to approve an investment loan and how much they are willing to finance you, the lender will look at the value of the property, rental income the property is expected to produce, as well as your personal credit situation.
Property investors choose to leverage for two reasons: to maximise returns by putting less of their own cash into each property investment, and to increase returns when the interest they’re paying on the loan (mortgage) is less than the rate of return on their investment.
Of course, the greater the debt, the more exposure to risk when it comes to factors like interest rate increases, changes to Government or bank lending policies, or unexpected economic events. It makes sense to get expert guidance and professional advice before employing a leveraging investment strategy.
Maximise the equity in your existing home
Equity is the amount your home is worth – its value – minus what you owe on your mortgage. For example, if your home is valued at $800,000 and you owe $600,000, you have $200,000 in equity.
If you’re looking to buy an investment property, you may be able to use the equity in your existing property to borrow against to buy an investment property. Which means you won’t have to save a deposit in order to add to your property portfolio.
There are two ways to build equity: either your home’s value increases over time due to market changes or home improvements, or you pay back the principal amount you borrowed or reduce the credit limit of your home loan over time.
Some key risks of property investment
When it comes to investing in property, it’s important to be aware of the risks as well as the benefits. Risks include being unable to repay the mortgage; a drop in property value which means you owe more than your property is worth; a rise in interest rates which reduces rental income; high vacancy rates (the property may not always be tenanted and high vacancies are especially risky if you depend on rental income to pay for the property's outgoings e.g. mortgage instalments, insurance, property taxes, maintenance, and so on).
The decision to buy an investment property should be carefully balanced by weighing up the potential risks and the benefits, in consultation with your Mortgage Express branded financial adviser.
Take control of your investment
There’s no doubt that property investment can pay dividends. Not only could it set you up for a comfortable retirement, for many Kiwis, it’s also a way to grow wealth. But there are risks involved too. If you’re just starting your property investment journey, or you’re looking at adding to an existing property portfolio, talk to the team at Mortgage Express about your options for finance.