Investing in property
Owning investment property isn’t like winning lotto. The not-so-secret truth is that successful investors put quite a lot of energy into making their investments work for them. So, if you’re into property investing you’re probably already pretty financially savvy so what can we offer? Quite a bit actually. Plus, we can support you when things don’t go your way.
Staying on top of the credit rules
It’s hard to play a game where the rules are constantly changing, but keeping up with any credit condition changes is vital - whether you’re just starting out or looking to grow an existing portfolio. Luckily we can help you get all your ducks neatly in a row and make sure you don’t get stuck.
Loan to Value Ratio (LVR)
The LVR restrictions imposed by the RBNZ mid-2016 is the credit condition that will have the single biggest impact on your ability to buy an investment property.
The limit was put in at 60% - meaning if you’re buying an investment property secured with a mortgage, you will need a deposit of at least 40%. That’s a lot of deposit.
It also means you can forget asking for an extra $10,000 if you get a bit carried away at auction! Before the rule changes we had back up options. Not anymore.
It’s not all bad news though, there are some exemptions to the rule.
- As of January 2018, the RBNZ eased the restrictions slightly to allow banks to lend no more than 5% of new lending to investors with an LVR of 65%. Meaning a deposit of 35%.
- New builds are exempt as long as the property is bought directly from the developer/builder within 6 months of the CCC being issued.
- Dollar for dollar refinance of existing lending against investment properties, where no increase in lending is required.
But bear in mind, exemptions to the investment property RBNZ rule will still see you sit within the general rules imposed by the RBNZ and your respective bank – which at the moment is a maximum LVR of 80%.
The importance of split banking and having a trusted adviser in your corner is becoming more and more obvious as credit policies start to take control of your next move.
Keep up with the rules
The easiest way to stay on top of the rules is to keep up-to-date with the RBNZ announcements, check out our blog (a selection to get you started at the bottom of this page) and sign up to receive our monthly newsletter (also at the bottom of the page).
Growing your portfolio
Having lots of properties in your portfolio is the best way to turn a profit. But with tighter credit rules and lower capital growth, it’s getting harder to do that. For people on a lower income the first roadblock is how much money you’ve got coming in. If more than 50% of your income is from rentals and you don’t have a lot of equity in them, banks see you as a pretty risky prospect. This means that if you’re a young investor with a lower income you’ll be limited to 3-5 properties at first. Here are some top tips to help you grow your portfolio:
Get rid of non-standard properties.
These are apartments of less than 45sqm and properties with more than 3 incomes. Get rid of them, even if they’re cheap and give you good rents; banks will typically only lend up to 70% of their value, so they’ll hold you back from borrowing what you need.
Work towards strong capital growth
Don’t rely on the market to push the value of your properties up. You need to add value to your properties so you have more equity to borrow against.
Choose equity over rent
Sacrificing higher rents in the short term can be a hard decision, but it’s much smarter to invest in a lower quality property where you can own more equity.
Get rid of the dead wood
No point owning properties for the sake of it. Identify the properties that aren’t growing in value, and not making you enough money, and sell them quick.
Everyone has to start somewhere, so rather than launching straight into building a 5-storey apartment block complete with underground parking and tennis courts, why not start out a bit smaller and closer to home.
Home and incomes
A granny flat under your house can be an easy way into property investment. They make sense on so many levels and can also help you buy in an area you might not otherwise afford. It’s a great idea to look for actual grannies to live in your granny flat. They tend to value the security of having a family close by, are reliable and quiet and much more tolerant of family noise than other types of tenants. Good old nan.
Converting your home into an investment property
When you buy a new home, you might want to keep your old place as a rental. Since there are significant costs to buying and selling, this can make good sense – but only after you’ve answered a couple of key questions.
Will your house make a good rental?
Making this decision should be based on some goals and a good strategy – ask yourself honestly if your current house fits the bill. Will it yield good results, or go up in value? If the answer is no, then you’re better off selling up and using the money to buy a better investment.
Do I have the right tax structure?
The debt on a rental is tax deductible so you’ll want to put as much into your investment property as possible. The way to do this is to sell your existing home to a Look Through Company or an LTC, which you own. The LTC buys the home at a fair market price and then borrows 100% against it. You then provide a personal guarantee to the lender using your new property as additional security.
You use the proceeds of the sale to clear the mortgage on the old property and put any extra into your new home. In this way you can move the equity from your old property to your new home.
Ins and outs of investing in property
Getting your strategy right from the start can save you lots of money and stress in the long term. That means you’re more likely to build a solid empire and keep your hair. We do a lot more than a typical mortgage broker so can help you build that empire one property at a time.
What makes a good investment property?
Not all properties are created equal. To find a good investment one you’ll have to look at a lot of properties. You won’t find good deals in the glossy section of the Saturday paper.
