Building wealth through property investment
Owning property is an excellent way to build wealth. Historically, property has been a less volatile investment with real estate values invariably tracking upwards over time. What’s more, you have the added benefit of being able to “leverage” your existing real estate investment to buy an investment property using borrowed money and grow your property portfolio even further.
Using equity to grow your investment portfolio
How much equity do you have in your home or investment property? Enough to fund your next property purchase and grow your investment portfolio?
If you’ve owned your property for some time and provided you have the means to service a mortgage, you may be able to access the equity in your property to fund the purchase of your next property. Equity is the difference between your property’s value and the amount you still owe on your mortgage. It’s essentially the bit you “own” of the property and it can be used as a deposit to buy another property.
If you’re buying a residential investment property or you’re using a residential investment property you already own as security for a new loan, you’ll generally need at least a 30 per cent deposit. Instead of having to save up the cash for the deposit though, you could use the equity in your existing property to purchase another property.
Calculating the equity in your property
To calculate how much equity you have, you’ll need to know the market value of your property. You can use the valuation on QV or get a registered valuation of the property to determine its market value. You’ll also need to know how much you still owe on any lending secured by the property, which you can obtain from your lender.
Lenders will determine how much you are able to borrow by looking at a combination of your equity and income. Different lenders will have different lending policies and the combination of equity and income may vary from lender to lender.
Your potential rental income from the investment property you’re planning to buy will be included in the lender’s servicing calculations when determining your borrowing capacity. Contact a Harcourts’ Property Manager to arrange a rental appraisal to help you determine the likely rental income from the property.
You’re required to have at least 20 per cent of equity in your existing property after new lending is taken out if you’re using the equity in your family home, or 30 per cent equity if using your existing investment property. That means you could borrow up to 80 per cent of the value of your family home and 70 per cent on any investment properties you own, based on current loan to value restrictions.
If you’d like to find out more about accessing the equity in your property and unlocking your opportunities to grow wealth through property investment, contact Mortgage Express and one of our advisers will get back to you within 24 hours. A Disclosure Statement is available on request and is free of charge.
Investing in Property in 3 Simple Steps
If you already own a property, you may be able to use the equity in that property to kick start your investment property portfolio. As a first-home buyer, you’ll need to have a deposit, the amount of which will vary between lenders. Your mortgage adviser will help you determine which lender best fits your situation, working from a panel of lenders, and can help you get pre-approval so you know how much you could borrow.
2. Determine Your Goals and Strategy
Decide on your goals for investing in property and the strategies to get you there. To help you get started, think about:
• Why you’re investing in property – to generate income, build wealth or to save for retirement.
• What your time frame is – how long until you retire, how long you plan to hold onto a property before selling.
• The type of investment property you could buy in order to reach your goals – a smaller rental in a cheaper area versus a modern apartment close to the CBD.
The investment strategy you choose will depend on factors like your age and how close to retirement you are. If you still have 20 years to go until retirement, you’ll likely be looking for capital gain to grow your investment substantially. If you’re close to retirement, you’ll probably choose a strategy that will provide a solid cash flow that you can comfortably live on during retirement.
3. Research the Property Market
Once you have a clearer idea of your goals and investment strategy, it’s time to research the market to find the right property to match. For each property you’re considering, take a look at:
• How long it’s been on the market.
• Any changes to the advertised price since it was listed.
• The sales history.
• Median sale price and historical capital growth rates for the area.
• What price comparable properties are selling and renting for.
Also consider the costs associated with maintaining and possibly renovating the investment property and the likely rental income you could achieve as these will all be determining factors in your property choice.
Investing in property needn’t be a complex process. At every step of the way, our mortgage advisers are available to guide you and assist you to ensure you understand the processes and requirements needed for you to reach your property investment goals.
If you’d like to talk to one our mortgage advisers about your property investment goals and how to achieve these, simply get in touch and we’ll have someone call you back.
