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NZ Home Buyers Guide
Here we look at the types of ownership and what to look for when buying your first home.

Guide to applying for a NZ home loan
This 5 step guide outlines what you will need to prepare and what we will do to assist you with your mortgage application.

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Calculate your monthly or fortnightly repayments with this mortgage repayment calculator.

Want to buy NZ Property but live Overseas?
At Approved we have many off-shore clients - Expatriate Kiwis and people looking to emigrate or invest in New Zealand.

NZ Bank Fees
Here we look at the various fees associated with mortgage finance.

The Legal Process
See how the legal process works when purchasing a property

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Saving & Investing
  After being mortgage brokers for many years it becomes apparent that it does not matter what your income is‚ it's what you do with your income that really counts. Full story...

Why buy NZ Rental Property?
Here we look at the advantages of investing in New Zealand rental property and why the current demand is so high.

Why Have an LAQC as your Investment Vehicle?
If you are investing in rental property in New Zealand you may benefit by setting up a Loss Attributing Qualifying Company.

 



investing in property in new zealand

New Zealand Rental Property Investing

Demand for investment property in New Zealand has been extremely strong in the past few years with high net immigration inflows and many ex-pat Kiwis returning home. Current yields of between 5-10% and good capital gains for residential property have resulted in many Kiwis switching from managed funds to property as their primary retirement vehicle.

Part of the demand has been due to urban population growth, particularly in Auckland, which has been growing at a rate of 49 people a day, but also by the "coastal land grab" which has seen areas like Nelson and Queenstown achieving massive capital gains in the last few years. Many areas like Mt. Maunganui, the Coromandel and Paihia have also seen strong growth.

A key point to remember is to use your home as equity to purchase rental property, rather than paying off your mortgage, then "trading up" to something better and renting out current your home. This allows you to claim maximum tax deductions on your rental property. This of course means you will have greater debt, but it is that debt that allows "gearing" to help create wealth - talk to your accountant, lawyer or financial advisor - if you don't have an accountant we can recommend someone to you.

If you are looking to invest in property, we can help you arrange the finance, either before you have found a property, with "pre-approval" (which gives you a good indication as to whether the bank will loan you the amount that you require) or if you currently have a property you are looking to purchase. You can call our toll-free number, 0508 APPROVED (0800 277 776) or use our mortgage application questionaire.

Places to look online

These websites are a good place to start looking for property. Many agents now have good systems in place to answer most of your questions online and usually supply more information to you on request by email. It pays to let the agents know if you are looking for an investment property as they may have similar properties not listed on their site.

Property Directories

  • Realenz Official property directory of the Real Estate Institute of New Zealand
  • Open2View Good site for seeing many properties online
  • NZHerald As listed in the "Auckland" Herald

Real Estate Agents

The advantages of investing in property

Shares and property are the best way to generate real wealth over the long-term. Hundreds of years of history show us that these asset classes are by far the safest over the long-term. The biggest risk you can take over the long-term is to leave all of your money in cash or fixed interest that historically return far less than property or shares. This is particularly valid when one looks at the magical effects of compound interest  3 or 4% per annum may not seem like too much of a difference but when this difference is compounded over 10 or 20 years it can make a huge difference to the future value of the investment.

In a way property and shares in New Zealand are quite similar. Both investments receive income  rental income from property and dividends from shares. Property and shares also have tax-free capital gain in New Zealand (provided you did not purchase specifically to make a profit or are a trader for tax purposes). Share prices go up because the company profit increases (therefore resulting in higher dividends), likewise property values tend to go up when the rent goes up.

To put this in context for property imagine the following scenario. You purchase a $100,000 house. The rental income is $10,400 p.a. ($200 per week), or a 10.4% p.a. return. Imagine you begin to notice in the newspaper that similar properties are now being rented out for $400 per week ($20,800 p.a.). Now an investor comes along, looks at your property after seeing the rental income obtained by similar properties to be $20,800 p.a. and offers $100,000 for the house. If you then sold the house to the investor s/he would rent it out at the going rate of $400 per week and get a 20% return  hence, when the profit (via rent) goes up the capital value of the property goes up. Now, this is an extreme example of course. Rents don't go up by $200 per week very quickly - it won't happen overnight (or even over a year or two), but it will happen!

Property and shares are both fine investments to have, however property has one particularly attractive advantage over shares  gearing. Gearing (or borrowing) magnifies the returns significantly. For example, you purchase a property for $100,000. You use $10,000 as a deposit and borrow $90,000 from the bank. The property price rises by $10,000 over a two-year period. What return have you made? Ten percent? No. One hundred percent! Remember you only put in $10,000 of your own money and that has increased $10,000. Banks will loan very little against the value of shares but will loan up to 95% of the value of a property.

