What to Consider When Buying an Investment Property

Everything you need to get started on your property investment journey

For a significant number of New Zealanders, more than 100,000 of us, owning investment property is a key part of our wealth creation plans. Whether it's a single property bought with the aim of generating passive income to help fund retirement, or a growing portfolio that expands every few years, investing in real estate just makes sense to many of us. This might be because investing in property is underpinned by basic demand \u2013 in the context of a rapidly-changing world, we still all need somewhere to live!

The number of New Zealand households renting is increasing each year and the bulk of those are living in homes provided by private landlords. This creates plenty of opportunities to use property as a way of building your own wealth. Here's what you should consider when buying an investment property.

Determine Your Borrowing Power

Property investment is one of the few investment vehicles wherein you can, quite reasonably, use other people's money (in this case, usually from a bank in the form of a mortgage) to reach your goals. This is a great advantage of investing in property.

So, before you even think of buying an investment property, getting an idea of how much you can borrow is the first step. This gives you a general idea of your target price range, helping you narrow your property search within your purchase budget.

This step also helps figure out if property suits you at all: banks like lending to those with stable income, plenty of surplus cash after they pay their usual outgoings, and plenty of years ahead to repay the lending in full. In addition to income, to start investing in property, you need one of two things:

1. A cash deposit
2. Own your existing home (or other property) and have enough equity within that property as your deposit. Learn more: how to work out if you have useable equity in your home

Does Property Investment Suit You?

If you don't meet those criteria, it's probably better to consider non-property investments, or if you are still committed to property, consider working on your financial situation to ensure you're in a better position to make the most of property investment.

Bank lending policies and interest rates change often. For an indication of how much you might be able to borrow, simply get in touch to book a no-obligation initial consultation with one of our team.

Understand and Accept the Risks of Investing in Property

Property investment is often described as 'safe as houses'. Yet there are risks, for example:

• A lender can ask you to repay the mortgage unexpectedly and you may not be able to sell, or sell for enough to cover the mortgage
• Increasing interest rates can reduce the cashflow you make from the property
• If the investment property is mortgaged with the same bank as your own home, there is the risk that the bank could sell both properties if you run into difficulty paying either mortgage
• Natural or man-made disasters can directly impact the property, or reduce rental demand
• Rent increases are not guaranteed
• You might find yourself needing to sell the property at a time when it's value has decreased, leaving you to owe the lender money after the sale
• Unexpected expenses, such as tenant damage, a lengthy vacancy, or maintenance
• Lower than expected returns. Even if property is still widely regarded as a good investment, the returns of investing in New Zealand property over the last couple of decades would be tough to repeat.

Related articles:

• \u200dThe other common way to invest in New Zealand property
• Rentvesting\u200d
• When and why you shouldn't diversify

In any case, if you do go ahead with property investment, just like any investment, ensure you're doing it as part of an overall plan to help reach your objectives in life. If you like, our financial advisers can help determine this too!

Settle on an Overall Strategy

There are four main property investment strategies. All can be used to achieve your investment goals over the long term.

The question is: which is the right strategy for you?

1. Buy and Hold

The buy and hold property investment strategy involves purchasing property and holding it for the long-term.

The aim is to hold these properties for lengthy periods and as they increase in value, you collect regular rent, and (usually) the mortgage is steadily repaid.

2. Fix and Flip

Sometimes called 'flipping', this property investment strategy involves buying a property that needs some work, undertaking the required renovations to improve its value, and then immediately selling the property on. The aim is to profit through renovation activity.

3. The BRRRR Method (\"Buy, Rehab, Rent, Refinance, Repeat\")

The BRRRR method might be thought of as a combination of flipping and buy and hold. It involves investors purchasing and renovating distressed properties, renting them out, performing a cash-out refinance, and then reinvesting the proceeds in another rental property. Through renovation, you increase the property's value, building instant equity and acquiring a rental unit that can generate passive income for the foreseeable future.

This strategy relies on the investor choosing the right house to renovate and often doing the work themselves. It takes work, both renovating properties and managing tenants, but the payoff can be worth it.

4. Develop

The develop investment strategy usually involves buying property or land and developing it into a new home(s), set of townhouses, apartments, etc. As zoning laws have changed, this has become more popular in high-density areas with developers purchasing a property with a moderate \u2013 large amount of land and turning it into multiple townhouses or apartments.

Once the development is completed, the developer will often sell off the units, hopefully for a profit.

Development requires the greatest amount of expertise; knowledge and a high level of due diligence is required. Because of this it is not a common strategy for someone new to property investment to take.

Which Property Investment Strategy Is Right for You?

While there's no \"right or wrong\" answer, most New Zealanders find the buy and hold strategy is right for them. It requires no background or specialist knowledge and can require the least amount of money to get started. It also complements a day job, whereas the fix-and-flip or development strategies can easily become a full-time occupation and lead to interesting tax considerations too!

Type of Property

Investors usually enter the property market with a focus on either capital gain, or rental yield.

A capital gain is the profit you make when you sell a property for more than you paid for it.

