Location is just one factor in the choice of investment property. The type of property – detached house, townhouse, high-rise apartment or student housing – can make a big difference to investment returns.

When buying an investment property, we often go with what we know. For many, that means a detached house somewhere near where we live.

There is nothing wrong with buying a house but there are other choices. A good starting point is to consider the yields of different properties in your chosen area.

Yield

One of the best ways to decide on the type of investment property is to consider the yield - the annual rental return expressed as a percentage of the purchase price.

According to a recent analysis in the New Zealand Herald, the average yield in New Zealand is 6%, although this varies significantly across regions.

The highest average regional yield is in Otago (9.1%) and the lowest is in Northland (5.4%). Auckland is at the lower end of the spectrum, at 5.6%.

Double-income properties (those with a main residence and a flat) often offer excellent rental yields.

As a rule, experts advise first-time investors to look for high-yielding properties. Generally, the cheaper the property, the higher the yield. Conversely, the lower the yield, the higher the tendency for capital gain.

Capital gain

Capital growth is estimated by looking at changes in property prices expressed as an annual percentage. Capital gain is simply the profit you make after selling a property and settling all outstanding loans and costs.

Buyers often assume that houses appreciate at a faster rate than flats or apartments because they have more land on title. There are three reasons why this is not necessarily the case:

1. Property values are tied to land values.
2. The size of a property has little to do with its capital growth potential – location, scarcity, value and building style are much more important.
3. Individual flats and apartments automatically take on a portion of the value of the block on which they are built.

Hence a small apartment in a sought-after suburb can achieve greater net returns than a large home in a less-sought-after suburb.

Tips for selecting an investment property:

• Decide on your investment strategy, taking into account yield versus capital gain.
• Evaluate the financial returns (set the minimum level of rental yield you are willing to accept).
• Choose a property that suits your lifestyle (eg a fixer-upper or high-maintenance coastal bach only suits investors with plenty of time to spare and the skills to handle renovations and repairs).
• Select a location with continuing high rental demand, land scarcity and enduring appeal.

What to choose – an overview

House
Free-standing houses remain the preferred choice of New Zealand property investors. When you buy a house, you are also buying the land it sits on. Because of this, houses are generally more expensive than flats and apartments and generally have a lower yield. However, it is easier to add capital value through renovation, extensions or by adding an income on-site. Depending on location and council regulations, you may be able to subdivide or redevelop the land to realise even greater capital gain.

Flats and apartments
Because flats and apartments are generally more affordable than free-standing houses, they are a good starting point for first-time investors. They also tend to offer higher rental yields. The trade-off is lower capital growth.

Considerations when purchasing a flat or apartment:

• Only buy in areas where land is scarce, demand is high and there is ongoing rental demand.
• The apartment should have at least one car park on title.
• Make sure views cannot be built out.
• Only buy from a quality builder.

Student housing

Education is one of New Zealand’s leading industries. The country boasts eight universities, 20 polytechnics and more than 500 private training facilities.

Some student-type properties are sold (and rented) fully or partially furnished, which may allow investors to claim big depreciation benefits on furnishings. (The depreciation on furniture currently averages at 20 to 25%.) Investors should always seek professional advice from their accountant or other tax professional.

Consider the following when investing in student housing:

• Location is paramount – close to university, transport, shopping and entertainment. City centre is best.
• As depreciation is high, consider renting fully furnished and get a thorough valuation of all goods and chattels.
• Choose hardwearing carpets, surfaces and furniture.
• Inspect quarterly, not annually.
• Make the most of the space – turning a dining room into another bedroom can boost the rental return.

What the experts say

Property experts Lisa Dudson and Andrew King, in their book Residential Property Investment in New Zealand, argue that location, not type is the key factor in choosing an investment property.

“Location is more important than whether the property is a house or a flat – in other words, whether you buy a house or flat is almost immaterial compared with the choice of which area to buy in.

“Multiple income properties, such as home and income or two properties on one title, tend to offer better rental returns than single houses. Flats usually offer better returns as well.

“Houses tend to have higher rental prices than flats, but because flats are generally cheaper than houses, they tend to provide better rental yields,” they say.

Real Estate Institute of New Zealand (REINZ) spokesman Max Oliver says investors should consider three key factors to choosing an investment property.

“Location, access to transport and the level of maintenance a property requires. Is the location always going to attract people to rent your house? Can these same people travel easily and conveniently to and from work? Are you going to have to spend most of your weekends cutting grass or painting weather boards – or even worse, paying someone else to do it for you?” he asks.