Why Rental Property?

One of the advantages of property is the fact that your tenants will help pay off the loan and the IRD helps out with the taxation. Considering taxation is the single largest expense you have it pays to look at ways of decreasing these bills you pay to the government.

Assuming you're not a property trader or developer, increases in property values are tax-free (NZ being the only nation in the OECD that does not have capital gains tax) whilst expenses associated with gaining income are tax-deductible, for example interest, bank fees, maintenance, and so on.

More People need Rental Properties to live in - Massey University Study

Census information shows 32.2% of the population rent their home rather than own it. This is up from 26.2% in 1991. The major reasons for people not wishing to buy were people wanting to spend on personal consumption (23%) and spend more time on recreation rather than home ownership (18%).

The survey also sited insufficient job security as an important reason for not buying a house, with 62% of respondents specifically citing lack of job security at the main employment-related reason determining their decision not to buy.

Overseas Comparisons

Country Home Ownership Rate
Singapore 90%
Taiwan 85%
Spain 81%
Ireland 79%
Belgium 70%
Australia 70%
UK 69%
New Zealand 66%
USA 66%
Canada 65%
Portugal 64%
Finland 60%
Austria 56%
France 54%
Japan 53%
Netherlands 52%
Denmark 51%
Germany 51%
Hong Kong 45%
Switzerland 31%

The Magic of Leverage

Another way that leveraging works well with rental properties is that you can use any gain in the property value to purchase more properties. For example, you purchase a property for $100,000 and that property increases by 10% to $110,000. You then have an additional $10,000 of equity in the property - you can use this equity to purchase another rental property without putting up any additional funds - the lender simply 'cross-collateralises' the loan meaning they have the two properties as security.

Even better, if you can find a property that is undervalued in the first place then you can instantly create equity in your rental property. Because the property market is not as efficient as the share market (i.e. information is priced into share prices much faster so there generally isn't as many bargains to be found due to the large numbers of buyers and sellers) - this means you can find a property where the vendor (seller) may be desperate to sell the property for $100,000 whereas it's real value is actually $110,000 - voila! You don't need to wait until the market picks up you know you've found a property that has additional equity in it already. Banks will normally only allow you to use this additional equity after six months has passed.

A Word of Caution

Property is a long-term investment. It is very boring. It is supposed to be boring. You buy the property and you hold onto it for a long time. Amateur property investors often get motivated by property investment only to sell the property two years later because the tenants were a hassle or they couldn't see any immediate gains  or even because they could see immediate gains  "Wow! The property's worth $305,000 according to the real estate agent, yet we only paid $260,000 so let's sell it and then think about our options." The transactional costs of selling the property and having to pay back depreciation can severely erode the returns of the investment.

"Far better to dare mighty things, to win glorious triumphs, even though chequered by failure, than to take rank with those poor spirits who neither enjoy much nor suffer much, because they live in the grey twilight that knows not victory, nor defeat." -Theodore Roosevelt, 1899.

So, where does one start when selecting a property?

Location...

Location (help me out here I've forgotten the last two words)...location...location! A common-sense approach is best used for choosing location. For example, a property that is close to schools, parks, shops, and other facilities is likely to have more appeal to more people (both prospective tenants and prospective buyers in the future) than properties in the middle of nowhere. This is simple economics  higher demand means higher prices.

Capital Gain or Income?

A popular source of debate! Capital growth on residential property is greater in areas where there is more demand for the property. For example, a $350,000 property in Remuera or Oriental Parade may only return say, $400 per week ($20,800 p.a.)  this equates to a gross yield (before vacancies, maintenance, and other costs) of only 5.94% ($20,800/$350,000 = 5.94%). A property in Southland worth $100,000 might return an income of say, $200 per week ($10,400 p.a.) or a gross yield of 10.4% ($10,400/100,000 = 10.4%). However the property in Remuera or Oriental Parade is likely to have greater capital gain than its Southland counterpart. It is also likely to be more tax-efficient as the property has more tax-free capital gain...although this depends upon the investor, some people will be better off increasing their income whilst for some capital gain will be a higher objective.

All investors vary in the type of property that they look for. The most successful investors that we see are usually people who focus more on the yield (gross yield = annual income divided by purchase price). The higher the yield, the more the cash flow, the more money banks will loan you in the future for subsequent purchases. If you are buying purely for capital gain then this is a bit of a gamble, whereas if you are buying on high yields it doesn't matter so much what the property cycle is doing.

