Buying an investment property

You could join the property investor ranks by tapping into the value of your family home if you’re already on the property ladder, or becoming a ‘rentvestor’ if you’re a first-time buyer.

1. Get your deposit together

If you want to buy an investment property you’ll usually have to stump up a bigger deposit than if you’re buying a house to live in. Generally, if you’re buying a house to live in (an owner-occupied house) you need a 20% deposit – with an investment property it’s 30%. There are some circumstances where you might be able to get a mortgage with a smaller deposit, but you’d need to talk to one of our home loan experts.

Using equity from your home as a deposit

If you already own your own home, you might be able to use some of the equity you’ve built up in it as a deposit on an investment property. Equity is the difference between the current value of your house and how much you owe on it. For example, if your house is worth $500,000 and you owe $200,00 on your mortgage, you have $300,000 in equity. You build up equity as you pay down your mortgage or if your house rises in value.

You can’t use all of the equity from your house – your bank will usually want you to leave at least 20% of the value of your property – but depending on your circumstances, you might be able to use some of it as a deposit on an investment property.

The bank will also take other things into consideration like your income and the potential rental income of the investment property. Talk to one of our home loan experts to talk through your options.

‘Rentvesting’ for first-timers

House prices have risen rapidly in recent years, and many would-be buyers find themselves priced out of their preferred suburbs. Rather than buy a house to live in that is a long commute from work, friends and family, some buyers look to enter the property market as rentvestors. This is where you buy a house in an area you can afford, but rent it out, rather than live in it.

If you’re a first-time buyer hoping to dip into your KiwiSaver to fund the purchase of an investment property, you’ll be disappointed - you can only withdraw KiwiSaver savings to buy a home to live in, not an investment property.

2. Work out your strategy

Most investors enter the property market with a focus on either capital gains, or rental yield.

A capital gain is the profit you make when you sell a property for more than you paid for it.

Rental yield is the rent a property could earn over a year, expressed as a percentage of the property’s value. The most basic equation to work out your gross rental yield is your rental income divided by the property value, multiplied by 100.

To work out how different areas stack up, take a look at the QV website, which has a table of rental analysis, where you can search median rents, annual rent changes, and gross rental yields for different suburbs around the country.

The bright-line test

If you’re looking to flip a property (buy to renovate and then sell at a profit) rather than rent it out, you need to be aware of the tax implications – it would be worth talking to a tax expert about this.

Several years ago, in an attempt to take some of the steam out of the property market and stop price rising too rapidly, the Government introduced a ‘bright-line test’. This test determines if you have to pay tax on profits if you buy and sell a property within a certain time frame.

If you bought between 1 October 2015 and 28 March 2018 then the bright-line test kicks in if you sell an investment property within two years, if you bought (or buy) an investment property on or after 29 March 2018 then it applies if you sell within five years.

A tax expert will help you figure out if the bright-line test applies to your situation.

3. Arrange conditional approval

Conditional approval, sometimes called pre-approval, will give you an idea of how much money you could borrow. This means you can focus on houses within your budget and you’ll also be able to move quickly and make an offer when you find a house you want.

Having conditional approval speeds up the process for getting full approval, because you’ll have already filled out the home loan application form. To get full approval we may need some additional information from you, such as a property valuation or rental appraisal. Your home loan expert will talk through exactly what you need to complete the process.

See more about conditional approval.

4. Get the right advice

Buying a house is a major investment, so it pays to get experts on board to advise you along the way.

A lawyer will make sure your offer is drawn up in a way that protects you, an accountant will help you structure your finances correctly, a tax expert will explain any tax obligations to you, a property manager can look after your rental if you don’t want to be a hands-on landlord and a home loans expert will help you structure your loan or talk you through saving a deposit.

5. The property hunt

Once you’ve done all the prep work, it’s time to hit the open home circuit.

When you’re looking for an investment property you need to think with your head, not your heart. Consider things like:

  • Location – is it close to public transport, schools, cafes, restaurants and shops?
  • Condition – has it been well maintained or will you need to do a lot of work to it? Does it meet the Government’s Healthy Home standards for heating, insulation and ventilation?
  • Rent potential – how much rent is it likely to get? Has it been a rental before? If so, can you see how much it rented for and what the occupancy rate was like?

When you find a property you like, you can get a rough idea of its value on sites like homes.co.nz, realestate.co.nz, Trade Me property insights or QV.co.nz.

If you find a house you like that looks within your price range, talk to your lawyer before making an offer and make sure it includes terms and conditions to allow you to make all the checks you want and to and finalise your finances.

Once you’re happy that all of the conditions of your offer have been met and all the i’s are dotted and the t’s are crossed, then your contract will go unconditional and you’ll officially be a property investor.

Take a look at our mortgage calculators to see what your repayments might be and how quickly you could pay off your loan.

Resources for landlords

Your investment property is a valuable asset for you, but for your tenants is a home. So once you’re a landlord, make sure you’re meeting your obligations.

Tenancy Services – the laws and bylaws that apply to rental properties

Healthy homes standards – see the heating, insulation and ventilation requirements for rental properties

Privacy guidance – what information you can and can’t collect when selecting tenants