Rental yield is the rent a property could earn over a year, expressed as a percentage of the property's value. The most basic equation to work out your gross rental yield is your rental income divided by the property value then multiplied by 100.

It's common for Kiwis to stick to what they know. If you live in a townhouse, you might be tempted to invest in another townhouse. If you already live in one, the allure of million-dollar-plus properties can be strong, but choosing a different property type at a lower value can often yield higher capital gains and better diversification \u2013 as there is often more rental and resale demand at the lower end of the value spectrum.

The type of property to buy depends on your individual plan. The 'gain versus growth' conversation will likely have an impact on what sort of property you should buy.

There are four broad types of residential property you can buy.

1. Freestanding House

Also called single family homes, this is what it sounds like: a home large enough to fit a single family standing alone on its own piece of property. It usually has just one kitchen, its own walls, and its own utilities.

Freestanding houses are often considered 'growth properties', which means they tend to increase in value more quickly than other residential property.

There are several reasons for this:

• There is greater demand for this type of housing: the New Zealand dream is having your own home with a backyard! This makes them more valuable, and typically easier to sell
• Usually there is more potential to add value: more land means more scope to add a minor dwelling or subdivide the property
• Even painting the exterior a different colour or carrying out renovations is usually simpler \u2013 you won't need permission from a body corporate, which is the case with most apartments

The main drawback of standalone houses is the price \u2013 they're the most expensive type of residential property as they come with more land and bigger floorplans. The rent is also usually low relative to the price, compared to the rent achievable in apartments and townhouses.

2. Apartments

Apartments are separate residences within a single building. Buying an apartment means you typically share the whole building and its common areas with other owners or tenants within the building.

Apartments can be popular with investors as:

• They're the lowest price of all residential properties!
• Because apartments are relatively cheaper to purchase, while still attracting good rents, they tend to have higher yields
• Low maintenance

Though apartments do come with their drawbacks:

• Lower potential capital gains when compared with all other property types
• Body corporate fees, and sometimes body corporate politics or inaction!
• Less control. Because you are unable to alter the outside of the property, through landscaping or painting the property (think about it, you couldn't paint the outside of just your apartment), there are a smaller number of ways to add value to the property
• Apartments often need the largest deposit relative to the property value to obtain lending when compared with other property types. This is especially if the apartment is small or unusual.  

3. Townhouses

In some ways, townhouses are a mix of the property characteristics of both freestanding homes and apartments.

Townhouses are generally smaller than freestanding houses, with fewer bedrooms and smaller rooms. They are typically built on a smaller plot of land and are often attached (\"conjoined\") to other townhouses, sharing one or more walls with neighbouring properties.

Often, 6-8 townhouses might be built on the equivalent amount of land that two freestanding houses would require. This trend is gaining popularity in the main centres of New Zealand as zoning laws are loosened, allowing for more intensification \u2013 in other words, building more homes on less land.

Townhouses are often popular with 'buy and hold' investors, as they're:

• Lower maintenance than houses, so cost less to upkeep
• Typically located in central suburbs close to amenities, city or town centres, schools, public transport etc.
• Cost less than freestanding homes. This makes it easier for those seeking their first investment property, and usually means rents are higher relative to the price \u2013 i.e., the rental yield is higher than freestanding homes

That said, townhouses do come with a few drawbacks:

• The usual thinking is that they won't achieve the capital gain of standalone houses. However, history shows us that the difference is marginal
• There has been speculation about lower building quality with some townhouse developments
• As townhouses can share some of the same walls, services, driveways, and car parks as with other townhouses within the development, they often come with a residents' association. This can be thought of as a 'diet' version of a body corporate. That means there are extra fees to pay
• Less control over the property \u2013 even the exterior colour of the home may be specified by the residents' association

4. Bare Land

When we talk about land in this context, we are talking about undeveloped land that has nothing on it \u2013 a bare site. Investors who purchase this sort of property are often known as 'land bankers' if they don't immediately develop it.

Well-sited bare land may go up in value quite quickly, i.e., it offers great capital gains potential. It's also low-stress if no development activity occurs \u2013 there are no worries about tenant damage, vacancies and so on.

However, obvious downsides of buying bare land include:

• Because you usually can't rent out land to residential tenants, if you invest in land and don't develop it, you probably won't have any cashflow. This makes it a tough investment for regular Kiwis \u2013 as bills such as council rates and mortgage repayments will still need to be paid.
• Land-banking is sometimes thought of as unethical, as there's a limited supply of land, so many people think land should be put to productive use rather than just 'sit idle'.
• Potential downsides are highest. For example, a change in zoning could have significant implications for the value of the land.
• If you choose to develop or subdivide the land, the costs and probable delays are significant.

Choose a Place to Invest

Some people choose to buy investment properties in their own neighbourhood because of their familiarity. They know which sorts of properties are popular, understand what tenants are looking for and know the things to watch out for when selecting a place to purchase. Buying an investment near your home can be helpful if you're planning to manage the property yourself, too.