Property Managers

Property Managers make sure the rent is being paid (it is deposited into their trust account), organise any repairs & maintenance (often the landlord can specify a figure, say $250 before permission is required to go ahead with the maintenance), and inspections, typically 3-monthly. Property managers can also perform other tasks such as going to tribunals, performing reference checks (which can be bogus, so they should be wary!), and reporting on inspections. Fees are typically around 7-9% + GST of the gross rental. Find a good property manager if you decide to have your property managed, they may cost slightly more but it will be worth it if they are vigilant in looking after your property.

Compound Interest

Ahhh, the magic of compound interest! Albert Einstein called compound interest the greatest discovery of the century! One of the true keys to riches is compound interest  making your money work harder for you. Compound interest is where you receive interest on your interest, for example $10,000 compounded at 10% over four years:

Year One

Year Two

Year Three

Year Four

10,000

11,000

12,100

13,310

Not impressed? Only going up a thousand or so dollars each year? The magic really begins to appear slightly further down the track, let's see what happens if we continue to get 10% p.a. compound interest for a whole 30 years:

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

10,000

11,000

12,100

13,310

14,541

16,105

17,715

19,487

21,435

23,579

11

12

13

14

15

16

17

18

19

20

25,937

28,531

31,384

34,522

37,975

41,772

45,949

50,544

55,599

61,159

21

22

23

24

25

26

27

28

29

30

67,274

74,002

81,402

89,543

98,497

108,346

119,181

131,099

144,209

158,630

Get the idea? By year 10 your interest comes to $13,579, by year 20 interest is $51,159 and by year 30 the amount gained over your $10,000 investment is a whopping $148,630. You can also start to see how exponential the compound interest becomes. Remember this example is only using an initial sum of $10,000. Imagine the compound interest on purchasing an initial property, building up the equity, purchasing a second property...and so on...

Moral of the story: It's not difficult to become a millionaire! The trick is to have a plan and a budget and take action.

Tax-deductibility

Tax is likely to be your single largest expense. People can shop around for an hour to save $5 on a toaster but never try and minimise their taxation. If you don't try and minimise your tax then beaureaucrats will waste it for you! These are the income tax rates in NZ presently (but don't forget GST, petrol taxes, road taxes, ACC etc. etc.):

$0-$38,000

19.5%

$38,000-$60,000

33.0%

$60,000+

39.0%


How much income tax do you pay each week?

Income each week

Tax/wk

$50,000

$218

$90,000

$506

$150,000
$1,031

Interest is tax deductible depending on the purpose of the loan. If the purpose of the loan is to buy an owner occupied property then this would not be tax-deductible. Generally, expenses incurred to produce income are normally tax-deductible. We sometimes have property investors who are living in their own home, decide to upgrade and then rent out their original property. Then the loan on both properties would then be non-deductible because the purpose was for owner occupied purposes as opposed to investment. A possible way around this is to establish a Loss Attributing Qualifying Company (LAQC), sell the property to the LAQC as an investment property and then the LAQC can claim deductibility, although specialist taxation advice should always be sought in these situations.

The following are generally tax-deductible expenses:

  • Interest
  • Bank fees
  • Advertising
  • Repairs and Maintenance
  • Travel costs
  • Solicitor's fees
  • Rates
  • Insurances
  • Lawn mowing/gardening
  • Telephone
  • Property Management

Credit Cards

Credit cards are taken into account as part of the overall debt servicing. Normally banks will use 5% of the credit card limit. Hence, if you have a limit of $10,000 on your Gold card the bank takes 5% of this amount - $500 as the amount they use for debt servicing each month. Sometimes this can make a loan fall outside a banks criteria, in these situations we would recommend that the limit is reduced  you can always apply for the limit to go higher at some later stage.

Overtime

Most banks will only accept overtime if it has been received for the past 2 years and can be validated by your employer.

Interest-only loans

Interest-only loans can be ideally suited for rental property investors. As the principal is not tax-deductible an interest-only loan ensures that the principal is not eaten into as the interest is the only tax-deductible part of the loan. The excess funds can then be used to save a deposit for the next rental or alternatively pay off the home you live in (which is not tax-deductible debt).

"When you play it too safe, you're taking the biggest risk of your life...Time is the only wealth we're given." - Jane Hifler.

If you are interested in investing in rental property in New Zealand, email or call us and we will let you know how we can help. Remember our service of arranging mortgage finance is free to you as we are paid a fee by the banks. We can also assist you in finding a good accountant, lawyer or financial planner as we deal with these professionals every day.

Contact us for more information:

See also: Setting up a LAQC

Click here for our contact page or call us on 0800 327 956

"I have now moved in and finished putting everything in place. This is just to say a huge thank you for not only putting all the options and paperwork together, but "going the extra mile", and generally making the whole deal flow smoothly. I have been so impressed I've told a few people about your company." - Heather

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