Property investors guide

Whether you have thought about getting prepared to purchase your first investment property or you are looking at expanding your portfolio, buying an investment property is a major life decision and ensuring that you obtain fantastic financial advice from a mortgage broker is essential.

With constantly changing bank policy and thousands of property listings to navigate, buying an investment property may seem daunting. That is why more and more buyers are choosing to use a Mortgage Adviser to guide them through the process of purchasing their investment properties.

At Journey Mortgages we work with potential buyers to streamline the house buying process and negotiate to get you the best finance deal so that you can focus on the investment that you would like to buy. We

understand that every person has a unique financial situation as well as financial goals and utilise our full resources to put buyers in a comfortable position to buy their investment properties with unbiased advice.

Choosing Your Investment Strategy

Investing in property has been a long-proven strategy in New Zealand for developing wealth over the long term. The main reason that this is such a proven strategy is that Kiwi’s love assets that are tangible – meaning that they are physical, and you can touch them. Another reason that property investment is desirable to many is because you can leverage your money. Leverage is created by using the banks money through a mortgage to increase the “purchasing power” of your funds.

The two main ways to create wealth when investing in property for the long term are Value Investing and Cashflow Investing.

Value Investing

Value Investing is used by investors who are willing to sacrifice a lower rental yield for larger capital gains in the longer term.

Cashflow Investing

Cashflow investing is used by investors who are looking to receive greater annual cashflow through a higher yield but who are willing to sacrifice longer term capital gains for the yield.

• If you are looking to Value Invest then you will need to look for properties that are typically a standalone residential house with a decent amount of These properties will generally realise larger capital gains in the long run, since land appreciates in value faster than the cost to build. This is because land is a finite resource as opposed to building materials and builders who will generally always be available. Houses that have a larger amount of land compared to apartments and townhouses will usually be more expensive and will generally not generate as high rental returns as their counterparts.
• If you’re looking to Cashflow Invest then you will need to look for properties that are capable of generating a higher rental return relative to their price, this is typically found in apartments, townhouses and properties with multiple dwellings. These properties do not typically have as high capital gains because they are not usually on as much However, they are often capable of producing the same rental yields as standalone houses with a lower purchase price.

Calculating Investment Yields

When evaluating if a particular property is right for your investment strategy you should get your head around the basic numbers. There are four main metrics for evaluating your investment. These are the calculations for gross yield, net yield, cash yield, and net return.

Calculating gross yield:

Gross yield = (weekly rent x 52) / purchase price

Eg. Gross yield for a property worth ($700 x 52) / $900,000 = 4.04%

Calculating net yield:

Net yield is just as important to calculate, and this takes into account costs of renting the property out such as maintenance, vacancy, rates, insurance, property management, etc…

Net yield = (weekly rent x 52) – (property expenses) / (purchase price)

Property expenses:

Maintenance = $1,000 Vacancy 3 weeks = $2,100 Rates = $4,000

Insurance = $1,500

Property management (7%) = $2,550

Eg Net yield = ($700 x 52) – ($11,150) / ($900,000) = 2.8% meaning that the property is cashflow positive before tax.

Calculating cash yield

Your cash yield is important to understand because it incorporates your mortgage repayments and establishes what your monthly cashflow looks like. Assuming you purchase your investment with a 40% deposit, you will require lending of $540,000 interest only and this is at 5% interest. Mortgage repayments annually would then be

$540,000 x 5/100 =$27,000

Cash yield = net yield formula inclusive of mortgage repayments

Cash yield = (weekly rent x 52) – (property expenses) – (mortgage repayments)/ (purchase price)

Eg Cash yield = ($700 x 52) – ($11,150) – ($27,000) / ($900,000) = -0.2% meaning that you will need to top up your investment each month.

A positively geared property does not require a top up from the investor. A negatively geared property requires a top up from the investor.

