Your Guide to New Zealand Property Investment - How To Become an Investor

Learn the basics of property investment in New Zealand and how to set yourself up for success.

Getting Started

Congratulations on taking what is probably your first step towards becoming a property investor. This guide is intended to introduce the key points to consider in the New Zealand Property Investment landscape:

• Funding – you need to understand how money is raised for an investment property and how much of it you can raise.
  

• Portfolio Basics – how to build a resilient portfolio you can live with for 10+ years (property is a long-term investment).
  

• The Numbers – yield, capital gain, and return on investment.
  

• Asset Selection – apartments, townhouses, houses, and the merits of each.
  

• Finally – finding a deal!

Property investment is a popular way for Kiwis to set themselves up for retirement

Funding

The best investment property is the one you can get funding for, so it’s essential to understand how much you can borrow.

This can be broken down into two sections:

1. Equity

Equity is the difference between the value of your property and the outstanding mortgage (the bit you own).

Investors mostly use the equity in their owner-occupied house as a deposit for their first investment property, so they need to know how much equity they have available to them.

Equity is calculated by:

Property Value - Outstanding Mortgage = Equity

Here's an example of how to calculate the equity in your home:

• Property value: $1,000,000

• Outstanding mortgage: $650,000

• $1,000,000 - $650,000 = Equity of $350,000

However, you can’t use the full amount of equity for a deposit because the banks will only allow you to lend up to 80% of the value of your house.

This is what we call ‘useable equity’ and it’s what makes up the deposit you have available to you (assuming you aren’t contributing any cash).

Useable Equity Example:

• Property value: $1,000,000

• Outstanding mortgage: $650,000

• ($1,000,000 × 80%) – $650,000 = Useable Equity of $150,000

  
  

Investors need a 20% deposit for new build investments and a 30% deposit for existing properties. This means your useable equity needs to be more than 20% of the purchase price for your first new build investment.

For example: If you had useable equity of $150,000, you could afford a $750,000 new build, but only an existing property up to $500,000.

People often debate whether to invest in new-build properties or existing properties. Although we will touch on this topic in this document, click here to read more about this and where we stand on the subject.

2. Serviceability

Serviceability is the ability for you to pay your mortgage.

The banks have a number of checks and balances in place to judge investors on their ability to service the debt.

Although not formally in place, it’s convenient to consider the Debt-to-Income Ratio (DTI). A DTI means people can only get lending from the bank up to a certain multiple of their income.

For instance, if a bank imposed a DTI of 7, this means someone can only get lending of up to 7 times their gross annual household income, plus the rental income on the new build investment property at 80% (assuming a 20% vacancy allowance).

For existing properties, banks will only consider 70% of the rental income.

DTI Example:

• Gross Annual Income: $160,000

• Rental Income: $600/week × 80% × 52 weeks = $24,960

• DTI = 7

• Outstanding Mortgage: $450,000

  
  

Borrowing Power: (($160,000 + $24,960) × 7) – $450,000 = $844,720

Now, combine equity and serviceability. In the example above:

• $150,000 deposit available

• $844,720 serviceable debt
  

This person could purchase a new build property worth up to $750,000.

Use our calculator to see how much buying power you have

Speak With A Broker

A mortgage broker will be able to give you further advice on lending capability and specific advice around banks’ lending policy, interest rates, and so on.

It can be tricky for investors to get lending, so here are a few tips on how to improve your chances of getting approval. Banks consider three things when assessing your loan: character, security, and serviceability (more on this under Investment Concepts).

Tips to Boost Your Position

1. Tidy up your accounts.

2. Pay bills on time, avoid overdrafts.

3. Cancel short-term debt like credit cards or hire purchase.

4. Keep up-to-date financial records.

5. Show a consistent savings history.

6. Take in a boarder or two.

7. Ask for a raise.

8. Convert commission/bonus to regular income.

9. Cut subscriptions and discretionary spending.

10. Consider fuel-efficient vehicles.

11. Revalue your property.

12. Accelerate mortgage payments.

    
    

Tip: A mortgage broker can coach you on all of this. Thrive Investment Partners has an associated company that can help. See more at The Finance Factory.

