The benefits of property investment
Buying an investment property is a very popular investment option in New Zealand. One of the main advantages is that you have control over most parts of your investment. You have the power to decide:
- If the purchase price, rental and potential for capital growth are acceptable.
- How much cash you're going to put into your property investment, if any.
- How you'll structure your mortgage(s).
- How you're going to improve the value of your investment property to achieve the rental return you want.
- If you'll manage your investment property or properties yourself, or pay a property manager to do it for you.
- How you're going to maintain the property and whether you'll repair it yourself (if you can) or get someone else to do it.
This doesn't mean you have to do everything yourself, but it does mean you have to take an interest in what's going on. Residential property investment is not a passive way to make money.
More specific benefits of property investment include:
The security of bricks and mortar
When you buy an investment property you're buying a physical asset. Many people are more comfortable with this than other less intangible investment types such as unit trusts or shares.
Tax benefits of property investment
New Zealand offers several tax benefits for investing in residential property. For example, expenses you incur to generate your rental income may be tax deductible (you should seek professional tax advice).
You can put the income from renting your investment property towards the repayments on the mortgage you’ve taken out to buy the property.
(If your financing costs and other investment property-related expenses are greater than your rental income, you may find yourself in a "negative gearing". While this has risks, it can also have advantages).
How to calculate your rental income return
Calculating the returns from rental income can help you compare different investment properties.
Two common measures are:
Gross rental yield
This is the rental income received relative to the value of your investment property. To calculate Gross rental yield, divide the annual income from the property by the purchase price and multiply by 100 to get the percentage rate of return (yield).
Rental return on investment
This is the rental income received relative to your equity or investment in the property. It's important to factor in the costs associated with the borrowing required to buy the investment property, along with the other expenses incurred from maintaining and managing it.
Potential capital gains
Capital gains are the second form of income from your property investment (along with rental income).
You achieve capital gains when the value of your investment property increases.
Returns from capital gains depend on movements in the housing market and may take longer to achieve than rental income returns. Keep in mind that while property values tend to increase over time, they can go down as well as up. One strategy for achieving capital gain is to look for investment properties that you may be able to purchase for below their market value, or in areas where you think house prices will increase.
Combining rental income and capital gains
As an investor, you may aim to buy investment properties that can provide both types of investment return. Different investment properties will provide different levels of capital gain and rental income. It’s up to you to decide on your investment goals and the most suitable properties to achieve them.
Negative gearing on property investments
Negative gearing is when your expenses and outgoings (such as interest repayments on your home loan) are higher than the rental income, which often happens in the early years of owning an investment property. In effect you are making a loss on your investment, but you can offset that loss against your income tax. This tax advantage is one of the key benefits of negative gearing.
Investors following a negative gearing strategy often choose interest-only loans, because they increase the tax-deductible expenses on your investment property (as you’re not repaying any principal). You should seek professional advice when following a negative gearing strategy.
The impact of leverage on the return from your property investment
"Leverage" is when you buy an investment property using borrowed money. instead of using your own. The more you borrow, the more you're said to be "leveraged". Leverage is one factor that can accelerate your investment return. If your investment property goes up in value, the higher the return on the actual money you've invested. On the other hand, it also increases the risks if your investment property or properties go down in value.
ANZ lending criteria, terms and conditions and fees apply to all loans.
A copy of the Reserve Bank Disclosure Statement published by ANZ Bank New Zealand Limited may be obtained on request from any ANZ branch.
This material is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product. If you would like to speak to an ANZ Authorised Financial Adviser, please call 0800 269 296.
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