An investment property is a long term wealth creation vehicle and should be about increasing your wealth and securing your financial future.
In New Zealand, buying an investment property is one of our favorite ways to invest. It’s a solid way to increase your wealth and secure your financial future.
In this post, I’d love to share 10 reasons why I love investing in property.
Let’s get started…
One thing that puts a line in the sand between shares and property is that you can leverage property.
So what does leveraging mean?
It simply means using the banks money to buy more property. So if you put down a 20% deposit and the property goes up in value, not only will you make a profit on your deposit but also make a profit on the money you have borrowed from the bank.
Here is an example of leveraging:
You buy a house for $400,000, put a 20% deposit down of $80,000 and borrow the remaining $320,000.
The property goes up in value of $300,000 over 10 years and is now worth $700,000.
$700,000 (current house value) -$320,000 (bank loan) = $380,000
Over 10 years you have made $380,000 from $80,000, which is a 475% return on your investment.
If you financed this yourself and didn’t borrow from the bank, your return on $400,000 investment would be 75% (400,000 purchase price / 300,000 (gain).
2. Higher returns than other investments
Over the past 20 years in New Zealand property has outperformed cash (bank deposits), bonds and shares by over 10% per year.
3. It’s a tangible asset
Lots of investors love property because they can see it, touch it and feel it. This brings a sense of security compared to shares, which can be extremely volatile, driven by sentiment rather than rational financial thinking.
Having a tangible asset such as property allows you to have control on how the investment performs. You can change the purpose of the property as mentioned below, see what condition the property is in and add value through improvements, which I discuss next…
4. Can add value to property
When looking to buy property, I always make sure I can add value to the property. Michael Yardney calls this manufacturing capital growth, which may be through refurbishment, renovation or development.
The key here is not to over capitalise, which basically means spending more on the renovation than what the finished valuation will be.
One project I currently have underway is an extension to make a 2 bedroom into 6 bedrooms. Purchase price was $405,000, renovation/extension $100,000 and once the house is finished it will be valued at $600,000.
The project will take three months, so $95,000 isn’t bad for three month’s work. Not only does this property benefit from capital gains, but changing from a 2 to 6 bedroom house will increase the weekly rental income.
…and as mentioned above the increase in property value can be leveraged to buy another house.
5. Can set long term goals for retirement
Following on from the previous point, you can’t be certain that shares will generate a good return, as they go up and down with volatility. But, if you buy the right property you can be certain that long term your portfolio will produce an income.
It’s pretty easy to diversify your property investment portfolio to minimise your risk. Diversification is important because if the area where all of your properties are located suffers a downturn, all of your properties would be affected.
Risk can be minimised by investing in different types of property:
- Residential (students, new builds, repairs needed, different suburbs)
- Commercial (office, retail, industrial, syndicated)
- Different cities
- Various price brackets
- Different investment strategies (renovation, capital growth, cash flow etc)
7. Change the property to suit market demand
As property is generally a long-term investment, over time the surrounding market demand might change. This has been the case in Christchurch, where the influx of workers for the earthquake rebuild, has resulted in some properties changing from single tenancies to room by room tenancies.
Other examples are demographic or infrastructure changes such as changing to low income or professional tenants, or smaller or larger families.
8. Easy to research
Once you have figured out what you want to achieve from investing in property (your goal) and how you are going to do it (your strategy), it’s all about having patience to find the right house.
Key things to look for are strong owner occupier appeal, in the right location that has population growth drivers and a property that you can add value to. We have tools to help you find the needle in the hay stack, we run the numbers for you to see if they stack up and help with your due diligence.
9. Rental income
The key goal of investing in property is wealth creation and this is generated by rental income and capital growth.
Rental income is important when starting off because it helps pay the mortgage and increases your serviceability. I always look for cash flow positive properties, which basically means having a positive number once all operating expenses and interest is paid. Having a stable and balanced cash flow has helped me grow my portfolio.
Yield = return on investment
When analysing property to buy, one of the first things I calculate is the gross yield. It’s shown as a percentage and indicates what annual return you are likely to get on your investment. It’s calculated by dividing the total annual rent by the purchase price (or by current value if it’s a property you already own).
Gross yield is calculated using this formula:
Gross yield = annual rental income / purchase price x 100
Purchase price: $400,000
Annual rent: $26,000 ($500 per week x 52 weeks)
Gross Yield = 26,000/400,000 = (0.065 x 100) = 6.5%
The net yield is calculated the same way, except operating expenses are also deducted. Operating expenses include property management fees, council rates, repair and maintenance costs and insurance.
Net yield = (annual rental income – annual operating expenses) / purchase price x 100
10. Capital growth
Capital growth is the appreciation of land and house value over time, due to market growth or by adding value to a property as mentioned above. Not all areas experience capital growth and it’s not consistent. Which means that a property will not necessarily appreciate at a certain rate each year.
Over the last 10 years in New Zealand, residential properties have increased at an average of 58%.
The property market works in cycles with periods of booms (as seen in Auckland currently) and busts (last was 2007). This cycle is on average 10 years from peak to peak, and properties in New Zealand’s main cities have approximately doubled during each cycle. Capital growth is affected by supply and demand (as seen in Auckland and Christchurch), population and economic conditions.
So as you can see there are many benefits of investing in property, but there are critical aspects to purchasing the right property and managing the performance of it. That’s where PropertyPlot steps in.
Our online tools will help you find the right property and manage your property portfolio, helping to make the right decisions and grow your property portfolio faster.
I would love to hear if you have any tips of your own?
Please feel free to share in the comments – I’d love to learn from you and join the conversation!