How To Choose Your First Rental Property
The fun part of residential property investing is buying your first house. But how do you do it? Andrew Nicol, of Opes Partners, explains in the third of our four-part series.
11 October 2021
Choosing your first rental
Once you’ve considered your property investment goals and worked out how you’re going to fund your first rental, you’ve reached the point where it all gets real – and fun.
You’re now in the market to shop for property. This can be overwhelming, and you’d be surprised how many people get cold feet at this point.
There are so many options, and if you’re a creative thinker, you can imagine a million scenarios that would make almost any property look like a good buy.
That creative thinking can also help you conjure up a million ways it could go wrong, making it easy to get freaked out and do nothing. Your first property can be the hardest.
The cost of upkeep
Maintenance can be a huge issue with rental properties, but often we wildly underestimate what it will cost.
Here’s the bad news: older houses typically cost 1 per cent of their purchase price each year to maintain, but not evenly.
Some years your NZ$300,000 house might cost nothing to maintain, while other years it might cost you NZ$12,000.
If you have a slow water-cylinder leak or your roof needs replacing, your property could require a cash injection of NZ$10,000 or NZ$20,000. You’ll need to have that on hand.
I love new builds and one of the main reasons for that is their low maintenance costs.
How much should you pay?
Your main issue is going to be price. You need to calculate your price ceiling by thinking about all these factors:
1. How much will the bank lend you?
2. How much can you afford to contribute each week, if anything?
3. Have you added in the extras like legal fees, insurance and accounting costs?
4. Do you have a buffer in case of a major surprise expense or interest-rate rise?
5. What will the maintenance costs be?
Don’t get stuck in a corner
Make sure you do your sums. You don’t want to spend more than you can afford, for this simple reason: the worst outcome for a property investor is being forced to sell.
If it all goes pear-shaped, desperate vendors can be forced to accept low prices when the market may be at its weakest.
You lose, the buyer wins, you’re out of the game – and it will cost you way more money to get back into the game than you would have spent holding on to the property you had.
Cash flow or capital gains?
Once you’ve figured out exactly what you can spend, you need to decide whether you’re buying primarily for cashflow or for capital gains.
A positive-cash flow property could give you a small extra income each year, but low-value growth.
An apartment might make you NZ$100 each week, for instance, and increase in value by 3 per cent per year.
A higher-growth property, on the other hand, will cost you money each week, but is likely to increase in value substantially over 10 to 20 years.
A house, for example, might cost you NZ$100 a week, but its value grows by 6 per cent each year.
This table shows the potential effect of each, based on the same purchase price (your initial investment):
What stage are you at?
If you’re already retired or approaching retirement, a cashflow property may be the way to go. That means you need your calculator handy to look for a property with a strong net yield, while balancing the risk factors in less salubrious areas.
If you’re not ready to retire, you’ll want a mixture of capital gain and cashflow properties.
You’ll need to think about a balanced portfolio that will keep the bank happy and allow you to weather market downturns.
For you, it’s all about finding a strong growth location and a property that will be desirable to tenants.
All it takes is research, time, and energy.
Check out the risks involved and be sure to see a financial adviser.
Narrow your search, have your budget set, and see if you’re ready to make that first leap.
Andrew Nicol is an Authorised Financial Adviser and the managing partner of Opes Partners. He has over 15 years’ experience in banking, finance, and property.
Published 29 February 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.
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