The most important ingredient that you need is cash or equity. The other is a desire to let your money work for you.
What do I need to become a property investor?
- By Damien Taylor
The most important ingredient that you need is cash or equity. The other is a desire to let your money work for you.
If you have owned a house for a period in New Zealand (or your parents have), then it’s highly likely you will have built up significant equity in that asset, which you can borrow against it. This means you do not need the physical cash sitting in your bank to become a property investor.
To access the equity, the Bank will generally allow you to borrow up to 80 percent of the value of your existing house. Or 70 percent of the value of an investment property.
As an example, if you purchased your home for $600,000 and it’s now valued at $950,000 with a $400,000 mortgage remaining balance, the Bank could lend you up to an additional $360,000. ($950,000 x 80% = $760,000, less the mortgage already in place of $400,000 = $360,000).
The other factor Banks look at during lending approvals is the serviceability of the loan. Some properties, such as Safari Group Property, are priced with investment in mind creating an opportunity for a positive cash flow property. This means that the rental income from the apartment will service the loan, without you needing to rely on your income for the serviceability of the payments.
All banks have slightly different stress rate tests they apply. Mortgage brokers are clued up on this, and will guide you through the steps if you are unsure.
If you want to use your KiwiSaver funds for a deposit, then you’ll need to commit to live in the property for at least six months before you rent it out.
Once you have your funds lined up (pre-approval), you are now ready to become an investor. Next step is to find the property investment that suits you for what you are looking to achieve.
Some properties, such as Safari Group Property, are priced with investment in mind creating an opportunity for a positive cash flow property
What to Buy?
Well it depends on what you are looking to achieve. But some things to consider.
Older homes often need a lot of maintenance and newer homes are often in more modern neighbourhoods with higher prices which when compared to the rental income you would receive, can make the yield considerably low..
As a first-time investor, the game for you is to own quality assets for a long time. It is important to find properties that would generate more in rent than they cost to hold. Costs would include rates, body corporate (if it’s a unit titled building), management costs, and mortgage repayments. if your rental income is greater than your costs, this is known as a “Cashflow positive” investment property, something that Safari Group specializes in.
Choosing to purchase a cashflow positive investment on day 1 will create a buffer to safeguard you from future interest rate increases. Compare this to purchasing a negative cashflow property at 3 percent interest rates which could look fairly scary if interest rates climb to 5 percent even when factoring in rent increases along the way.
Many investors choose to buy new properties because banks are able to be more lenient in their lending on them.
It also means less maintenance, with new property also proving more desirable for tenants. A new dwelling should also meet the standard required for rental properties, as it has been built to the current code, with warrantees in place providing further peace of mind.
If a lower deposit allows you to get into the property market then jump in, it’s more worthwhile to have an investment ticking over in this market than to wait and watch the buying power of your cash diminish from rising values. An old adage is that time in the market beats timing the market.
A good piece of advice is to treat this as a business decision, not a home that you plan to live in. This will ensure you always come back to the numbers, and the numbers need to make sense.
Places where rents are high compared to house prices is a good place to start. Usually off the plan sales will be accompanied by independent rent appraisals, and you can do your own research pretty easily.
People generally look for investment properties with a gross yield of more than 5 percent (which has become harder and harder to achieve with the rising values) – to figure the yield out out, you take the annual rent and divide it by the purchase price multiplied by 100.
Anything much lower than this and you will struggle with the cash flow. This is where a lot of newer as well as more experienced investors come unstuck. They buy properties with low yields and therefore either have to put in a very big deposit to make it cash flow neutral, or they top up the cash shortfall themselves with their income.
A good piece of advice is to treat this as a business decision, not a home that you plan to live in. This will ensure you always come back to the numbers, and the numbers need to make sense.
Once you have selected your investment and done all your research, it’s important you are comfortable with the process and have faith and trust in the entity that will be bringing your investment to life. With funding harder to obtain these days, and undercapitalized developers, there has and will continue to be many projects that have gone to the market for pre sales and ultimately failing to eventuate for a myriad of reasons. Whilst your deposit should be safe and secure (see further note below) you will have missed an opportunity if the funds are returned with only a small amount of interest gained on that deposit.
Deposits on off the plan sales (an apartment or a house that is not yet built) tend to be lower than traditional deposits and Safari Groups are 100% secure, being kept in the lawyers trust account until settlement is able to be activated. A deposit for a New Zealand resident purchasing any of our products is 10%, and the balance is paid on settlement of the property.
Settlement on our newest projects could be up to two years away. The time it will take us to obtain the permitting, line up the funding and complete the construction. Getting in early, locks in today’s values, allowing you to capitalize on any gains in the property market that happen between the time of purchase (entering into the contract) and settlement. With the costs of construction and land, rising year on year, it’s highly unlikely that building will become more affordable, which would allow product to be delivered to the market cheaper.
Once you have taken the plunge on your first investment property, the process becomes easier and the steps are repeated.