Buying an investment property in New Zealand

Buying an investment property is a popular way to build a nest-egg for the future.

In 2017, 32% of total investment in New Zealand was in residential property.

If you’re wary of the stock market, and uninspired by the low interest rates available on savings accounts and term deposits, you may be considering buying a property and renting it out to earn an income (or renovating and reselling it to benefit from the increase in value).

This handy guide will tell you everything you need to know if you’re considering buying an investment property in New Zealand.

Before we get into the financial nitty gritty about tax and mortgages, here are three important issues you need to consider.

  • Property is a long-term investment

    Once your cash and borrowing potential is tied up in a property, it can be expensive and time-consuming to access it, should you need it later. To get at the equity in your property you’ll have to sell it or attempt to refinance it.

    Unless the property has risen a fair amount in value since you bought it, the cost of agency and legal fees on the sale – not to mention the costs of buying your property and applying for your mortgage in the first place – may mean you end up with less money than when you bought the place.

    What’s more, if your property has increased in value and you sell it within two years of acquiring it (or you buy and sell too many properties and are considered to be making a living from ‘property trading’) you may be caught by the IRD’s ‘bright-line test’ and be taxed on any profits you make.

    Of course, you may be planning to buy, renovate and then resell your investment quickly, making money from the value you add through your improvements. If this is your strategy, you’ll need to take care in how you structure your mortgage (be careful not to get locked into long-term borrowings with fees for early termination) and be mindful of the tax implications outlined above.

  • Property is a hands-on investment

    Unlike cash savings or investments in a managed fund, investing in property can be a lot of work.

    First of all, you have to find the right property, apply for a mortgage, go through the purchase process and then prepare the place for renting out.

    Then you need to find a tenant (and another one every time your tenant moves out), collect rent and manage the ongoing maintenance of your property. You may choose to use a professional rental agency / property management firm to take care of all this for you – which will spare you the 3am calls from frantic tenants when the toilet springs a leak, but will also eat into your income.

  • Property is not a risk-free investment
    1. While your property is rented out it will, hopefully, generate a steady income stream – but finding a reliable tenant isn’t always easy, and you may be surprised at all the costs that can quickly swallow up your precious rental income (including mortgage interest, insurance, agency fees, maintenance, body corporate fees, council rates and tax).

      If you’re planning to use the rent to pay your mortgage, you’ll need a back-up plan, for any periods when your property is untenanted, or your costs exceed your rental earnings.

    2. If, for any reason, you find yourself unable to keep up your mortgage payments, your lender may force you to sell your property and repay your mortgage early – or even repossess the property and sell it themselves.

      This is known as ‘mortgagee sale’ and is often done by auction. Since the lender is only interested in recovering the debt rather than getting the best price for the property, you may lose any equity you have built up.

    3. Meanwhile, for many, the main attraction of a rental property is the prospect that its value will rise over time.

      While we have seen aggressive price rises in property right across New Zealand in the last two decades, especially in our main cities, there is no guarantee that this trend will continue. In fact, there has been lots of speculation recently that New Zealand’s housing boom is at an end.

      Even if average prices do continue to rise, there’s also no guarantee that the specific property you choose will appreciate in value – it could even fall, if economic conditions change or if something should happen to negatively impact your area (anything from natural disaster to commercial or industrial development can change how safe or desirable a suburb is considered to be).

    4. Given all the effort and risks involved in property investment, we strongly recommend that you seek independent professional advice before sinking your hard-earned savings into property.

      If you’ve already taken advice and made your decision, here’s how to go about buying your investment property in New Zealand.

Getting An Investment mortgage

You may find it harder to secure a mortgage as an investor than you would for your own home.

Many lenders have lower limits for lending to investors (i.e. they offer the majority of their home loans to owner-occupiers) and you will generally need a deposit of 35% because of the Reserve Bank of New Zealand’s LVR rules.

Even if you have never owned a property before, you won’t qualify for any of the special first home buyer incentives like the Welcome Home Loan if you are not planning to live in the property you are buying.

There are still several different types of mortgage to choose from. Here’s a quick overview.

Fixed mortgage

A fixed mortgage is one where the rate of interest you pay on your loan is set at a pre-determined rate for a period of time – usually for between six months and five years.