Calculating net return:

Return on investment is a necessary calculation for all property investors because it takes into account your overall return including capital gain on your original investment. Your net return is calculated by taking your cash yield and then adding your expected % capital gain. The average capital gain in New Zealand is 6% pa, but this varies widely depending on the location, so it pays to check the average yield where you’re buying.

Net return = Cash yield + capital gain

Eg Net return = -0.2 + 6% = 5.8%

Multiply this by your purchase price to obtain the equity gain you expect to receive annually

Equity gain annually = 5.8/100 x $900,000 = $52,200

Buying an Existing Property V’s Building

When evaluating your investment strategy, it is wise to consider early on if you would like to pursue purchasing existing property or building. There are advantages and disadvantages to both.

Purchasing an existing property

The deposit requirement for purchasing an existing investment property is 30%.

When purchasing an existing property, the main advantage is that it is already built and should be ready to rent out immediately. This means that you will start earning an income as soon as your tenant moves into the property. The other advantages of purchasing an existing property is that you do not need to worry about council delays with consents, and building delays with supply chain issues that we are seeing across New Zealand.

The main disadvantages with purchasing an existing property are likely increased levels of maintenance and repairs, potential hidden issues, no customisation.

In past years there has also been longer periods of ownership time before a capital gains tax is applied, and less ability to deduct interest. This is not currently the case but could be a consideration for the future.

Purchasing a new build

The deposit requirement for purchasing a new build can be as low 10% but is usually around 20%.

When purchasing a new build there are several advantages. These include the product you are purchasing is brand new so your maintenance costs should be lower and they come with a builders guarantee for several years.

In past years new builds have come with other advantages like a shorter ownership period for capital gains tax exemptions and interest deductibility. Currently their are no differences between new builds and existing on these two points.

The main disadvantages of purchasing a new build are that you can experience cost escalations in the cost of your build due to the increasing cost of materials and delays in consents and construction. Additionally, the construction process takes time to complete and you will not be earning rental income until a tenant has moved in.

The main difference we see in type of property is the deposit requirement. Lets say that you have $200,000 in cash or equity to put toward a rental property purchase. With an existing property you need 30% equity and with a new build you need 20% equity.

To get your maximum purchase price of an existing property you divide by 0.3 and for a new build 0.2.

Split Banking

To avoid the one bank trap and protect your assets, it’s important to consider split banking. This involves spreading your lending across multiple banks, giving you more flexibility and bargaining power. By having a diverse range of lenders, you can reduce your risk in the event that one bank changes their lending criteria or becomes difficult to deal with. It’s also important to regularly review your lending arrangements and consider refinancing to ensure you’re getting the best deal possible. While split banking can be more complex and time-consuming, it can ultimately provide greater security and protection for your investments.

Another potential issue with having all your lending with one bank is that it can limit your ability to negotiate better interest rates and terms. When you have all your loans with one bank, you are essentially at their mercy when it comes to interest rate increases, loan term changes, or even refinancing options. By having loans with multiple banks, you have more options and can shop around for the best deals. This can potentially save you thousands of dollars in interest over the life of your loans.

Cross securitisation is another significant issue that can arise from having all your lending with one bank. Cross securitisation occurs when the bank uses one property to secure the borrowing on another. This means that all the properties owned by the investor are tied together, and the bank has the ability to sell any property in the portfolio to recover their debt. This can be a significant problem if there is a change in circumstances or if the bank decides to change their lending criteria. It can also make it difficult to sell individual properties in the portfolio, as the bank may require all properties to be sold together to recover their debt. By using multiple banks and avoiding cross securitisation, investors have more flexibility and control over their properties and can better protect their assets.

Overall, splitting your banking can be a smart strategy for property investors looking to protect their assets and maximize their financial flexibility. It’s important to work with a trusted financial advisor to determine the best banking structure for your unique situation, and to ensure you have a solid plan in place to manage your loans effectively.

