Property investment is just like life. To get the best results, it’s important to know where you’re heading and how you’re going to get there. People with the best plans in place, with strong cashflow portfolios, may be able to give up their day job. Before you start, ask yourself what kind of passive cashflow are you seeking to build up and ultimately retire on. What levels of equity do you need? What’s your investment timeframe? Where should you invest? What types of property should you buy?

Buy and hold

Buy and hold is the plain vanilla property investment strategy. You invest for the long term to build up significant passive cashflow. You also grow your equity, by getting an increase in the property’s value. You buy a property for the long term, to get a regular return from it. You’ll hopefully also get the benefit of capital appreciation as the property hopefully increases in value over time. You’ll get tax deductions on what you spend to run and maintain the property. Over time you’ll repay some or all of the loan principal, which further increases your equity in the property.

Two variations include:

Improve and hold, where you renovate a property to add to the income and capital value of the property. Develop and hold, where you add buildings to the property, often subdividing, to get increased income and create equity growth too.

How involved are you?

Decide how much you’d like to be involved. Are you going to be hands-on as an active investor, or are you more of a passive investor? Some people have the time and skillset to be productive as hands-on property investors. This depends on a range of factors, but it’s certainly not a prerequisite to be hands-on. Be prepared – as your portfolio grows, property can become like a fulltime job. The key is to identify your strengths and your weaknesses. Don’t be afraid to connect with experience and seek help when you need it.

Growth or yield?

Some properties generate stronger cashflow returns through rent or lease income, and others generate stronger equity returns (grow in value). In general, commercial property, with net leases, generates stronger cashflow returns, but this isn’t always the case. There are three things to focus on in property investments: cashflow, equity, and growth. Cashflow is crucial because it pays the bills, and most investors have loans (at least at the start) to finance their purchase. It’s always nice to have more money in your pocket at the end of the month than you had at the start of the month. Equity is important too, because as you own more of the property, you lower your investment risk. By building equity, you have future sale options, or you can refinance and redraw equity from your portfolio, perhaps to buy another property.

Growth is my favourite. You get two bites of the cherry with growth. You’ll get growth in cashflow as rents rise over time, and hopefully growth in equity. This is where population trends are your friend. Pick cities that are growing. Infrastructure and employment bring population growth. Watch for cities with new subdivisions, new malls, and a growing café culture. The best performers in my portfolio have been in suburbs that had strong infrastructure being put in, such as around Westgate Town Centre in north-west Auckland, and around Auckland International Airport.

Roll your sleeves up

Are you interested in creating the full deal – by building, renovating, or subdividing? For some investors, engaging tradespeople, builders, architects and surveyors is a step too far and too much risk. However, there can be great returns for those ready to take on this kind of risk. For example, it’s not hard to do a cosmetic renovation to add to your rental potential, increase your cashflow, and add value to build your equity. For some properties, it’s as simple as boosting the street appeal by weeding the gardens, replacing the rusty old 1970s steel letterbox, or painting the front door.

Maybe you’ll go one step further and repaint, or replace the carpet. The degree of difficulty increases when you have to redo kitchens and bathrooms, or if you do restricted building work like moving plumbing fittings around or moving load-bearing walls. Getting council permits can delay work and make life hard for your tradespeople. Subdividing to create multiple titles can be an exciting and lucrative way to build a significant portfolio. I’ve tried the strategy of build to hold myself, and found it worked for me. However, it does increase your risk and the amount of money you need to borrow. To reduce your risk, seek expert advice, and consult a quantity surveyor.

New rules

Be aware of new ‘ring-fencing’ rules, which mean that negatively geared (loss-making) portfolios can no longer be offset against your personal income tax. Investors have long used the ability to do this as a handy tax advantage, but it’s no longer possible. This was long foreshadowed in tax policy by the Labour, Green and NZ First political parties and it’s very unlikely to change. With rents on the rise and loan interest rates near record-low levels and likely to be heading lower, the impact of the new rule isn’t cause for alarm.

The other rule you need to be aware of affects you if you sell a property within five years of buying it. Not only do you miss out on capital growth, but you also may fall foul of the ‘bright-line test’, and Inland Revenue may rule any gain you made was ‘capital income’ – and tax it. The idea of property investing is to get enough income from your properties over time that you can give up your day job or business. Many professional investors have achieved this level of success.

Other ways to invest in property

If direct investing and becoming a landlord or developer doesn’t appeal to you, there are several other ways to invest in property. You can invest in property funds listed on the share market in New Zealand, real estate investment trusts (REITs), many overseas-listed property options, or joint ventures and partnerships. Or you could consider lending to others for a return on property investment. There are plenty of ways to get into property investment into New Zealand, if that’s your goal. Just make sure you get independent financial advice to find out what’s best for your situation.

Published 28 November 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.