Residential Property Investment – creating a better future
Why are you investing in property? Do you want to generate additional income or build wealth?
Is this a form of savings for your retirement? It may be that it’s a combination of all these.
What is your investment timeframe? Buy and sell vs buy and keep.
What type of investment property will meet your goals? e.g; do up, new build, apartment or house.
Owning rental property is a popular investment in NZ. When making this decision, researching how to be a good landlord should involve speaking to those who’ve done it successfully before and seeking advice from lawyers, accountants and investment advisers.
Unlike buying your own home, it is governed more by head than heart.
Decisions should be centered on financial considerations.
Deposit for residential investment property
UPDATE: From February 2021, the Reserve Bank of NZ tightened restrictions on new residential investment property by increasing the maximum loan amount banks can lend to 60% LVR throughout the country.
The deposit can be from cash or equity in existing property you own. (Remember 'equity' means new lending against that security though)
To use your own property as equity there are two considerations. The value of your properties and how much equity you can release from each property.
Rateable valuation is commonly used, however this can be less than market value. In such cases you may need a desktop or registered valuation, one that is acceptable to a bank.
Speak to us about your options.
2. Releasing Equity
If it is the home you live in, you may be able to release up to 80% of this property value. To work this out, multiply the value of your property by 0.8 and then deduct how much you still owe on the mortgage. What is left can be used for the deposit of your new property in the same way as if you had cash savings.
If the property you are using for equity is another rental property and you would like to purchase a new property for rental purposes, you would multiply the value of your existing rental property by 0.60.
It can also be a combination of the two above.
Your accountant may speak with you about gross yields when looking at different investment property options. Gross yield is the % return that you’ll get after expenses but before tax.
To work out gross yield deduct total expenses from gross annual rent and divide the total by the purchase price of the property.
Expenses to consider may include rates, insurance, mortgage repayments, depreciation, compliance and maintenance on the house and section, property rental management fees, tax returns, body corporate fees and an assumption of 3 weeks vacancy per year.
(Annual Rent – Expenses) ÷ Property price = Gross Yield
Tax considerations and gearing
Tax returns for your property investment must be completed each year. Rental income is taxable and legitimate expenses, such as mortgage repayments, are usually tax deductible. If income is greater than expenses, the property is said to be positively geared. In the reverse situation where expenses are greater than income, the property is said to be negatively geared. In effect you are making a loss on your investment, but you may be able to offset that loss against your income tax. This tax advantage is one of the key benefits of negative gearing.
We recommend you seek professional tax advice.
Another consideration is to decide which entity will own the property/properties.
• Individual or joint names
• Look Through Company
• Standard Company
Different structures offer varying benefits to you, depending on your situation and objectives. Seeking legal and tax advice is highly recommended when making this decision.
On your behalf, we will apply for your loan and once approved, optimize your loan structure, loan type, the term, interest rates, negotiated cash contribution and help make the process as easy as possible for you. We will work with your accountant and/or solicitor to ensure all your advisers are aligned and working in your best interest.
We look forward to working with you to help you build your property portfolio.