Portfolio Basics – Key Investment Concepts

The following five investment concepts should be at the forefront of your mind when researching how to grow your property portfolio:

1. Scale

Scale refers to the number of properties and the value of the assets under investment. Closely related to leverage.

This is the idea that you need a big enough position in a market for the increase in value to be meaningful in terms of your goal.

Retirement is a big undertaking, and to do it well takes a lot of capital. Property investors largely seek capital gains to a greater or lesser extent to accumulate this nest egg.

Scale shows us the risk and return that comes with building a portfolio

For example:

• Small Scale – purchase a single investment property and commit to repaying the loan. Let it appreciate and either sell or rent it to fund retirement. There is no speculative element as there is no dependency on appreciation in value. Although this is harder to achieve, as no other properties are being sold to help pay off the first property.

• Medium Scale – several properties are purchased (say four). These are held long-term, and the mortgage is paid down as much as possible. Eventually, the investor sells one or two to pay off the balance of the debt. The retained properties are rented to fund retirement.

  
  

• Large Scale – the investor purchases as many properties as the lending criteria allow. All lending stays interest-only. When the time comes, the investor sells as many properties as necessary to freehold the balance.

2. Typology

An investor can increase scale by varying the typology (type of property).

Invest for growth

Some property grows in value fast but doesn’t produce a lot of yield (rent). Those properties make you wealthy but sap cash flow, meaning borrowing capacity is exhausted sooner.

Invest for yield

In contrast, some properties generate a lot of rent relative to purchase price, high yield. Often, these properties have limited capital growth.

Investors can use this to their advantage by holding both types of property. The high-yield properties help pay for the high-growth properties. This allows further leverage/scale and larger profits over the long term.

This curve allows us to rank properties according to their characteristics

Property is scored on a curve. The best property in the best area with the best prospects for growth should have the lowest yield. The worst property in the worst area with terrible prospects for growth should have the strongest rent yield.

If this doesn’t hold, the property is considered “suboptimal” and should be ignored.

3. Duration (Time)

There is a correlation between age and the appropriate amount of risk/scale/leverage. Time informs as to the scale and level of speculation that is appropriate for the portfolio.

A 60-year-old who wants to retire in five years wouldn’t spread their surplus income across four properties. They would be likely to buy one, put cash into it, and aggressively attack the mortgage with principal and interest repayment (amortisation). Potentially, also using some of their KiwiSaver payout to finish the loan repayment to produce an inflation-resistant income stream in retirement.

A high-income 30-year-old could justify focusing solely on their own mortgage and using the equity in the property to propagate a multi-property portfolio, leveraged to 100 percent. Those loans would be “interest only”. With a 35-year investment horizon, there will be multiple cyclic “booms”. Usually, these investors seek a cash flow-neutral portfolio and that is what justifies their choice of typology.

4. Diversification

This is a simple but extremely important concept. It works on the premise that picking winners is fickle.

By spreading your investment across the country and across a range of typologies, you will get more consistent and greater capital appreciation and rental return.

Our philosophy on this is to try and choose properties that are not correlated i.e., not part of the same market, nor influenced by the same factors.

5. Leverage

Leverage is using borrowed money to make more money, with the requirement that your return is greater than the cost of using the borrowed money.

The return from the investment should be greater than the interest rate; otherwise, it’s not viable. There is more to it, though. The ability to access borrowed money depends on three things:

• Character
  

• Security
  

• Serviceability

Character means you pay your bills and do what you say you will do; almost all our clients have no problem meeting this threshold.

Security for residential investment means having headroom between the value of your property and the maximum lending-to-value ratio. For your own home, you can borrow up to 80 percent of its value. For any existing properties, you can borrow up to 70 percent of the value.

But it gets even more complex when you spread your borrowing across different lenders, and if this is done right, it allows you to access more capital without increasing the interest rate or risk.

Likewise, getting the typology and the split between yield and growth right allows you access to the optimal amount of leverage.

You can download this investment guide by clicking on the image above

Serviceability is the main hurdle for most investors. Again, this is heavily influenced by the split between growth and yield properties. Choosing properties with strong cash flow, even though the capital gain prospects are lower than other options, can make sense because it enables you to increase scale. This trade-off is central to building a property portfolio.