A good property is one where you make a profit. You can make a small profit on some properties from day one, but really your profit will come from its value going up. This will happen over time on almost any property, but can be a bit like watching paint dry. Instead, you can watch actual paint dry on a property that you’ve added quick value to with a simple renovation. Some other ways you can add value to your investment property are:
- buying property for less than its true value. This could be occasions where the seller needs to get out quickly or a mortgagee sale.
- solving a problem – resolve a code of compliance issue
Importantly, an investment property should pay its own way. You should expect a net yield of at least 6%. Net yield is the rent, minus your rates and other property costs, divided by the property value. Properties that you have to prop up with extra money (negatively geared properties) are harder to borrow against so will stop you growing your portfolio.
Eight mistakes to avoid when investing in property
We see a lot of people trying to do weird things when investing in property. Don’t follow their bad habits.
1. Borrowing from only one bank
Having all properties with one bank is easy, but not that smart. Banks control the sales process, so if they have all of your properties it gives them absolute control around any sales proceeds.
2. Relying too much on rental income
Over time you may need to diversify your income. A good way to offset your property investment income is to build a strong cash flow business.
3. Holding poor performing properties too long
Tougher lending criteria means you need to be more disciplined about selling the properties that aren’t making you enough money.
4. Choosing poor quality advisers
Always make sure your advisers, like your broker, valuer and lawyer are independent – you don’t want information from people who have a vested interested in supporting the seller, the real estate agent or the bank.
5. Not building relationships
If you’re going to trade properties you need to be up front about it with your broker and with the bank. As you do more deals, and more complex ones, these relationships will become critical.
6. Having no plan
Before you start, make sure you have a really clear investment plan. It will help you buy the right house straight away. So many people go with their gut, then work out a plan later.
7. Not doing your homework
Make sure you look at the demographic market closely – you know what they say about assumptions.
8. Paying too much
The more properties you look at the easier it will be to spot the really good deals. Don’t jump on the first deal you see – chances are it won’t be the best one.
Most successful investors have multi-income properties with 2‐3 incomes per property. This is where you will find the best yields for a number of reasons:
- The property will probably have compliance issues you can fix. The seller will often have never intended to sell the house so didn’t bother getting it compliant.
- They might be facing cash flow issues so are motivated sellers.
- Multi-income properties will only appeal to other investors, which is a smaller and more rational market.
- Pricing is rational. The price should reflect the yield and most investors expect net yields in metro locations over 6%, which is a gross yield of 7.5%‐8%.
Doing joint ventures
How to team up with others to invest
Joint ventures are a great way of spreading the workload, diversifying risk, and bringing in complementary skills.
The key thing is to make sure inputs reflect the outputs. Nobody should get a free ride and everyone should have skin in the game.
Here are some things to watch out for:
Be careful of guarantees
Make sure you don’t guarantee your new partner for anything other than your deal. Any guarantee should be limited to the joint mortgage facilities and not to anything else your partner is doing on the side. Even if it seems really awesome.
Find the right lender
When it comes to joint ventures, some banks are better than others. You may need to try a few different lenders, or use an experienced broker who can find the right bank for your deal. A weak JV partner might make it difficult for you to get financing on another deal.
Make sure everyone has skin in the game
Everyone should have real skin in the game and have something to lose if a deal sours. Don’t let other people gamble with your money or your reputation.
Manage the risk
Make sure your partners are financially stable and that they have adequate life and health insurances. You don’t want to be left holding the baby. They cry. And are expensive.
Educate yourself about your responsibilities
Non-disclosure is fraud. As a trustee or director you will personally guarantee the debts of that trust or company. This guarantee is a liability that must be disclosed to the bank in any of your mortgage applications. Ignorance is not an excuse.
Create strong JV partnership agreements
Have a formal agreement about what happens if something goes wrong. If you are using a company structure make sure you follow the Companies Act and correctly appoint and remove directors and transfer shares.
Subdividing a property is a great way to instantly add value, but it’s expensive.
Councils will see you as a way to cover their budget shortfall with a “development contribution.” These fees average around $20,000 per dwelling. Councils will also sting you with a bunch of compliance-related costs. In Auckland, for example, you’ll pay about $7,000 per dwelling just to connect the water.
To subdivide a property, first you need to:
- understand what you can and cannot do according to council zoning rules
- do a land survey.
When looking at a property you could subdivide, consider:
- How steep is the section?
- Is the section in the front or back? If it’s on a back section, how long is the drive?
- Is the place you’ll have to dig on rock or soil?
- Is there already drainage, water, storm water and power nearby?
Land values – keep note of town planning rules
Town planning rules artificially drive land values, so it’s worth understanding them and keeping up to date. For example, under the current Auckland plan, land that has changed from commercial or residential to mixed-use can significantly change the value of land.
Learn from our experience
If you’re seriously thinking about doing a subdivision, read about our experiences with relocation and subdivision in Mount Albert or check out these videos:
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