Property Investing – Where to Start
Property Investment can help you on your way to financial independence. This is where you can stop working if you want to, and your income from property allows you to live the life you are used to.
You should understand these concepts-
Cash Flow and yield – how much money you make from the property, less the expenses
Capital Gains – the growth in the value of the property over time
Capital Improvement – renovations, subdivisions, minor dwellings, that make the property worth more
The other keys things to keep in mind are
- Where to buy
- What to buy
- When to buy
- How to buy
- Why buy
- Be wary of experts
You should consider reading some blogs/books on property investing from different sources because ‘property investing’ is different things to different people. Successful investing is not limited to one strategy. You can buy and flip properties, you can buy and renovate then sell (trading), you can buy and hold, renovating in the process, and you can build. There are hundreds of ways to make money and you need to pick the strategy that will work for you. It might be information overload at the beginning but it’s worth knowing the different strategies before deciding on a path to follow.
So, where should you buy property? Generally speaking, buy in areas you understand, and for most people, this will be in somewhere they have lived before or somewhere close to where you live. You can research areas and learn about what to avoid, but tread carefully because ‘out of town’ investors can be taken advantage of. If you try to invest over a long distance, the flights/driving will start to take their toll if you self-manage (not worth the hassle) and you just cannot keep an eye on things. If you have a bigger budget for investing then consider Auckland, Hamilton or other major centres. Bear in mind that yields in larger cities tend to drop because prices rise to a level where investors are relying on capital gains instead of cash flow.
Matthew Gilligan of www.gra.co.nz (NZ’s largest property specialist accounting firm) prefers to buy in Auckland instead of smaller towns because of his belief in capital gains (based on historical figures) and that buying in the regions brings more complications and higher costs for maintenance (as an example a new roof on a $100k house is going to be about the same costs as for a $900k house). He is an extremely experienced investor and his company advises thousands of clients… so you need to take his opinion seriously. He does not ignore cash flow or capital improvement, but he picks higher growth areas.
In contrast, Graeme Fowler, another extremely experienced investor focuses more on Cash Flow and generally advises people to ignore capital gains because they’re not predictable and you should buy property that pays for itself (with good positive yields).
Both have a collection of books you should check out and you can join the Property Investors Chat Group NZ for daily insights. If you want to listen to podcasts, try the www.biggerpockets.com podcast – this is American but the lessons still apply.
Location, location, location as they say about Property Investing is the most important thing, and this applies to what your property is close to like schools, train stations, and proximity to amenities. Experienced investors usually have buying rules like ‘buy close to decile 10 schools and within 500m of a bus stop’. As you read and talk to more investors, you will get a feel for what is important to you.
Choosing what to buy can be tough. Everyone has an opinion. You should make this decision based on what you want…
Do you want low maintenance and managed properties? Apartments might be worth a look, they can yield a bit higher in Auckland than other properties of similar value. However, we do NOT suggest you buy apartments because their values can fall sharply and oversupply is common. Capital gains tend to be lower for apartments than for properties with good land sizes (houses in the suburbs). If you buy an apartment that has a very little option for renovation/improvement, you are basically buying for cash flow and are taking the risk on body corp not significantly increasing and capital gains keeping up with other property types.
Tread with caution when buying apartments especially from agents or brokers that make a commission when you buy from them. One of my best friends bought off the plan for $715,000 and sold 4 months later for $885,000 – a spectacular buy. He did a ton of research, knows the market well, understood the building and timed things perfectly. But he was lucky and smart. It’s a risk to speculate like this. Do not get tricked into buying an apartment from an agent or broker who has a commission lined up for themselves when you buy (repeated for effect). Only buy an apartment if it matches your lifestyle and goals and you have at least considered other pathways.
Buying a property with some land is preferable. Depending on your budget and location, try to look for properties that have subdivision or development potential, even if you never plan on doing this yourself. That way you get future value locked in and can create yourself some equity.
