Investing in real estate provides two forms of potential returns; rental income and an increase to the value of the property over time. Investing in property can be a successful financial venture, provided you take into consideration several factors that could contribute to the long-term viability and security of your investment.
Rental properties are in hot demand across many regions of New Zealand, but careful research, preparation and professional advice is recommended in order to give you the best chance of a successful investment.
The first factor in identifying a good potential investment is its location. A prime location can significantly impact the potential for appreciation and good rental income. Close proximity to essential amenities such as schools, hospitals and public transport will increase desirability, not only to tenants, but also future buyers. Areas with a diverse job market and plenty of employment opportunities are also a good indication of the desirability of the area.
It’s a good idea to research crime rates, insurance costs and property rates in the neighbourhood you are wanting to purchase in, all of which can impact not only your ongoing expenses but also future saleability.
2. Healthy Homes standards
Rental properties in New Zealand need to comply with the Healthy Homes standards that were first introduced in 2019 and have continued to evolve ever since. The Healthy Homes standards specify a minimum requirement for heating, insulation, ventilation, moisture ingress, drainage and draught stopping in rental properties.
The purpose of these standards is to improve the quality of rental stock in New Zealand, decrease health issues suffered by tenants as a result of unhealthy housing, and improve the condition of properties to better protect a landlord’s investment. Non-compliance can result in hefty fines and expensive remedial work.
3. Rental income and potential yield
Find out how much you can expect to rent a property out for by requesting a rental appraisal from the salesperson or a reputable, local, property management company. You will then be able to calculate the potential yield. The yield refers to the annual revenue you can reasonably expect to receive in rent, represented as a percentage of the property’s market value.
Positive cash flow is crucial for covering expenses and generating profit. Calculate these metrics to determine if the property aligns with your investment goals. Expenses to consider include management fees, rates, taxes and maintenance. Use this online tool to calculate a potential yield.
6. Property appreciation and market trends
Property appreciation, or the potential increase in a property's value over time, is a key component of long-term real estate investing. Start by researching price trends in the local area, both current and historical, to give you an indication of how values have tracked to date. Refer to reputable resources that cite market research backed by statistics, or engage the services of a property investment broker, to ascertain how the values in the area are likely to track in the future.
Investment brokers conduct analysis of the current property market to ascertain good areas of investment and also opportunities to avoid.
7. Inspection and due diligence
Never skip a thorough property inspection and due diligence process, it could cost you later. Hire a qualified building inspector to identify any hidden issues. A comprehensive building report will also be able to identify the current status of the home's insulation and other factors that contribute to compliance of the Healthy Homes standards. They can also identify areas that may need remediation.
Enlist the services of your lawyer or conveyancer to review and approve of all legal documentation relating to the property, such as the LIM Report and Certificate of Title.
Conduct a rigorous pre-purchase inspection and ensure the chattels are in working order. Identify and communicate to your lawyer if there are any issues that may need to be repaired prior to purchase. You might also want to consider getting additional specialist testing conducted, such as identifying Methamphetamine contamination.
8. Financing options
Consider your financing options and how they will impact your investment. Explore current mortgage rates, loan terms, and deposit amounts to determine the most suitable financing strategy. Investors do require a higher deposit than owner occupiers. This is often in the vicinity of 40% for an existing property but this could be as low as 20% for a new build.
If you require financing through a lender it’s a good idea to enlist the help of a Mortgage Broker. They can liaise directly with lenders, negotiate interest rates and terms, and help expedite the lending process.
Identifying a good investment property involves a combination of research, due diligence, and careful consideration of various factors. By focusing on location, property condition, income potential and market trends, you can increase your chances of making a successful real estate investment. Remember that real estate investing is a long-term endeavour, and patience and thorough evaluation are key to your success.