But, if you hold a large portion of your wealth in a couple of properties in one location, you're vulnerable to all manner of negative impacts:

• Disasters, especially in New Zealand. This could be an earthquake, volcanic event, tsunami, forest fire, or even a biological event such as mad-cow disease having an outsized impact on one part of the country when compared to other regions.
• Significant property zoning changes.
• Economic downturns are a normal and inevitable part of life. Any economic downturn usually hurts some segments of the economy more than others, which flows through to property values.

During the pandemic, the New Zealand education sector was hit hard, which majorly reduced demand for international student housing. Given that different suburbs \u2013 or even towns and regions \u2013 tend to attract certain types of people, it's crucial not to be caught out by a downturn that might hurt one group more than others, resulting in reduced tenancy demand or property prices in your chosen area.  

On the flip side, you could get lucky and see a major uptick in values if you manage to concentrate all your efforts in the 'right' suburb, but are you willing to bet your whole livelihood on it?

Diversify Your Property Portfolio

Alternatively, diversification of any investment portfolio gives you broader exposure to the market and helps you identify opportunities in areas that are a little further from home. Property investment is no different. No one city, region, or type of property ticks all the boxes, but broadly speaking you'll want to look for:

• The long-term economic prospects of the region, town, or city. Importantly, all residential property markets are closely tied to the long-term prospects of their general location.
• Linked to above, likely population growth.
• How expensive, or affordable, housing currently is.
• Rental demand and current rents (\"rental yields\").

Consider Tax Efficiency

Investing in a tax-efficient manner should always be a consideration. Structuring your loans in a way that reduces your tax bill will help your wealth grow over time. But tax should never determine your overall investment strategy, as tax rules are always subject to change.

A perfect example of this is the flip-flop on interest deductibility rules for property investors. In 2021, the Labour-led government removed the ability for property investors to claim their mortgage interest costs. The National-led government subsequently reversed this, and from 1 April 2025 investors can once again claim 100% of mortgage interest as a tax-deductible expense against rental income. Rental loss ring-fencing rules still apply, meaning losses from rental properties cannot be offset against other income such as salary or dividends. The key lesson is not to plan your life around the tax rules, but to take them into consideration, because as this example shows, they can change significantly between election cycles.

The Bright-Line Test

Like any tax, the bright-line test is subject to change. If you're looking to flip a property (buy to renovate and then sell at a profit) rather than rent it out, you need to be aware of the tax implications. You'll nearly certainly be classed as a property development business and taxed on the gains you make. It will be worth talking to a tax adviser or accountant about this.

Even for buy and hold investors, the bright-line test is an important consideration. The bright-line test determines whether you must pay income tax on gains if you buy and sell a property within a certain timeframe. When first introduced in 2015, the bright-line period was two years. It was subsequently extended to five years, then 10 years under the Labour-led government. From 1 July 2024, the National-led government reduced it back to two years. This means if you sell an investment property you've owned for more than two years, the bright-line test no longer applies. Once again, this illustrates why you shouldn't plan your investments around tax policy, as it can shift with each change of government..

Of course, a new government might increase it back to 10 years. However, this again goes to show, don't plan your investments around tax policy.

The current bright-line rule is straightforward: if you sell a residential investment property within two years of purchase, any profit is treated as taxable income. The main home exclusion still applies. If you purchased a property under the previous rules (when the bright-line period was five or 10 years), transitional provisions may apply to your situation, so it's worth checking with a tax adviser or accountant. As always, the bright-line test does not apply if the property is your main home for the period you own it.

New Build Properties - Entry with a low deposit

New builds are homes that have either just been built, are in the process of being built, or they will be built soon. For instance, if a developer is selling off the plans. New builds can be accessible for everyday New Zealanders to invest in, as:

• Lending rules favour new builds. Under the Reserve Bank's loan-to-value ratio (LVR) rules, you typically need only a 20% deposit for a new build, compared with 30% for an existing investment property. Since July 2024, debt-to-income (DTI) restrictions also apply: for investment property borrowers, most banks will limit total lending to seven times your gross annual income. This means your borrowing capacity is now determined by both your deposit (LVR) and your income (DTI), and for many investors the DTI limit is the tighter constraint. Both sets of rules are subject to change, so check the current settings with a mortgage adviser before committing.
• They don't require as much maintenance.
• People want to live in new, dry, warm, properties \u2013 which probably means better quality tenants and less vacancies.
• Problem-solving. It's no secret there's a lack of housing in this country, by buying a new build, you'll be doing us all a favour by adding to the housing stock!
• Tax is a complex area at the best of times. A tax adviser or accountant will help you figure out if the bright-line test applies to your situation, and whether your new-build property is tax-advantaged under the current tax settings.

Buy a Property!

If you've read this far, you've got the knowledge. So long as you've also got the finances, you're ready, so it's time to act.

When you're looking for an investment property you need to think with your head, not your heart. This is an investment: emotion shouldn't come into it. Take the time to make the calculations to ensure you're likely to be getting what you want.

Then, you'll be well on your way to financial freedom as a property investor!

Your property investment pathway could start with a complimentary financial health check with one of our trained professionals \u2013 get in touch to arrange yours. It would be our pleasure to assist.