Author Katrina Shanks, CEO Financial Advice NZ Article originally published on Stuff.co.nz.
Property has always been a popular choice of Kiwis as a form of investment, going back as far as anyone cares to remember.
Reserve Bank figures show that since 1965, actual house prices have risen significantly. Up until 1991, the average annual increase was 12 per cent, but after low and stable inflation was established that year, it dropped to 7 per cent.
But that’s still much higher than the returns of the share market over a comparable period, and certainly higher than the rate of inflation.
And while there are always ups and downs – as we’ve seen over the past two years – property remains one of the best investments you can make.
I recently wrote about the four main investments to protect your money from the erosion of the inflation – shares, property, cash, and fixed interest. And I said one of the keys to investing is staying ahead of the rate of inflation.
Like shares, the figures above show property, over time, will do just that. So let’s take a look at its different forms, their benefits and what to be wary of.
As with any investment, you need to look at your risk before you start. That is, how much money you can afford to lose if things don’t work out and the market slumps or mortgage interest rates jump.
Risk is also directly related to when you’re going to need the money you’re investing and where to invest it. For example, are you approaching retirement, or are you a long way from that? Can you afford to lose money on an investment in the short term? If your circumstances change, how long could it take to sell the property?
You should also look at your finances to see what you can afford, and you do that by understanding your incomings (wages) and outgoings (living expenses) – and with property, the tax implications and bright-line tests.
The different forms of property investment
You can buy a property with tenants, buy one to flip for a quick profit, or a dunger to do up and sell. Whichever you decide, your investment property has to be practical. Will it give you the capital growth you want? Will it be able to create a good revenue stream until you decide what you want to do next?
A good rule is to not buy it just because it looks good. That won’t necessarily give you the return you want. It has to work for you and the numbers have to stack up. That should be your top consideration. Do your research, including getting a Land Information Memorandum (LIM) to make sure a factory can’t be built next door, and to help show you it’s in a growth and high-yield area.
One of the most popular property investments, and one that has the most benefits, is that which enables you to create a passive income while owning an asset that grows over time. That’s a property where tenants pay a good proportion, if not all, of your outgoings while the property (hopefully) appreciates in value, and you get capital growth when and if you decide to sell.
Those outgoings could include your mortgage repayments, rates and even maintenance and upkeep. If the rent covers all your outgoings, then maybe over the long term it could create you an income so you don’t have to work.
At some point, perhaps when the mortgage is paid off, you may have to decide if you want to keep the tenant on or sell. What’s more useful to you and your lifestyle plans: a $200,000 profit when you sell or $600 income a week?
Be aware you will have to pay tax on the profit from the rental income but nothing on the profit from the sale – as long as it’s outside the bright-line test. That test stipulates that the gain made from the sale of a property bought after March last year will be subject to tax if it’s sold within 10 years, unless it’s a new build.
Of course, if the rent covers most of your outgoings then you’re benefiting anyway from capital gain, so it may be best to wait until it’s outside the bright-line test before selling, so maximising your profit.
The downside to renting is having to do constant inspections of the property, keeping up to date with regulative changes, and having to find new tenants if existing tenants move out. Or having to pay someone to do all that.
The trick is finding the right property in the first place, getting the deposit, convincing the bank you’re a good risk, and getting an interest rate and setting a rent that makes it economic. In the current market, that’s not quite as easy as it was before the pandemic struck, with interest rates rising and credit tightening.