For example, let’s say you buy a single house on 800m2 that the seller is desperate to sell because they have a new job in Aussie. The house needs some renovations before being rented again and the site can fit another 2-3 properties if zoned correctly (check the unitary plan). If you can pick up the house at a $20k discount from the Registered Valuation, and spend $10k after you buy it for renovations, you might get the house value to increase by $50k which helps you lock in more equity to use for future borrowing. The future value of the house will be dependent on the number of properties it can fit and your ability to renovate it and improve the valuation. You cannot do this with apartments.
The reason we tend not tend to advise New Builds for investors, even though the LVR rules make it easier to buy them, is because the ability for you to add value through renovations is unlikely (the house is new), and capital gains on new builds is often (not always) slower to eventuate as builders take a big margin on the project and land is often smaller in comparison to other houses in the same area for the same price. New builds tend to be on smaller plots of land. Having said all this, if the property is cash flow positive or you really believe it is undervalued, then trust your instincts.
Deciding when to buy an investment property can be tough, especially if you are reading what is in the headlines each day. There are plenty of people that wait and wait and miss out on good opportunities because they’re scared of losing money. As long as you’re buying at a good discount, and have thought about cash flow, capital gains, and renovation potential, it’s always a good time to buy. Lots of property investors talk about property cycles, which can be shown in the growth charts, but don’t let this fool you. Every day property investors are buying, and in many cases getting a good deal. You just have to know your numbers. This includes your borrowing power so you can take action when you find a good deal. Your mortgage adviser can help with this or just fill in your details on our site and we will.
Buying a property can involve many different sales methods; buying at auction, by negotiation using an agent, directly through a private sale, and there are many more ways. Most sales will happen through auction or by working with the vendor’s agent trying to find a price that works. What you should have before going to auction is a pre-approval otherwise you’re taking a big risk that the bank might say no to the property in question or that your finance is not approved. An auction is an unconditional offer… no second chances. When negotiating on a property against other potential buyers, it is often not the highest offer that is pushed by the agent who wants not only to get the highest price but to make sure the sale goes through. You will have more negotiation power with fewer conditions on your sale & purchase agreement. When no one else is bidding you can add in many conditions and the agent will begrudgingly accept, but if 2 offers are the same price and one includes and finance clause and the other does not, the agent will favour the agreement that is more likely to close. This is where a pre-approval is helpful. If you are trying to score a property at a discount and feel that you want to lock up a property for 10 working days under contract to do inspections etc then try using a due diligence clause (agents do not usually like them).
Investing in property is a long-term commitment. When you buy shares you can sell them the next day, but buying a property means loan payments, rates, insurance, tenants, maintenance, etc… there is a lot to it. This is why so many people do not buy property. They cannot afford it or they cannot be bothered (or a combination). This is part of the reason the rewards can be so great when you own investment properties because they are essentially a business and not everyone is suited to being ‘in business’. If you research and prepare well, buy at a discount, and add value to the property, you can add $50-100k to your net worth every year or so and do this for 10-20yr as long as you are disciplined.
The most important factor to successful property investing is your mindset – this is my opinion but shared by many. Check out more on that here –
If you would like to build up your team with expert property investment advisers who already help 1000s of other clients just like you, fill in the form and book a call with one of our free mortgage advisers. It is important to choose a mortgage adviser with options at all banks and lenders, many brokers do not have access to Kiwibank (for example) and this means they cannot always guarantee the best rates or negotiation power. When you work with an independent mortgage adviser, choose someone who has a lot of experience helping hundreds of other clients like yourself, too often we see people work with their mate or cousin who just started mortgage brokering which can lead to major headaches. You do not know what you are missing out on. The spreadsheets, the offers, the advice is so different between advisers that you will want to work with the best once you have tasted what is on offer. As always, iRefi Advisers are generally free to work with, the only time you will be charged is with non-bank lenders and this is disclosed in advance. All main bank services and advice is free.