Although the official cash rate set by the RBNZ hasn’t changed since November 2016, mortgage rates are impacted by other factors, including the cost and availability of funding in the global markets. This can cause rates to be volatile, and is one of the reasons fixed mortgages are very popular in New Zealand.

Fixing your interest rate means that you’ll know exactly how much your repayments will be for the agreed period. The main advantage is certainty – during that time, even if mortgage interest rates rise, you will not have to worry about paying more for your finance. Since rental income is likely to be fixed for six to twelve months (depending on the length of your tenant’s lease), it may make sense to fix your interest payments too.

There are disadvantages, though. Fixed mortgages are usually more expensive than floating, especially if you want to set your rate for a longer period. They also tend to be less flexible, with little or no ability to make additional repayments and high fees if you wish to terminate your loan early. Also, if the interest rate falls rather than rises, you will not benefit.

At the end of the fixed period you may have the option to fix your rate for a further period – based on the rates on offer at that time – or your rate may become floating.

Floating mortgage

With a floating mortgage your rate will track up and down with the lender’s mortgage rate. This means that rates can go both up and down – although given that the official cash rate has been at an historic low since 2016, there is much more potential for increases than cuts. This means that you will not be able to budget for the future with any certainty, and if rates rise sharply your mortgage repayments could end up being considerably higher than your rental income.

The main advantage of a floating loan is flexibility – generally, you’ll have the option to make extra repayments and pay off your loan much earlier, which can save you a staggering amount of interest in the long run (and can save you hefty break fees if you decide to sell your investment property for any reason).

Split mortgage

Also known as a ‘combination’ loan, a split mortgage is a hybrid arrangement that separates your mortgage into different portions, each with different interest rates. You can choose to fix several portions for different lengths of time – or leave some floating so that you can make additional repayments and benefit from any interest rate cuts, while having the security of fixed rates on the remaining portions.

Offset mortgage

If you have a floating or split mortgage you may be able to link it to an everyday or savings account under an offset arrangement, which enables you to minimise the amount of interest you’ll pay while making sure you have cash available should you need it. With this arrangement, the amount of savings you have is offset against the balance of your loan, and you’ll only pay interest on the difference.

Note: As an investor, you can claim a tax deduction against rental income for the interest you pay on your investment loan, so you may want to think twice about using an offset account to reduce your mortgage interest. We recommend you discuss the structure of your mortgage with your accountant or financial advisor before making any decisions.

Revolving credit facility

This is another option that you may be able to combine with a fixed or floating mortgage. Like an offset account it can help you reduce the amount of interest you pay on your loan (which means it may have the same tax implications noted above).

With a revolving credit facility some or all of your mortgage can be linked to a transaction account, where it will operate much like an overdraft. Every dollar you pay into the account will reduce your balance and every payment you make will increase it. The interest will be calculated daily and paid monthly.

The real danger with a revolving credit facility is that you’ll have a credit limit which reduces slowly over time, but which, in the meantime, gives you easy access to funds. Unless you are disciplined it can be all too easy to spend those funds and increase your borrowings, meaning you’ll constantly be paying maximum interest on your loan.

Revolving credit does have one major advantage though – you won’t have to worry about making regular repayments if you are self-employed or if your income fluctuates for any reason.

Low-deposit loan

For investors, a low deposit loan is one where you have a deposit of less than 35%. Because of Reserve Bank of New Zealand restrictions, banks can only make a very small percentage of their loans to borrowers with a high ‘loan-to-value’ ratio. They are riskier for the lender, too, so the chances are you’ll only be able to secure one if you have an excellent credit rating, a high income from stable employment and a great savings record.

If you are offered a low-deposit loan, expect to pay a ‘low equity fee’ until the equity in your property reaches 35% – this will be margin on your interest rate to compensate for the increased risk to the lender. You will probably also have to pay lenders mortgage insurance too, to protect your lender in case you default on your repayments.

Other considerations when choosing an investment mortgage

As well as deciding on the structure of your mortgage, you’ll need to think about:

  • The term

    – i.e. how long you want to borrow for. 25- or even 30-year mortgages are very common in New Zealand now, and the longer your loan term, the lower your repayments will be. BUT the longer it takes you to repay your loan, the more you’ll pay in interest, and the difference can end up being tens or even hundreds of thousands of dollars.

    Take a look at the following to see the difference on a $500,000 mortgage…

  • The repayment schedule.

