With the removal of LVR restrictions, a lot of home owners have rediscovered a love for investment properties. Currently most banks are allowing investors to borrow up to 80 percent on a new investment property, up from 70 percent a month ago, meaning more people have the ability to consider this in the near future.
If you’re looking at investment property for the first time, here are six tips to think about:
1: Keep emotions out of it
You should fall in love with your own home but investment property is a calculation not an emotional decision. Rental properties typically suffer more damage than an owner-occupied home simply from the amount of furniture that is moved in and out on a regular basis. Choose a property that is bulletproof over breathtaking.
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2: Your existing house may not make a good rental property
Often property investors take the opportunity to upgrade the place they live in and rent out their old home. While it’s likely that your first home is quite a simple and robust property, it’s worth considering if it is in the right suburb for good returns or capital growth. The cost of selling your original home is what puts a lot of people off - why spend $20,000 getting a real estate agent to sell your property when you could just rent it out? But buying in an area that meets your investment needs (positive cashflow or capital growth) can make you significantly more than the cost of a real estate agent.
3: Your rental property doesn’t have to be in the same city as your home
In some cities (Auckland) it can be almost impossible to find a rental property with a positive cashflow. If that is your priority, it is quite acceptable to look to other cities. First time investors can be hesitant to purchase away from their own city because they don’t know the good suburbs but there are plenty of property finders who will guide you to areas that suit your needs. If you don’t want to use a property finders, you can do the research yourself; it’s the perfect excuse to travel the country!
4: Consider your DIY capabilities
I am a notoriously poor DIYer. My expertise stops somewhere around changing lightbulbs. So while renovation projects are a great way to increase the value of a rental property, that is simply not a market I look at. Know what you’re capable of and, importantly, what your time restraints are. If renovation isn’t a thing you enjoy or have time for, consider newer homes or apartments.
5: Understand the requirements of being a landlord
The Residential Tenancies Act is in place largely to protect tenants but the rules are complicated and inflexible. This means landlords can’t take advantage of vulnerable tenants but it’s easy to fall foul of the rules unintentionally.
Additionally, not following a correct inspection procedure can void your landlord insurance. Rental property managers know the key rules and, in my opinion, are well worth the cost.
6: Think about future interest rates
We are currently experiencing historically low interest rates but some thought should be given to how you will be affected when interest rates go up again. It doesn’t need to be an immediate concern - no one is expecting them to rise in the near term - but have a plan for increasing your income and/or reducing your mortgage so that when rates do rise, you will still be able to afford the payments. Aim to be comfortable at an interest rate of 7 percent per annum.
Property investment has historically had a good return and isn’t something to be frightened of. Understanding your own capabilities and risk tolerance should give you the comfort to proceed in this new pro-investment market.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
