Buying Guide: Buying your First Investment Property
It may be your first home, but you won’t be living there.
Buying your first home is a big life event. But what if that first step in your property journey is a property investment? Maybe you have some travel plans or are uncertain what city your job is going to take you to next, but you still want the long-term financial benefits of home ownership. Making your first property a property rental, you’ll be building some equity in it through rental income and then, in a few years, leveraging that equity to help buy your dream home. It can make for a good plan B.
But first some things to consider.
How to get started in property investment while continuing to rent
1. Take some professional advice before becoming a property investor
Acumen personal financial adviser and real estate investment expert, Lisa Dudson, advises first time property investors to talk to an accountant or financial adviser about their financial situation before taking the plunge.
Lisa regularly talks to first home buyers in Auckland about starting their real estate journey with an investment property. There are real benefits to buying an investment property before your first home, she says, but it’s worth being 100% sure that it’s the right choice for you.
A financial adviser will be able to help you embark upon your investment property journey.
2. Be aware that home loans for investment properties work differently
There are some things to weigh up – you won’t be able to use your KiwiSaver savings to help with the deposit. That can only be used for a first home you intend to live in.
And while banks will lend around 80% to first home buyer owner occupiers, they’ll only lend 60% to investor buyers.
This doesn’t need to be a deal-breaker. You may choose to buy in a cheaper property market where a 40% deposit isn’t too much of a stretch for you. Or, if you’re investing in a new home you’ll only need to find a 20% deposit, so that’s another option.
There are new properties being built all around the country – from infill parts of West Auckland to units near the CBD in Christchurch, says Lisa.
The beauty of a new home is they’re low maintenance and relatively reasonable in the current market, especially recently completed ones.
3. Understand the bright-line property rule for residential property
As the IRD will tell you, if you sell a residential property within 10 years, you may have to pay income tax on any gain you make if you sell due to the bright-line property rule. With a new build you’ll have to pay tax on any gain if you sell within five years. Read more on this here. Loan Market’s Cameron Muggeridge notes that mortgage interest is still tax deductible on a new build while it isn’t on an older home.
It's crucial you do the sums before investing.
4. Do the sums on buying your first investment property
In an ideal world, when buying a rental property, the home will pay for itself. All the costs – insurance, rates, maintenance and property management – will be covered by the rent. That’s not so much the case in the current market but an investment home can still make good financial sense especially in a buyers’ market with strong tenant demand.
Cam says unless you’ve bought an investment property at a high yield, chances are you’ll be adding to the mortgage payments on the property to help build up equity in the home. While you’ll be able to use some of the equity you’ve built up in the rental home to buy your own home when the time comes, you won’t be able to use all of it, he warns. So consult with your mortgage adviser on the particulars. What does a high yield look like? It will be a That would be a yield of around 7-8 %, says seasoned property investor, Andrew Duncan.
The yield is the annual income of the property as a percentage of its total value.
If a house price is around $500,000 and rents for $750 a week, $750 x 52 (weeks of the year) divided by $500,000 x 100 = 7.8%.
You can find median rents for any area from the Tenancy Services website.
This first property investment shouldn’t be a high stress purchase that stretches you financially, says Andrew.
“It allows you to have a piece of the Kiwi property market without committing to a massive mortgage which can cause financial anxiety,” he says.
4. What to look for in your first investment property
You can be far less emotional about buying an investment property than your first home. Yes, it should be attractive to tenants, have good public transport links and local amenities – but it doesn’t have to be anyone’s dream home.
You might choose to buy in a smaller town you know well rather than the city you’re living in if you have a good property manager.
Andrew likes buying simply designed, multiple income properties, say 2 x 2 bedroom units side by side. This kind of investment spreads the risk and you can update one unit at a time when necessary, he says.
When he does a search for an investment property on the Trade Me app, he’ll look for any location, price $300,000 to $550,000, three or more bedrooms, two or more bathrooms, any property type with a keyword of “income.”
Other keywords you could try our ‘rental’, ‘flats’, ‘investment’, ‘return’, ‘yield’, and ‘home and income’ to cover all your bases.
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