    Most investors make regular repayments of the same amount each month, paying mostly interest to begin with and only slowly reducing their principal over time. This is called a ‘table’ loan. An alternative is to pay the same amount of principal each month (a ‘flat’ or ‘reducing’ loan) plus the interest – your payments will be a lot higher to begin with, but as your balance reduces your interest component will drop, and you’ll pay off the loan much more quickly.

    You might be considering an interest-only loan, which is exactly what it sounds like. For an agreed period, you’ll pay only interest, no principal – which will make your repayments lower, but mean that you’ll continue paying interest on the full loan balance, a very expensive option in the long term. For obvious reasons, this type of loan is most suitable for investors who plan to buy, improve and resell a property quickly, making money from the increase in value due to renovations rather than from long-term price appreciation or rent.

  • The fees.

    Mortgages always come at a cost, and each lender and product will have different set-up fees and ongoing charges in addition to the interest you pay on the loan, including break fees for most fixed mortgages. Make sure you find out all the fees associated with each loan product you’re considering and get advice from a reputable broker if you are having trouble comparing products.

  • Your goals and circumstances.

    Different lenders and products suit different investors – your tax position, financial circumstances and long-term strategy will all play a part in choosing the right mortgage. For example:

    1. If you’re planning to ‘flick’ the property by buying, renovating and reselling quickly, you may be considering an interest only mortgage, and you will need to steer clear of fixed mortgages with penalties for early termination.
    2. If you hope to build equity fast and then leverage your investment property to buy another, you may prefer the flexibility of a floating loan, with the option to make extra repayments.

Because each type of loan can have long-term consequences, we strongly recommend you get your financial advisor involved in helping you to make this decision.

Applying for your mortgage

Once you’ve chosen a suitable mortgage product, you can either apply direct (you may need to visit your bank in person or make an appointment with a mobile lender, or you may be able to apply online for pre-approval) or get the help of a mortgage broker.

If the application process seems daunting, a mortgage broker can help guide you through it (as well as helping you compare products, find a lender who will support your investment goals, and capitalise on any special deals such as cash-back offers or free legal advice).

As part of your application you’ll need to provide supporting documents to prove your financial circumstances – the most important consideration from the lender’s point of view is whether you have enough income to cover your mortgage payments in addition to your other expenses.

Once you have pre-approval you’ll be able to start looking for properties and be eligible to bid at property auctions – but you’ll still need final approval of the purchase from your lender, and may be required to get an official valuation of the property before they will confirm your finance.

If your loan is rejected read our article about what to do if the bank says no.

Using equity to finance your investment property

Saving a 35% deposit is no easy feat, especially if house prices continue to rise.

If you already own property and have built up some equity, there may be an alternative – although, once again, it’s vital that you get professional advice before following this path.

Some lenders will allow you to ‘leverage’ the equity you have in your existing property as security for your new loan. This can allow you to grow your property portfolio without having to save for a cash deposit for each new purchase.

The big risk of this approach is that if you default on repayments for your investment property, you could lose your existing property too.

Another risk is ‘cross-collateralisation’ which can happen if you use the same bank each time as you build up your portfolio, with each property acting as security for the others. This can considerably reduce your flexibility over time.

Why? Because the more reliant you become on one bank for finance, the more control they will have over you. Should you decide to sell one of your properties, for example, the bank may insist that you revalue every property you own (at great expense) – or use some of the proceeds to reduce the balance on some of your other mortgages and improve the overall loan-to-value ratio on your portfolio.

Cross-collateralisation can also make it tricky and expensive to refinance your loans, should you wish to, as it may be difficult to separate one property from the portfolio, and some lenders may not be willing to offer you loans on a large number of properties at once.

Investing from overseas

If you’re not a citizen or resident of New Zealand and you’re thinking of buying a property here, you’ll need to be aware of the government’s proposed restrictions on foreign investment. Legislation is currently under consideration which could prevent foreign investors from buying existing residential properties or land.

The legislation is intended to protect residents from being forced out of the market by foreign investment driving up property prices. You can follow its progress here.

Tax considerations for property investors

One of the big advantages of investing in property here in New Zealand is that there is currently no land tax or stamp duty on house purchases, and no capital gains tax in most cases.

This makes investing in property considerably less expensive than it is in many other countries (like Australia, where stamp duty can be as high as 7%).

