You’ve bought your first home and you’re absolutely stoked. A place to call your own, an excellent and well set up home loan and a financial plan for the future. With the Reserve Bank removing the LVR restrictions on main banks, now may be the best time possible to buy your first investment property.
What’s next?
For plenty of Kiwi’s the next investment they wish to make (other than the investment almost everyone has which is Kiwisaver, and may now be looking a little less healthy now you’ve bought a home!) is an investment property.
Let’s roll through the things you need to have in mind when buying your first investment property… there are many specifics which will be unique to you but this is a great start;
- Equity - this is the biggest one, especially given the rules around LVR (Loan to Value Ratio) which the Reserve Bank have in place. At the time of writing this is up to 80% borrowing on your own home (where you live) and 60% against investment properties. This means to buy a second property, you have to magic up a 40% deposit, and most of the time this comes from equity. I’ve put together an example below of Tim and Charlotte who purchased their first home with me 5 years ago and have just bought their first investment property.
- Servicing - can you afford it? Any bank will assess your ability to borrow your existing home loan, plus the money for the new rental property. You will therefore need a reasonable amount of income to be able to service the debt overall. Banks usually “scale” rental income by 75% to allow for times when you might not have the place rented or rental income coming in.
- Rental Income and costs - how much money will you receive for the rent and what will you need to pay? Consider interest cost (from a bank loan), as well as things like maintenance, property management, and any other extras
- Location - where will you buy? This is really important and something overlooked by a lot of investors chasing believed cash returns. A property in Whanganui or Te Kuiti (traditionally a little bit cheaper to buy up front) has the same maintenance costs as one in the centre of Hamilton that rents for an extra $200 / week. Consider these things very carefully and ensure you do a budget, as well as look for things like educational institutions (University of Waikato) or large employers (Waikato Hospital) where there will be plenty of people looking for places to rent
- Type of property - what will you buy? Are you looking for a 2 bedroom flat which will house an elderly couple or a home near a university which will rent to students. Consider your ability to manage property as well as how much risk you’re willing to take on. If you buy something in a slightly rougher area you might have tenants who will take more energy to deal with. Paying a bit more for a nicer area but a smaller property could be better for you
- Accounting and Tax - even considering some recent changes to tax legislation for people with investment properties, there are big benefits to ensuring your ownership structure and also your home loan are set up correctly when you purchase your first investment property. Please get advice from an Accountant, because you can get into trouble if you aren’t sure what you’re doing
What do you look for in an investment property?
While this is not advice around how to find the right property, there are some guidelines that will help steer you towards the right type of property to buy so you’re not stuck with something which has a low return or is requiring too much maintenance.
- Low maintenance
- Simple
- Tidy and clean, ideally fairly new interior
- In a decent area
- Has an “upside”
Case Study: Tim and Charlotte
Tim and Charlotte purchased a home in Te Awamutu in June 2015 for $350K and borrowed $280K. They had a rate of 5% and they have paid $25K off their loan in the last five years.
Their property has also increased (rather significantly) to now be worth $480K, an increase of $130K.
Let’s see what their LVR position is currently;
- Their property is worth $480K and they can borrow 80% of that, $384K
- Their existing loan balance is $255K so the difference between possible and existing is $129K.
- This is the number we use as “equity deposit” for the new property. If we divide $129K by 0.4 (or 40%) we’ll get $322.5K, which is their borrowing power for a new property.
To be clear, Tim and Charlotte aren’t actually “taking money” out of their home. They are using the equity growth to allow their borrowing percentage to be high enough that they can borrow for a new property. So they will still need to borrow the full $322.50K for the new property, unless they have additional cash deposit.
How can I buy an investment property?
The first thing for us to do together is like Tim & Charlotte above, working out where you're at. Get in touch with us and we'll crunch some numbers so you understand the pathway to your first investment property.
One of the most important things to understand is that it's a process - it could take a few years and some hard work in repaying your loans to get into a position to buy your first rental or you might be there already and not know!
We'll be here to give advice and help you focus on what's important, and you might find it's closer than you think!