If you're looking to become a property investor then understanding the finances and funding behind investment properties is key.
Buying an investment property can be a great way to plan for retirement, gain financial independence or leave a legacy for children. Investing in property yields two forms of financial gain;
Capital gain - the increase in value of the property from when you purchase it to when you sell it.
Rental income - the income generated from a tenant or occupier. This often pays the mortgage, and a little extra.
Investment financing rules are different to buying a property that you intent to live in. For example, a residential family home only requires a 10%-20% deposit when being purchased, whereas a stand-alone investment property typically requires a minimum deposit of 30%. This can have big implications on financing an investment property no matter whether you're buying an office block or a small rental unit.
The type of investment you're making can also have implications for the ongoing returns on your investment, and legislation may mean you need to borrow more than the initial cost of the property to meet the legal requirements for renting properties to live in, for example:
Investing in Commercial Property
Commercial property encompasses buildings that are usually occupied by businesses. The management of a commercial investment can be less involved (in some ways) than residential investments. Insurance, rates, power and operating costs are paid directly by the occupant.
Getting a mortgage for a commercial property can be done through a mortgage broker in exactly the same way as you would buy a family home. If you're interested in investing in commercial property speak with one of our mortgage advisors for a better understanding of the requirements.
Investing in Residential Property
This is one of the most popular types of property investment, it involves buying a home or apartment and renting it out to a tenant. At a very simple level renting out a room as an Air BnB is a basic form of property investment. Rates and home insurance are paid for by the landlord (with costs passed on in the rent).
Investing in rental properties is popular, for those that can, because of a chronic rental shortage across New Zealand that has lasted for several years. The lack of available and affordable housing means many people are staying in rental accommodation, and the demand for that rental accommodation is high enough to drive up rental returns. As demand increases people often need to pay slightly more weekly rent to secure their desired property and this can make for good returns for property investors.
Capital Gains Tax
Before 2019 the Labour government raised the possibility of implementing a capital gains tax. This put the brakes on a few people's investment plans and even caused many to sell their rental properties.
The Capital Gains Tax could have imposed a tax on value increases for many high value assets. This was slated to include cars, boats and property, and would have resulted in a tax on the difference between the original price you paid for a property and the increase in value when sold. As property investment strategy is partially founded on the belief that your capital investment (the property) would likely increase in value over time, this could have made returns from this investment significantly lower.
Other government initiatives have also cast shadows around property investment as potential investors struggle to wrap their heads around the new legislative requirements. Below we'll highlight a few new changes that a residential property investor will need to be aware of.
Healthy Homes Standards - The residential property must have a qualifying heater in the main living space of the house. This should enable the house to be effectively heated providing comfort and a healthy living environment for tenants. In many cases a heatpump will meet these necessary requirements. There are additional requirements for things like opening windows and insulation, so be sure to do your own research to ensure your property complies.
Insulation Standards - With effect from 1st July 2019 every residential rental property needs to comply with the new insulation standards legislation. If you're considering buying a property to become a rental investment it might be worth having a builder or professional assess the property first to see if this is something that has been done already, or is something that you will need to do.
Getting an investment mortgage
Acquiring a mortgage for an investment property does not need to be a major challenge. The friendly team at Stephanie Murray Mortgages have vast experience in securing investment mortgages and can guide you through the entire process in a painless and stress-free way. Many of our Mortgage Advisors are property investors themselves and can offer tips and insights to help you through.
The added benefit of working with our Stephanie Murray Mortgages team is that our services are completely FREE. We go to the major banks and non-bank lenders to find the best rate for your individual needs. Speak to a member of our team by booking a chat using the button below.