There are still important tax considerations though:

  • Any rent you earn from your investment property will be classified as income and will need to be declared on your tax return. Your tenant’s bond – provided that it is passed, as legally required, to the Tenancy Bond Centre – will not count as income, but any amount that is passed to you from the bond to compensate for damages etc IS income and will need to be declared.
  • You can claim a tax deduction against your rental income for the expenses you incur as a result of renting out your property. These can include interest on your mortgage, insurance, maintenance costs and agency fees.
  • Capital gains tax isn’t something most property buyers in New Zealand have to think about – but if buying and selling property is your ‘trade’, or if you’re selling a property too quickly, you may have to pay tax on any profit you make.

    In 2015 the IRD introduced the ‘bright-line test’, which applies to any property bought and re-sold within two years. This test was designed to supplement the existing, more subjective ‘intention test’, under which you’ll have to pay tax on any gains you make from property sales if your intention, when buying the property, was to sell it later to make money (even if you plan to use it as your family home in the meantime).

    So, if ‘flicking’ properties is your investment strategy – i.e. buying then selling later once you’ve renovated, or buying in a rapidly inflating area and selling as soon as the property’s value has increased – you’ll need to be prepared to pay tax on your capital gains.

Choosing your rental property

When it comes to choosing a rental property, you’ll need to use different criteria than for buying your own home.

Again, this will come down to your strategy:

  • If you’re planning to make most of your income from rent (and hopefully, over the long term, some appreciation in value), then you’ll need to find a property which will give you a steady income and a good return on your investment – i.e. where rents are high and rental properties are in demand.

    Bear in mind that the majority of people who rent are not looking for high-end properties. Choose something that will be attractive to renters in your area, based on the type of tenants you are likely to find – for example:

    1. a well-appointed, low-maintenance apartment near the CBD for young professionals (who may need to share a property with two or more bedrooms to afford the rent).
    2. a comfortable family home with a garden in the suburbs.

    Consider what makes a property more appealing to prospective tenants – local facilities like shops, restaurants and schools, or access to transport. Remember, too, that if your property is neat, clean and well maintained, you are more likely to attract responsible tenants who will take good care of it.

    Avoid buying into serviced apartment buildings or complexes with high-maintenance facilities like gyms and swimming pools, as your share of the communal costs can be prohibitive and can rarely be passed on to tenants.

  • Many tenants prefer properties that are managed by a professional third party, as they expect to get quicker responses to their queries and prefer to have an ‘arms’ length’ relationship with their landlord. Having a property management firm take care of your investment can save you lots of time and hassle and make it easier to attract good tenants, but you will have to pay for their services.

    Pro tip: Look for tenants who are likely to stay in the property for a long time, as the cost of untenanted periods and of finding and installing new tenants can very quickly erode your profits. You’ll need to decide whether to offer a fixed term or periodic tenancy. Fixed terms of 6 – 12 months are now becoming more common, but periodic tenancies (which continue until either landlord or tenant gives notice) still account for around 50% of the New Zealand rental market.
  • If you’re planning to make money by renovating and then on-selling the property, you’ll obviously need to find a property which needs work, ideally within a popular area where most of the surrounding properties have already been refreshed.

    Looking for ‘the worst house in the best street’ is a tried and tested formula – but be aware that renovating almost always costs more than you expect. Get professional advice to help you estimate the costs, and make sure you get a professional building inspection before you invest, so that you don’t get caught out by more serious issues that could quickly swallow up your renovation budget.

    Remember that you’ll have to pay capital gains tax on your profits if flicking the property is your investment strategy.

  • Another flicking strategy depends on finding a property in an area where property prices are rising fast, and on-selling once the property has appreciated in value. If this is your goal, you’ll need to do your research to identify fast growing suburbs. This strategy can be particularly risky since there is no guarantee that price trends will continue, and you will have to pay capital gains on your profits if you succeed.
  • If your goal is to build equity in your property fast so that you can leverage it to buy more investments, you’ll probably want to look for a property that has high potential for price appreciation but will also appeal to tenants. Lower value properties with low maintenance costs tend to offer the best rental returns.

Buying your rental property

The property buying process in New Zealand is quite straightforward, but you will need to engage the services of a solicitor or conveyancer to manage the transaction for you. Expect to pay between $500 and $1,200 for your legal advice.

It’s prudent to get your mortgage pre-approved before you start looking for an investment property, so you’ll know exactly how much you can afford to borrow (and that you won’t run into difficulties securing finance).

