One of the biggest advantages of buying an investment property is that you have control over most parts of your investment.
- You decide if the purchase price, rental and potential for capital growth are acceptable and how much cash you're going to put into your property investment, if any.
- You decide how you'll structure your loan(s).
- You decide if and how you're going to improve the value of your investment property and its rental income to achieve the rental return you want.
- You decide if you'll manage your investment property or properties yourself, or pay a property manager to do it for you.
- You decide 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.
By acknowledging that you're in charge, and accepting responsibility for success or failure, you'll be more likely to seek out good information, and take your investment in property seriously. 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 the security of this bricks-and-mortar investment, unlike other less tangible 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.
Rental income is the money your tenant pays you to live in or use your investment property. One of the benefits of property investment is that you can use your rental income to make, or at least contribute to, the mortgage you’ve taken out on 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.
Calculating 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. It can be a useful way of comparing the return from different investment properties. or comparing your actual investment results with your goals. 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: 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.
To calculate rental return on investment, work out the rental income per year and subtract total expenses associated with the rental property for the year (include mortgage repayments, insurance, rates, maintenance etc). This will be the net operating income which when divided by the total amount invested (equity or investment in the property including the cost of any improvements made) and multiplied by 100 will calculate the rental return on investment.
|Potential capital gains|
Capital gains are the second form of income from your property investment.
You achieve capital gains when the value of your investment property increases, compared with its original purchase price or value. This is why it's important to try to buy investment properties below their market value if possible, or purchase a property in an area where house prices will increase.
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. You should also consider the increase in your investment property's value in relation to the time you've owned the property and your original investment in it.
|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 will be 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 the potential tax advantage of residential property investment.
It refers to the period, generally during the initial years of owning the property, when your property investment makes a loss because your expenses and outgoings (such as interest repayments on your home loan) are higher than the rental income. These losses can be used to offset your income tax. Generally, you pay more interest during the initial years of a standard principal and interest-reducing home loan. Once you start making headway on repaying the principal, you pay less interest.
An interest-only loan increases the tax-deductible expenses associated with residential investment property over time because you're not repaying any principal. So an interest-only residential investment loan may be a good choice 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.
For more information on how ANZ can help you invest in property
Contact a Mobile Mortgage Manager
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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 wish to consult one of ANZ's financial advisers, please contact us on 0800 269 296.
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