When it comes to property investing, one of the most important decisions you’ll need to make is how you’ll structure your mortgage payments. There are two main options: principal and interest or interest only. With a principal and interest mortgage, you’ll be paying off both the principal amount you borrowed and the interest on that amount. This means that over time, you’ll be building up equity in your property as you pay off the mortgage. On the other hand, an interest-only mortgage means that you’ll only be paying the interest on your loan for a set period, typically five years. This can be beneficial for investors who want to keep their mortgage payments low, but it also means that you won’t be paying off the principal and won’t be building up equity in the property over time. It’s important to carefully consider the pros and cons of each option before making a decision, taking into account your overall investment strategy and financial goals.

Understanding Serviceability

Mortgage serviceability tests are an essential part of the borrowing process for property investors. These tests are conducted by individual banks and lenders to determine the borrower’s ability to meet their mortgage repayments, taking into account their income, expenses, and other financial obligations. One crucial element of the serviceability test is the test rate, which is set by each bank individually and is generally around 2.5% higher than their carded interest rates, usually at or around 8.5%. The bank will assess whether the borrower can afford the mortgage payments at the test rate, even if the actual mortgage rate is lower at the time of application. Additionally, short-term debt such as credit cards and buy now pay later schemes is considered a liability when calculating the serviceability of a mortgage, as the borrower’s ability to make mortgage payments is reduced by these additional financial obligations. It is crucial for property investors to minimize their short-term debt and manage their finances effectively to increase their chances of being approved for a higher mortgage amount.

Buying Your First Property

Buying your first investment property using equity in your owner-occupied property can be a smart way to start building your property portfolio. By tapping into the equity you have built up in your home through mortgage payments and property value appreciation, you can access funds to use as a deposit for your investment property. This can be a more straightforward process than trying to save up a deposit from scratch. However, it’s important to ensure that you have enough equity in your home and that you can comfortably service the additional debt from your investment property. It’s also important to consider the potential risks, such as market fluctuations and rental vacancies, that come with property investing. Seeking advice from a financial advisor or mortgage broker can help you determine whether using the equity in your owner- occupied property is a viable option for you. Right now you are allowed to draw down on a loan of up to 80% of your owner occupiers value.

Example:

You own your own home worth $850,000, with an existing mortgage of $475,000. You are allowed a mortgage of up to 80% of your homes value.

80% x $850,000 is $680,000, less your existing mortgage is $205,000 of available funds.

Remember to purchase an existing property you need a 30% deposit and for a new build you require 20% deposit.

Maximum purchase price for an existing home is $205,000 / 30% = $683,333 Maximum purchase price for a new build is $205,000 / 20% = $1,025,000

Expanding the Portfolio

Expanding your investment property portfolio in New Zealand can be a great way to grow your wealth and increase your passive income. There are a few things to keep in mind when expanding your portfolio. Firstly, it is important to do your research and due diligence on any potential properties, including the local property market, rental yields, and potential capital growth. It’s also important to have a solid financial plan and budget in place, as expanding your portfolio can require significant upfront costs, such as a deposit, legal fees, and other associated expenses. Additionally, having a good team of professionals, such as a trusted mortgage broker, real estate agent, property manager, and accountant, can be invaluable in ensuring your investments are profitable and managed effectively. With careful planning and smart investments, expanding your investment property portfolio in New Zealand can be a great way to build long-term wealth and financial security.

Consumer vs Non-Consumer Loans

Laws in New Zealand changed at the end of 2021 around lending to consumers. This is covered under the CCCFA which is the Credit Contracts and Consumer Finance Act. Essentially as a result of these changes the banks have to delve deeper into the expenses and outgoings of potential clients before they can approve lending. This has led to increased frustration for purchasers of properties requiring mortgage lending. Here at Alex Toohey – Vega Mortgages we are acutely aware on what each individual bank requires for a mortgage approval so that your process is streamlined.

There are some non-bank lenders who are capable of doing Non-Consumer mortgage loans. These lenders can give you lending without delving deep into your personal income and expenses. There are a few key considerations for this type of lending and these are that the property is positively geared after mortgage repayments and expenses, that you have a good amount of equity in the property and that the lending is for non-consumer purposes.