Property investment is one of the most popular types of investment in New Zealand, and often one of the biggest investments we ever make. Property investors are exposed to risk for a longer time, so it’s important to understand the risks before you invest.
About property investment
You can invest directly in property or invest through managed funds, property syndicates or listed property funds.
This may be a property to sell later for a profit (called capital gain), or rental property. Some people buy and sell, or build and sell, the home they live in for profit.
It’s your 'intention' when buying a property that differentiates your family home from property investment. If your intention is to sell for profit, then that property is considered an investment – even if you live in it.
Investing through a fund
Investing through a fund or syndicate gives you the advantages of property ownership without having to purchase and manage the property yourself.
Direct property investment gives you the opportunity to make money in two ways.
The return you make on a direct property investment is known as a yield. In its simplest form, this is your annual rental income ÷ property value x 100.
For example, a property that was purchased for $500,000 and returns an annual rent of $26,000 would have a current rental yield of 5.2%. You can compare the average yields you might receive on properties in different regions around New Zealand on the Quotable Value (QV) website.
This is the money you make if you sell your property for a higher price than you paid.
Property values are tied to interest rates, how many buyers there are for your property and how many others are also selling their properties at the same time. You may risk losing capital on your initial investment when you sell.
Understanding the risks
We don’t regulate direct property investment but we do regulate managed fund and property syndicate providers. There are a number of things to look out for if you are investing directly in property.
You usually have to borrow a large amount of money to invest
Most people pay a deposit and borrow money to invest in property. Ask yourself how much debt you can afford to take on. Use your bank’s mortgage repayment calculator to find out how much you need to repay per month, and how much of your income is left to pay other household bills.
Your mortgage repayment will rise when interest rates go up, affecting your disposable income. A 0.5% rise in interest rate to 6% for a loan of $300,000, fixed for 30 years, would add about $110 more to your mortgage each month, or a repayment of around $1,800 per year.
If interest rates fall, and you choose to refinance a mortgage rate that has been fixed for a number of years, you might need to pay a penalty fee for breaking the terms. This may make your total loan repayment more expensive. It’s also possible to end up owing more than your property’s worth if its value drops. This is known as negative equity.
Your money isn’t easy to access
Buying a property can tie up your savings. If you invest most or all of your cash in property and then need access to cash, you’ll either need to sell, tenant your property or increase your mortgage. This isn’t always easy and there are usually fees involved.
Your rental property may not always have a tenant
If you have a rental property and cannot find tenants, you’ll have to dip into your savings to pay your mortgage. Make sure you have enough savings to cover these unexpected costs.
There are lots of costs involved in managing a property.
Some of these include legal fees, property manager fees, insurance, taxes, utility bills, maintenance and interest rate increases. Besides costs such as commissions, fees, and council rates, there might be unexpected costs associated with repairs to a property.
If property is your only investment, you’ll have little or no diversification, which increases your risk. You can reduce this risk by also having other types of investments, such as bonds and shares and/or investing in managed funds. Making regular contributions to KiwiSaver is an easy way to achieve diversification.