Tag Archives | Property investment

Property Investment Basics

property-investment-basicsProperty Investment Basics

Low interest rates and rapidly rising property prices are driving investors to property investment. Many would-be property investors don’t understand the complexities involved and can easily make costly mistakes. Here are some basic principles to follow.

Understand that property investing is a business. It requires planning, discipline, a wide range of knowledge, willingness to take calculated risks, and a focus on getting a good return on your investment. There is no room for emotion in property investment.

Develop your strategy. There are many different approaches to property investment with different financial outcomes. You might choose to:

  • Buy property to retain for the long term, buy to renovate and sell, buy to renovate and retain, or be a property developer.
  • Specialise in certain types of property, such as apartments, properties with multiple tenancies, coastal properties, or low cost housing.
  • Specialise in a particular geographic area.

Different strategies have different implications for taxation and cash flow.

Get help from a team of experts. As with any other business, you will need an accountant and a lawyer. It also helps to have good relationships with real estate agents, mortgage brokers, insurance brokers, property managers, property inspectors and tradespeople.

Learn as much as you can before you invest. Read property magazines, learn from other investors and research the areas you are interested in. Practice doing financial analysis on properties for sale so you get a feel for the kind of property that makes a good investment.

Investing is a great way to build wealth because of the principle of leverage – that is, borrowing money to invest. Leverage multiplies the returns you receive on your investment. Get it right and you could well make a fortune. Get it wrong, and you could lose a fortune. There’s a good incentive to stick to the basic principles.

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Property Investment Update

PropertyProperty Investment Update

Property investment is on the boil again thanks to low interest rates and rising property values. Underlying the price rises are high levels of net migration, low levels of new building and growing numbers of first home buyers tapping into KiwiSaver balances for their deposit. Auckland-based investors are taking advantage of the increased equity in their homes to buy properties in the Upper North Island, particularly in the Waikato and Bay of Plenty. Wellington, which has seen little change in property values since the Global Financial Crisis, is suddenly surging ahead and other areas are seeing growth too. From an investment point of view, property is looking good in comparison with other alternatives. The returns on fixed interest investments such as term deposits and bonds are the lowest they have been for decades and there is no sign that this will change any time soon. Worries about the Chinese economy continue to cause volatility in share markets around the world. On the other hand, property prices across the country increased by over 11% in the year to February according to Quotable Value statistics.

While property investment is looking increasingly attractive, it is not a game for novices. There are significant risks involved. Successful property investment requires research to identify the right location and specific property, a good understanding of the financial aspects including how to get a good return, the ability to negotiate a good purchase price and borrowing terms, knowledge of tenancy law and a whole host of other things. Basic concepts like being able to calculate the gross and net income yield on a rental property are essential to understand before making an investment. In a rising market, any fool can make money, but markets eventually turn and that is when the soundness of investment decisions is revealed.

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Property Investment Opportunities

HouseProperty Investment Opportunities

It would seem the Auckland property market is reaching a plateau. Price increases in the Auckland market have been underpinned by a shortage of properties, high net migration and high investor activity. New conditions to be imposed by the Reserve Bank on 1 November, 2015, including a 30% deposit requirement for Auckland house purchases, alongside an easing of restrictions outside Auckland on purchases with less than a 20% deposit, may well see investors looking elsewhere. In the medium term, the increased rate of building in Auckland combined with an expected fall in net migration could well see the end of the property shortage and reduced pressure on prices. Huge increases in property prices (24% in the last year) in Auckland have not yet been matched by equivalent increases in rent, which means the gross income yield (annual rent divided by property value) on Auckland properties is particularly low, being well under 5%. Without capital gain, there will not be much in it for investors.

Meanwhile, the rest of country has been lagging behind Auckland and has some catching up to do. As investors abandon Auckland, there could well be opportunities for capital gain in other areas resulting from increased investor attention. There are several areas around the country where gross income yields are in excess of 6%, which compares favourably with mortgage interest rates as low as 4.35%. Further details of income yields nationally by region can be found here.

The spill over from Auckland will not only be investors but also people looking to cash in at the top of the market and move elsewhere, first home buyers who have been squeezed out by the higher deposit requirements, and renters who face rising rents. Those investors who get in early in areas outside Auckland could make good returns.

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Is Property Still a Good Investment?

Property Investment

Tax changes for investment property came into force on 1 April this year, forcing many existing investors to review the ownership structures for their investments and the viability of retaining their properties. In a nutshell, the effect of the changes is that investors will no longer be able to claim depreciation on their buildings, and fewer investors will be able to claim losses against personal income. The backdrop to these changes is a depressed property market with little prospect of significant increases in property prices for some time to come. The question many are now asking is whether investing in property is still a good idea.

One of the most prevalent mistakes made by investors in all types of investment assets is to base investment decisions on tax benefits. As they say, ‘there are only two certainties in life: death and taxes’. To that should be added a third certainty, and that is, ‘tax rules change’. Sound investments are those that stack up in their own right, rather than because they have tax benefits. Many investors made the mistake of purchasing properties in the expectation that future capital gain would offset losses and that the tax benefits would help their cash flow in the short term. This was not a sound long term strategy. The impact of the new legislation is that those investments which were soundly based will continue to be so, and those which relied on the benefits of tax losses are unlikely to stack up.

Investors without good cash flow will no doubt sell off properties over the next two years. The result is likely to be higher rents, fewer investors (but with deeper pockets) and more soundly based investment portfolios. In the long term, the increased stability will be a good thing for both landlords and tenants.

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Farewell to the LAQC

Property Investment

The property investment bubble that burst following the Global Financial Crisis came about partly due to the huge tax refunds many investors were able to claim from their properties. These refunds enabled investors to borrow heavily and buy more properties. In many cases, the interest on the money borrowed to buy the properties was more than the rent received, and the investors relied on property prices increasing to make the investment worthwhile.

Investors were able to claim the cost of depreciation of the building and chattels as an expense and this resulted in a refund of money that had not actually been spent, which helped to cover the losses on the properties.

Investors who wanted to be able to claim large tax losses on their investments but who also wanted the protection of a limited liability company often owned their investments through a Loss Attributing Qualifying Company or LAQC. One of the benefits of an LAQC was that the losses could be passed through to shareholders in the LAQC who could then offset the losses against personal income. Owning properties through an LAQC became a very popular form of investment.

However, all this is set to change. On 1 April, 2011, LAQC’s will cease to exist and depreciation on buildings will no longer be able to be claimed. Shareholders will be given a window of opportunity for six months following that date to change alter their company structure without  adverse tax implications. The LAQC can be converted to a standard company, a sole trader, a limited partnership, or a new kind of entity called a Look Through Company or LTC. Each of these options has advantages and disadvantages for different circumstances of investors and it will be very important to get expert advice so as to make the right decision.

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