Cashflows and Capital Gains Projections

Working out the cashflow is important so investors can understand the cost of ownership. Let’s run a basic cashflow:

We can also forecast capital gains by compounding a growth rate, say 5%, for the number of years the property is owned.

Asset Selection

So, what do I buy?

In the residential property space, there are apartments, townhouses, and houses. So, what are they and what’s best? The simple answer is that there is no silver bullet.

Let’s consider the differences:

Apartments

Apartments grow in value more slowly than townhouses or houses, but are generally higher in yield. When considering cash flow, investors look at yield.

Gross yield is the amount of income a property receives in relation to the purchase price. You can calculate it by the following formula:

• (Annual rent/purchase price) * 100

Let's presume the apartment costs $500,000 and has a weekly rental income of $550 ($28,600 annually). The yield would be:

• (28,600/500,000)*100 = Gross Yield of 5.72%

Because apartments tend to have a lower purchase price and a similar rent to the other options, their yields are typically higher, meaning investors seeking cash flow prefer apartments.

Strong yield makes it easier to get funding for your next property. However, the trade-off for high yield is lower capital growth, so it’s important to consider this when weighing up your investment options. Ideally, one offsets the other because capital growth is where the majority of wealth is made during a property investment lifecycle.

Townhouses

Townhouses are usually cheaper than houses because there is less of a land component and often fewer external walls.

Townhouses represent a middle ground for investors where they can purchase at a reasonable price, have a good yield, and high levels of capital gain.

Townhouses are a very popular investment choice and especially good for first-time investors who might not have enough equity or serviceability to pay for a more expensive standalone house.

Townhouses offer a good balance between growth and yield, often at lower prices than standalone houses

Houses

The most expensive of the options.

An off-the-plan house & land package has the highest land component and is standalone, meaning it doesn’t have any shared walls. A lot of New Zealanders grow up with this sort of living situation, so the lure of familiarity is large.

However, this doesn’t mean it’s the best investment option for first-time investors because the yield is often low (weak cash flow). This makes the cost of ownership high and rules out a lot of first-time investors because they don’t have the surplus money to fund the investment.

Finding a Deal

What does a good deal look like? Here are some focus points:

• Is the price reasonable or under market value?
  

• Can I negotiate a discount on the purchase price?
  

• Does the cash flow stack up?
  

• Is the developer reputable?
  

• Is it in a good location?

Common Risks

There are also some inherent risks with buying property, so here are some key things to look out for:

• Developers with poor track records. Has the developer delivered products as promised in the past?
  

• Contracts with hostile clauses. Once you have a conditional contract in place, make sure to seek legal advice on the clauses within the contract. Sunset clauses, vendor conditions, and price escalation clauses should all be noted. Read more about sales and purchase agreements by clicking here.
  

• How your deposit is treated. The majority of deposits are kept in a solicitor’s trust account and can’t be accessed by the developer. This means you will get it back if the development is discontinued, but this should still be checked with your lawyer

So, which property should you buy?

As always, it depends on your individual circumstances. Your personal financial situation dictates what investment type is best.

It’s hard to do any of this on your own, and it is important to seek advice from experts who can help you. Building a team of experts around you is a critical first step to unlocking a successful property portfolio and setting yourself up for a bright future.

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What do we do?

We help Kiwis build wealth through property investment. Our advisors will take the time to understand your individual needs and recommend suitable investment properties to help you build wealth and set up your retirement.

What does this look like?

We use a 3-step process:

1. We start with a Discovery Meeting where we learn about you, your goals, etc. and you learn more about us.
   

2. This is followed by a Strategy Meeting where we model your retirement plan, understand key investment concepts and briefly touch on some investment choices.
   

3. Finally, an Asset Selection Meeting where we discuss investment options in more detail and make any recommendation adjustments based on what we now know about you.

Who are we right for?

We help people with limited knowledge of the property market make smart investment choices and set up their futures. From first-time investors to experienced investors, we can cater to a wide range of people and help set up their futures through research-based property investment.

How much does it cost?

Nothing! We get paid a fee from the developer when a property is transacted so you are getting expert advice at no charge - it's a no-brainer!

How do I start?

Start the process now by booking a time to talk with our advisor by clicking here.