Frequently Asked Questions
What You Ought to Know
A little while ago we were talking with the owner of a small but growing landscape business and a home, a smart guy who understands business. He’s saving for another house to rent out. He also said he’d never thought about his mortgage because he was afraid he wouldn’t understand the ‘lingo they talk’ when dealing with the bank. Since we help people with mortgages you can imagine this was something of a shock… made us think how many other people would like to understand the banking terms better.
The mortgage business does use a lot of specialised words but there really isn’t anything especially complicated or mysterious about what these mean. Because we’ve used them so long and so frequently we’ve just assumed everybody understood them. That has been our mistake. And a big mistake. For if people don’t understand what mortgage terms are, they aren’t likely to spend their time considering their options. “So what?” you ask. Well, here’s “what”.
A lot of people might want to invest some of their savings where they can get a fair return on them, for many New Zealanders this has been in property. But they are unfamiliar where to start or what their appetite for risk and rewards are. If you want to consider home loan options but you’re unfamiliar with the terminology, it’s unlikely you will put your money into them, and miss out on the benefits. For all these reasons and more, it’s important that people know as much as they can about this mortgage business.
You can skip over the stuff you already know.
What is the difference between fixed and floating terms?
Fixed terms bring certainty to your mortgage repayments over the agreed period (for example 4.69% fixed for 2 years). In NZ it’s common to fix for 1-3yrs at a good interest rate (what on the day is perceived to be good). Banks like to have a mixture of fixed and floating loans on their books to manage their own risks to the global markets and this is one of the reasons the rates fluctuate. Banks try and keep both the fixed and floating rates somewhat competitive and let the consumer decide.
It’s more traditional in New Zealand for people to fix for short to medium terms and assess the rates every few years. Floating terms allow you to ride the interest rates up and down, this is linked to the Official Cash Rate (OCR). Your repayments will go up and down each month but you’ll be able to fix when you think there’s a good interest rate.
Should you fix, refix, refinance, or float…?
This really depends on the type of homeowner or property investor you are. When the rates are low and falling you’ll want to fix at a good rate before they start going up again. All global markets go up and down in cycles that are very hard to predict, even the experts struggle, so it’s best to get advice from an expert you trust.
What is re-fixing?
When you’ve got a mortgage on a fixed rate you can re-fix with the same bank at a different interest rate but there’s usually a penalty for this. The reason you’d consider this is because the savings from the lower interest rate would be lower than the cost of the break fee(s).
What is the difference between re-fixing and refinancing?
Re-fixing your mortgage refers to a new loan with the same bank you’re already with. Refinancing is when you change banks to take advantage of lower rates. Whilst it’s easier to stay with your current bank, it can be more better to refinance your mortgage with a different bank who will offer more attractive interest rates or offer you cash back to incentivise you to switch. Most banks have dedicated teams to help people switch banks and all automatic payments are seamlessly brought over. One of the reasons banks do this is because of their monthly targets. Your current bank might not be able to match the attractive rates and rewards being offered by other banks.
Use our refinance calculator to see how much you could save with a lower interest rate.
What are ‘break costs’?
Break costs are the penalty for cancelling your mortgage. The bank will try and discourage you from changing to a lower rate or switching banks by charging you a fee. Usually the only reason you’d pay this fee is because the benefits are bigger than the fees. If you’re switching banks the new bank might help you pay these fees with cash back. You can also add the break fees to your mortgage with the lower interest rate and pay this off over the life of your mortgage. In the long run it is often a small price to pay for the benefits of re-fixing or refinancing. Some people do get a little worried when the break fees are big fees in the $5-10,000+ range but when they see that they are saving much more than that they can see it is worth it.
Use our break fee calculator to get an estimate of your break costs.
Should I float or fix or both?
That’s a tough question and without too much more information it’s best to leave it with this: if you have an average mortgage and can make the repayments consistently each month, you’re probably fine with either option. If money is tight you’re best to fix now while rates are low and work out your costs going forward with a plan in place. Again, it’s best to get an expert to look over everything and like you would with medical questions, a second and third opinion can’t hurt… especially when they’re free.