Renting out a house remains a great way to create a stream of passive income to boost your finances, says Knight Hou, cofounder and chief executive of the Relab property platform.

“As people will always need a place to live, properties tend to be less affected by the Covid-19 pandemic’s economic impact than other types of investment,” he says.

However, before you throw yourself in the deep end and buy a house, there’s a lot to consider.

Hou says one key factor is the location you choose.

“We live in a highly connected world, so you no longer have to buy in the area you live in. Instead, you can choose a dynamic city with a growing economy that’s going to keep attracting great tenants.

Hou says if you’re looking to get returns on your investment property by renting it out, then one of the key metrics to consider is the area’s average rental yield.

This is often calculated as an annual percentage, based on the property’s value. A gross rental yield of above 5 per cent is ideal, and this average varies significantly across regions.

Relab has compared average yields across the nation and found some of the best cities for buying a rental property in New Zealand in 2021.

Tauranga

This North Island city has seen huge growth in recent years, because it offers a laid-back break from busy Auckland life.

Young families and professionals are flocking to beach suburbs, such as Papamoa and Mount Maunganui.

Data from the Real Estate Institute of New Zealand shows that Mount Maunganui’s average rental yield stands at around 3.8 per cent.

But don’t overlook some of the region’s fringe areas. Te Puke, known for its kiwifruit orchards, lies 28 kilometres to Tauranga’s southeast and boasts an average rental yield of 4.7 per cent.

New Plymouth

Many Aucklanders go to Taranaki for work and its affordability, but end up staying for the lifestyle. The North Island’s western coast has great weather, amazing surf, and stunning natural scenery, including Mount Taranaki.

There are many big employers in the region, including Tegel, Fonterra, and the oil and gas industries, , but there’s a serious rental shortage.

With a rental yield of 4.6 per cent, and many great tenants looking to rent, New Plymouth is quickly taking hold as a high quality investment location, says Hou.

Christchurch

Since the Christchurch earthquakes, this city has seen huge amounts of growth and infrastructure development, says Hou. The high number of construction and trades jobs and the reasonable cost of living make Christchurch attractive.

Along with the work opportunities, Christchurch is also a well-balanced and diverse city with many cafes, museums, and more, making it an enjoyable place to live.

The surrounding areas offer beaches, forests, mountains, and ski fields.

The Canterbury region currently has a solid 4.0% rental yield, as reported in REINZ’s first quarter Capital Gains and Rental Yields report.

Dunedin

Home to the University of Otago, with around 21,000 students, there are always young people looking for a flat in Dunedin.

However, if you buy an investment property in Dunedin, you won’t be limited to renting to students, says Hou. Suburbs like Mornington and St Kilda often appeal to those who moved to Dunedin to escape the high prices of New Zealand’s larger cities.

Dunedin is a diverse city, and offers employment opportunities in a range of sectors. The hospital is currently going through a major $1.4 billion rebuild, a huge project that shows that this small city is seeing some real growth.

Otago’s regional average rental yield is 3.7 per cent, but it can be as high as 6.3 per cent in St Kilda.

Invercargill

New Zealand’s southernmost city offers affordable prices, thriving farms, and a slower pace of life compared to some of New Zealand’s bigger hubs.

It’s no wonder Invercargill is gaining popularity for those looking to buy an investment property in New Zealand.

As a city with a strong economy that isn’t overly reliant on tourism, Invercargill fared reasonably well since the first lockdown.

A commercial centre for the agricultural and dairy industries, Invercargill now boasts average rental yields of 5.6 per cent.

West Coast

This quiet region of the South Island was named by REINZ as the best region for investors for the first time since mid-2020, so it definitely deserves a mention.

The West Coast region currently has an average rental yield of 5.4 per cent, with Grey District seeing the highest yields, at 5.7 per cent, followed by Buller at 5.6%, and Westland District at 4.9%.

It also had the fourth-highest capital gains of the regions, with prices up by 26.3 per cent in the first quarter of the year.

Maybe the rise of remote working is enabling Kiwis to move further out into nature, suggests Hou. “Provincial renting could be the way of the future.”

Tips for choosing an investment property

Choosing a good investment property can be overwhelming, and deciding on a city is just the first step. When you’re deciding on a location, consider these factors:

• Future growth. You want to invest in a growing area that’s got an expanding economy and population. What projects are happening in the city you’re considering? What’s the infrastructure like? Are there opportunities that will continue to attract people to the area?

• Target demographics. Make sure you look for a city where your preferred tenants would want to live. If you’re looking to rent to dynamic young professionals, the West Coast may not be your best bet.

• Safety. Check that the city or suburb you’re considering has a low crime rate. You want desirable tenants to feel confident about living in the area, and you definitely don’t want your house to be damaged.
• Property management. If you’re buying a property in a city that you don’t live in, you may want to hire a property manager to look after it for you. If so, make sure to find a manager you feel confident in.

Remember, metrics like rental yields and capital gains aren’t everything, says Hou.

“When you’re choosing a property to rent out, ensure it’s a warm and dry house that meets the healthy homes regulations, in an area where people will want to live.

“This way, you’ll be providing tenants with a great home, and making the returns you want, too.”