When you find a property you’re interested in, the first step is to negotiate a price.

Just like with a home purchase, it’s important that you look at a lot of properties in the area and get a good understanding of value first. Remember that the agent is working for the vendor, not for you – don’t seem too keen, don’t give too much away, and don’t let emotion get in the way!

After you’ve agreed on a price, the next step will be to make a conditional offer and get to work confirming your finances, getting an official property valuation, arranging for a professional building inspection and getting a copy of the Land Information Memorandum for the property.

If all is in order, you’ll be required to sign a written sale and purchase agreement and agree a settlement date – your legal advisor will need to check the agreement over for you and help you negotiate any changes to the conditions.

Your solicitor will then take care of all the formalities, liaising with your bank or mortgage broker and the seller’s legal team. You will simply have to make sure your insurance is in place before the purchase settles and check the property over before settlement to make sure it’s still in the same condition as when you made your offer.

You’ll find a detailed overview of the property buying process in this guide from the Real Estate Authority, (the independent government agency that regulates the New Zealand real estate industry).

Insuring your investment property

Insurance premiums are likely to be one of your biggest ongoing costs as an investment property owner. But this may be the biggest investment of your life, and it’s vital that you protect it.

If you’ve taken out a low-deposit mortgage you’ll probably have to pay lenders mortgage insurance. Your lender will almost certainly require you to take out building insurance (regardless of what type of mortgage you have) – unless you’re buying into a complex where you contribute to a communal insurance policy held by the body corporate.

If you’re planning to rent out your property you’ll also need landlord insurance, to protect you in case your tenant fails to pay the rent or damages your property (by accident or intentionally). Landlord cover is essential protection since you’ll be relying on your tenants to take care of your investment and to cover your mortgage obligations. The costs, terms and conditions of landlord insurance policies vary widely, so be sure to do your research or get a recommendation from your mortgage broker.

Your obligations as a landlord

If you decide to rent out your new investment property, you’ll have a number of responsibilities to your tenant, including:

  • Making sure the property is well maintained and in reasonable condition at all times.
  • Leaving the tenant alone to enjoy the property in peace .
  • Comply with all New Zealand’s health and safety standards and building regulations.

You can find out more about your responsibilities, plus useful advice on finding tenants and managing your investment property, here.

If you fail to comply with your legal responsibilities – such as failing to lodge your tenant’s bond with the Tenancy Bond Centre – your tenant can complain to the tenancy tribunal and you may face very severe penalties.

Top 3 mistakes to avoid when buying an investment property in New Zealand

  • Buying the wrong property

    Your investment property is exactly that – an investment. You will be tying up your precious capital in your property and putting a lot of time and effort into the process.

    Before you buy, it’s absolutely vital that you DO YOUR RESEARCH to make sure you understand the market you’re buying into and the return potential for the specific property you are considering (and make sure you get a professional building inspection before you buy!)

    It’s important to be strategic, rather than simply buying in a ‘hot’ area which already has a lot of rental stock – or buying close to home simply because you are comfortable with the area, even though there is low demand.

    Being strategic doesn’t just mean figuring out the right place to buy – to succeed as a property investor you need a well-developed strategy to help you make money from your investment in the long term. We can’t stress this enough – get professional advice to help you develop a strategy that suits your circumstances and plans.

  • Structuring your mortgage badly

    As explained above, you need a loan that will suit your investment strategy. For example, getting locked into a long-term fixed contract when you plan to flick your property can cost you dearly.

    How you structure your interest and how quickly you pay off your loan can have a massive impact on your tax profile and your financial circumstances in the short and long term. Get advice!

  • Ignoring the risk

    Property investment isn’t fool proof, and you could end up in financial difficulties for many reasons, for example if:

    1. interest rates rise sharply
    2. property values fall
    3. you can’t find reliable tenants
    4. your renovation costs far exceed your budget
    5. your ongoing costs exceed your rental income (mortgage interest, insurance, agency fees, maintenance, body corporate fees, council rates and tax – the costs of running a rental property can mount up very quickly, and even a short period without a tenant can leave you well in the red).

    Before investing it’s vital that you understand the risks involved and formulate a plan to manage any financial difficulties and make sure you can cover your obligations if something goes wrong.

    If you can’t, investing might not be the right strategy for you – so be sure to take financial advice first.

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