Why Investing in Properties
As a starting point, let’s talk about why we want to buy investment property. From talking to my past clients, here are the main reasons I’ve heard.
- When reaching retirement, people can sell investment property which has gone up in values over the years and then pay off debts and any surplus to support a good lifestyle in retirement.
- When people retire, they want to have at least one investment property which has no debt or little debt. The net cash flow from the rent provides excellent passive income for retirement living.
- They use investment property to help their children achieve their financial dream by either gifting or providing a personal guarantee.
- From a building wealth perspective, if you manage well, the power of leverage in property can provide a much better return for people than investment in shares or putting money into a bank savings account.
- At the time of writing this article, if you hold property for more than 2 years from the purchase date and your intention is for long-term investment (buy-to-hold), then you don’t pay capital gain tax. All other types of gain are taxable in NZ.
- Buying investment property should be a long-term game. If you buy and then quickly resale, you will miss the capital growth period and also have to pay capital gain tax to IRD and real estate fee, finance fee (with property trading, finance normally come from non-bank lenders who charge 1%-2% application fee), solicitor’s fees. After deducting all these, there is not much wealth left for yourself.
- Capital growth assets make you rich, cash flow assets keep you solvent. In order to grow wealth, you must have capital growth assets, otherwise, what’s the point of investing after the hassle of property management and taking risks. However, you can go broke if you can’t meet all the outgoings so cashflow properties are also essential. Best practice is to have a balanced portfolio.
- Location, Location, and Location! Choose high growth areas where supply is tight and demand is high, have high average incomes, and lots of economic activities.
- Buy at a discount if possible or find the one that has the potential for adding values. Don’t just pay market price and rely on organic growth over time especially in the down market.
- Use mortgage brokers who understand property investment, structuring and have access to wide range of lenders.
- Recycle deposit - This is a useful tool if you want to build your property portfolio reasonably quickly and can’t wait for the market to pick up organically. The concept is that you buy a property, add values by renovation, and then get it evaluated at the increased price by a registered valuer. You then go back to the bank to request a top up so you get your deposit back. This is a complex area which needs to have the right structure in place. Best to talk to a specialised mortgage broker before taking action
- Clearly define buying rules and then follow them. When making decision rely on numbers and quality of the assets, as opposed to your emotion. Buying rules include minimum yield, minimum capital growth rate, location, land size, development potential, property type, max purchase price, etc.
- Understand property cycles and use different strategies at different cycle stages.
- Use buy-to-sell to create deposits in order to buy capital growth assets to hold for long-term
- Learn through education. Education can fast-track your success. Trial and error can be slow and very costly.
- Have the right tax and legal, and finance structure.
- Managing interest rate fluctuation.
- Have a line of credit set up in advance to create liquidity buffers.
- Split banks to minimise the control of your affairs from a single bank.
- Don’t cross secure your family home with your business or investment properties
- Don’t get your spouse provide personal guarantee unless the loans rely on their income for servicing
- Always confirm finance before going unconditional because the consequences can be very expensive
For more in-depth discussion, please check the other three sections.
Other Useful Tips
- Set your goal and create strategy plan – if you don’t know where you are going, how you are going to measure your progress? If you don’t have a strategy, then the result can be random.
- Start with an easy and small project. If you make mistakes, it’s not going to cost you a fortune.
- You can’t be an expert in all aspects of property investment. Find experts in your property investment team with the right skills and knowledge and experiences, understand your goals and have your best interest at their heart.
- A good Mortgage broker specialise in investment property finance and good at structuring and advice focus, as opposed to transactional focus. I am a property investor myself and use to own five rental properties. When I work with you as property investor client, I understand the most important things in property investing, know the pitfalls and more importantly, I know how to support you.
- A good accountant who specialises in property investment, who not only understands tax but also appreciates the asset protection aspect.
- A good solicitor who can act fast, contactable, and specialise in property investment, not just property conveyancing.
- A good real estate agent who can understand your buying rules and find the right property for you before it’s on the market
- A good property manager to managing your tenants, maintain your property, collect rent on time, review rent to make sure you receive the market rent.
- A good insurance broker to review your personal risks every year. Don’t use the bank’s insurance products, as their policies have limitations than going directly to an insurance company via a broker.
- Undertake a thorough due diligence on the property you are looking to purchase.
- Don’t borrow to the max capacity – leave breathing space for yourself.
- Take landlord insurance for rental property.
- Have good mindset – property has its cycle. In Auckland, it ranges from 7-10 years. When you experience down market, don’t panic and sell. If you buy wisely in the first place and have the right structure in place, you can ride out the downturns and recover well.
- Spread your investing out over years. Don’t buy too much in one year.
We initially approached Connie regarding our home loan refinance because my wife normally worked during daytime but I worked at night shift for 3 days a week. It was not convenient for us to go to bank directly.
Connie went to our house during night time where both of us were available to review our existing home loan and discuss our financial goals. She sorted everything for us with a breeze. We were not only successfully refinanced existing home loan and secured very good interest rates and cash rewards but she also managed to help us finance our first rental property without any cash deposit by leveraging our home equity which we were not aware of before. She also gave us great advice on how to manage our home loan so they can be paid off quicker and build wealth through property investment.
We definitely recommend Connie because her knowledge, experience and expertise in finance gave us peace of mind. She is always there to help us and keep us updated regarding our home loans.