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How do I get started in property investment?

November 16th, 2017.

How do I get started in property investment?
 

  • Learn the basic principles you need to know about property investment
  • Understand how to turn your first investment property into a portfolio


Property ownership is and always will be a kiwi dream, if not, THE kiwi dream. In the current market, especially among major town centers – with Auckland in particular – affordability is more and more problematic, with property investment seeming even further out of reach – but in reality, is it?

How do I get started in Property Investment? It is a common question that seems to elude many people, and lack of knowledge can often be the main catalyst for lack of action – however we all understand that when it comes to investing, making the first move early is key because returns end up compounding over time.

 

What are your investment goals?

When getting into the property investment market, you must first know what your goal is, because without a sense of direction, you may be spending your time taking the wrong path.  A key phrase from Stephen Covey which I’ve seen works with any type of goal you are trying to achieve is “Begin with the end in mind”. Decide what is important to you on your own journey first, before you make any steps. Do you want cash flow? Do you want to build net worth? Do you want a mixture of both? Be specific in terms of your goals, and add a timeframe in which you’d like to get this achieved.

 

Putting in place Buying Rules

The next stage would be creating buying rules for yourself to get you to your destination. Buying rules are important because everyone only has so many resources, and allocating them correctly or incorrectly will be the difference in how quickly you reach your goals.

Property has a return in two main forms – cash flow (rental income) or equity (capital gains), which can usually be determined by the location and property type, and it is important to ensure that the location you purchase in matches your overall strategy.

 

Understanding how much you can spend on your first property

This is important to know when looking at what your options are especially with the understanding that property is a long-term play.  The key here is to ensure you don’t overcapitalise by outlaying all your cash into the purchase without the ability to continue investing. This could either mean you have other funds left over for your next purchase (and purchase at a lower price), OR purchase at a discount and renovate to add value, to release equity and continue on your path.

The next side of the equation is your servicing capacity. At some point in an investor’s timeline they will eventually hit a wall of either equity or servicing, and ensuring you are able to further your limits over time is important – serviceability relates to your income relative to your fixed and discretionary expenses – and what surplus you have left over at the end. The larger the gap, the more you can borrow. It is important to look long term and take an approach that allows you to ride through market (interest rate) fluctuations, and don’t over extend yourself.

In the current market under RBNZ restrictions, through main-banks you can have 80% lending on your home and 60% on investment properties. If this isn’t suitable for you there are other options which can extend further lending on investments to make things work for you – these lenders are typically a bit more expensive than banks – but could be the difference in you making things work.

 

Congratulations, you’ve now purchased your first investment property!

Now you’ve learned the answer to how do I get started in property investment – how do you continue investing in property?

Depending on what stage of the property cycle you bought in, building capital will be more (or less) dependent on your own actions.

In a rising market, you can often ‘ride the wave’ and reap the benefits of capital growth without much work required.

If however you’re buying in a down market – it is often more of a buyers’ market and you definitely want to be making low offers – with investing, you make your money when you buy, not when you sell. The last step in increasing value is renovating your property to ensure it is aesthetically pleasing. This is going to be important from a ‘sales’ and a ‘rental’ perspective. The better your property looks, chances are that the registered valuation report will show a figure that is more reflective of the effort you put in renovating it.
 

Buy and Hold or Trade?

Deciding whether to hold or sell is important from a long-term perspective. The key differences are as follows:

Holding:

  • Equity can be released up to LVR limits imposed by the reserve bank, topping up against the registered valuation figure will be where your deposit funds come from to proceed.
  • You have passive income being received from the property
  • You will have continual holding costs

Trading:

  • Equity is realized through sale – your net proceeds are then taxable in most cases, and what you are left with will be your deposit funds for your next investment.
  • The return is one off
  • There are no continual holding costs
  • You will have tax and GST to consider in your numbers here

 

Finally, property investing isn’t as difficult as most people think. When asking how to get started in property investment, the key is beginning with knowing what you’re aiming to achieve, and then getting the right team around you to ensure you’re able to follow the path you’ve chosen. Your financial position will dictate where your limits are, and understanding these will help you make more informed choices and narrow down your search.

At Kris Pedersen Mortgages we work with both seasoned investors and those who are just starting out. We offer free finance strategy meetings to help you answer the finance questions you will need to know on your property investment journey.

Contact us today to book your free Finance Strategy Meeting.

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