Capital Gains Tax Update from REINZ
REINZ questions whether CGT will improve housing affordability in the long term
Following announcement on 21 February from the Tax Working Group that it recommends the Government introduce a Capital Gains Tax (CGT) from 1 April 2021 at an individual’s marginal tax rate, the Real Estate Institute of New Zealand (REINZ) is questioning whether implementing a CGT will improve long term housing affordability.
Bindi Norwell, Chief Executive at REINZ says: “In the short-term there may be some initial relief in house price affordability as investors look to sell their property to avoid paying CGT. This may create opportunities for first home buyers.
“However, in the long term it’s likely to push house prices up as people look to invest more money in the family home, as there will be less incentive to invest in rental properties or other forms of investment e.g. equities.
“This will also have a flow on effect for the rental market with fewer rental properties available for tenants, thereby further pushing up weekly rental prices when they are already at an all-time high.
“The report even recognises that any impact on housing affordability could be small, therefore, we question whether all of the administrative burden and cost to implement GCT is worth it? Especially as CGT coming at the end of a raft of legislative changes the housing market has faced recently including the foreign buyer ban, ban on letting fees, insulation, healthy homes and ring fencing.
“Interestingly, when we look at the impacts of CGT globally, the most recent country to introduce CGT in the OECD was South Africa. Whilst CGT wasn’t the only impact on South Africa’s housing market, house prices there increased by 139% in the first six years* following CGT implementation indicating that the tax did nothing to improve housing affordability. We believe introducing CGT in New Zealand may have little impact on improving affordability long term,” says Norwell.
“We’re also disappointed that the rate of CGT is an individual’s marginal tax rate and that there will be no reduction in the rate such as is seen Australia and the US. This means that New Zealanders will effectively be paying a much higher rate of capital gains tax than individuals in other OECD countries.
“However, it is positive to get confirmation that the Tax Working Group has recommended that the family home is excluded from CGT and that the calculations of gains are not to be retrospective. Additionally, it’s great that some relief in the form of rollover provisions for small farms and businesses has been proposed,” concludes Norwell.
* Data sourced from the First National Bank of South Africa Repeat Sales House Price Index
Does a swimming pool add value?
As the summer heatwave hits, the idea of a swimming pool in your backyard is an alluring one. And surely you can justify the cost by the value it will add to your home?
Not necessarily. In fact, the opposite may be true. In some cases swimming pools can put off prospective buyers who fear the ongoing maintenance costs and time, the dangers to small children or the amount of space pools can take up on the section.
Of course the decision to install a swimming pool isn’t usually all about your property re-sale value, it’s about the personal enjoyment of you and your family. But if you’re considering it there are some things to think about before proceeding.
Location, location, location.
It’s stating the obvious but do you live in a warm enough region that will see you use a pool more than a few days a year? Also consider how close you are to the beach or good local public swimming pools that may offset the need to take on the expense and ongoing maintenance of a pool yourself. This will also influence property buyers shopping in your area. Consider the average house prices in your area. Do you risk over-capitalising by spending on a pool? If you need to recover that cost when it comes time to sell you may put off buyers who find the property too expensive for the area you’re in, and fail to attract bigger spenders who aren’t interested in your area. Talk to your local real estate sales consultant. They can give you an idea of what people are spending in your surrounding area and what you can expect for your property before or after the addition of a pool.
Consider the size of your section. Will the addition of a pool take up the majority of your backyard? If so that may deter a number of buyers looking for a good size section. Large pools can make your section seem smaller and less usable, particularly to those who don’t prioritise the need for a swimming pool.
If you’re committed to getting a pool for your own family to enjoy but are mindful of the impact it may have when it comes time to sell your home, do your research on all the different styles and construction options of pools available. Try to find the “happy medium” of a pool that will meet your needs without taking over your budget or section. Too cheap and it may not age well, putting buyers off by appearing scruffy and high maintenance, too expensive and you run the risk of over-capitalising
Make it sparkle.
If you do have a pool, whether you’ve inherited it with your house or added it yourself, make sure it is in tip-top condition when you come to sell your property. Make sure it is scrupulously clean, fenced to meet the legal requirements and that all surroundings such as fences and decks are well maintained.