Property investment is one of the most popular types of investment in New Zealand, and often one of the biggest investments we ever make. Property investors are exposed to risk for a longer time, so it’s important to understand the risks before you invest.
What is property investment
You can invest directly in property – this may be a property to sell later for a profit (called capital gain), or rental property. Some people buy and sell, or build and sell, the home they live in for profit.
It’s your 'intention' when buying a property that differentiates your family home from property investment. If your intention is to sell for profit, then that property is considered an investment – even if you live in it.
You can also invest through managed funds, property syndicates or listed property funds.
These give you the advantages of property ownership without having to purchase and manage the property yourself.
We don’t regulate direct property investment but we do regulate managed fund and property syndicate providers.
You can learn about residential property investment tax obligations on Inland Revenue’s website.
Understanding the risks
Property can be less volatile than shares and other investment types. It’s also a concept most New Zealanders are familiar with, which is what makes it so popular. However, it’s not easy to sell property in a hurry when you need the cash.
Property values are tied to interest rates, how many buyers there are for your property and how many others are also selling their properties at the same time. You may risk losing capital on your initial investment when you sell.
For more information and guidance on buying and selling property visit Settled.govt.nz.
Things to look out for
Your money isn’t easy to access
Buying a property can tie up your savings. If you invest most or all of your cash in property and then need access to cash, you’ll either need to sell, tenant your property or increase your mortgage. This isn’t always easy and there are usually fees involved.
It can be hard to manage your costs
There are lots of costs involved in managing a property.
Some of these include legal fees, property manager fees, insurance, taxes, utility bills, maintenance and interest rate increases. Besides costs such as commissions, fees, and council rates, there might be unexpected costs associated with repairs to a property.
You usually have to borrow a large amount of money to invest
Most people pay a deposit and borrow money to invest in property. Ask yourself how much debt you can afford to take on. Use your bank’s mortgage repayment calculator to find out how much you need to repay per month, and how much of your income is left to pay other household bills.
Your mortgage repayment will rise when interest rates go up, affecting your disposable income. A 0.5% rise in interest rate to 6% for a loan of $300,000, fixed for 30 years, would add about $110 more to your mortgage each month, or a repayment of around $1,800 per year.
If interest rates fall, and you choose to refinance a mortgage rate that has been fixed for a number of years, you might need to pay a penalty fee for breaking the terms. This may make your total loan repayment more expensive. It’s also possible to end up owing more than your property’s worth if its value drops. This is known as negative equity.
Your rental property may not always have a tenant
If you have a rental property and cannot find tenants, you’ll have to dip into your savings to pay your mortgage. Make sure you have enough savings to cover these unexpected costs.
How to reduce risk
- Diversify – if property is your only investment, you’ll have little or no diversification, which increases your risk. You can reduce this risk by also having other types of investments, such as bonds and shares and/or investing in managed funds. Making regular contributions to KiwiSaver is an easy way to achieve diversification.
- Invest in managed funds – investing in a managed fund removes the risk of unexpected costs involved in the day-to-day management of a property. It can also help you to diversify as each fund invests in a range of commercial properties.
