What to consider when buying an investment property
Put yourself in Emma's shoes. Emma is a 35-year-old HR Manager who lives in a coastal tourist town where she grew up*
She has previously bought an investment property in the region and is looking to buy another so reached out to Become as a financial advisory service for the everyday Kiwi.
As Become developed her plan, taking into account her goals and objectives, it was determined that an Investment Property would be an appropriate investment within her plan.
What to consider when buying an investment property
Emma has limited time and a lack of real estate expertise. Become are not authorised real estate agents and the selection of property is not part of their planning service. Based on her circumstances, Emma would benefit from engaging an independent Property Specialist to help with her selection criteria and finding a property to suit her strategy. In this case Become provides Emma with a referral to an Independent Property Specialist. One such Property Specialist is Rick Stapleton, who has detailed below how he would assist Emma.
Having had developed her financial plan with her Private Wealth Manager, Rick’s goal would be to help her find an investment property to fit her strategy. His speciality lies in finding investment properties that could maximise capital gains, cash flow, equity or a combination of those outcomes depending on what Emma's financial strategy requires.
Investing in tourist towns
Rick says that buying a third property in her ‘tourist-y’ coastal hometown is generally not a good idea.
“I understand why Emma might want to live there. I live in a beautiful tourist town myself, on the Gold Coast. But people often buy their investment property in a location they know because they’re too scared to buy elsewhere or they just don’t understand other markets.”
Rick says that property markets in tourist towns tend to be more volatile than other areas as they tend to be small, with small localised economies or heavily reliant on one industry.
“Over the long term, the growth rates in small tourist towns tend to be poor, compared to somewhere like Hamilton or Christchurch. You’ll generally get a higher yield, but less capital growth. It’s often a trade-off between the two,” he says.
Capital gains versus capital growth
The best place to buy an investment property depends on the individual’s plan. Rick argues that, as Emma is a manager, she’s on a higher than average income (compared to the rest of the population), so her plan might be geared towards growth rather than cash flow.
“It’s about targeting,” says Rick, “We’re not usually focussing on high yield alone, we’re often targeting high capital growth as the primary goal. This could put them in slightly negative to neutral cash flow positions, which may also be a good thing. Usually, we’re not trying to increase their cash flow as they’d then have to pay even higher taxes.”
The ‘gain versus growth’ factor will likely have an impact on where Emma should buy her property and what sort of property she should buy.
Where should Emma buy an investment property?
Rick has a detailed knowledge of different regions across New Zealand.
One of his favourite spots is Christchurch, “When you look at median price and the population growth that’s occurred in Christchurch over the last 10 or 15 years, the median growth in Christchurch has far outstretched anything in Auckland or Wellington.”
It’s a good area for Emma to buy an investment property… but there are other good areas for her to look at too – Rick will take all relevant circumstances into account to help find the ideal property.
“That’s how I support Become's role,” adds Rick, “I’ll give Kiwis that extra pair of hands and show them what and where great opportunities are.”
What kind of property works well?
It’s common for Kiwis like Emma to stick to what they know. If you live in a townhouse, you might be tempted to invest in another townhouse. The allure of million-dollar-plus properties can be strong too, but Rick says choosing a different property type at a lower value can often yield higher capital gains.
Rick notes, “Properties at more affordable price points tend to have more competition and are less volatile. Even during periods of no growth, circa $600,000 properties are likely to hold their value. Properties at higher price points are often more volatile, they can go up and down quite a bit more.”
“If Emma's borrowing capacity was around the $600,000 – $700,000 mark, I’d look at finding a turn-key all-inclusive house and land package in a growing area like Hamilton. These packages have higher land content than something like a townhouse or unit. Land appreciates, so following that rule of getting more land content in real estate, means a better chance of more long-term capital growth for Emma,” Rick adds.
The price point and strategy will determine the type of choices he provides. Rick looks for appropriate options accordingly; “If Emma had a lower price point of around $450,000 then I’d present her with options like a one-bedroom apartment near the city or perhaps a townhouse a little further out. It depends on what her priorities are. I’ll send a couple of options in an email, explaining what I’ve chosen and why. This will include a description of the area and what the vacancy rates are like, what the expected growth rates would be like in that particular suburb, then an overview of the specific property – floor plans, specifications, relevant details and all that sort of stuff.”
How can an Independent Property Service help?
Rick is a licensed property consultant in Queensland, New South Wales, Victoria, and New Zealand. His detailed knowledge of different property types and areas, and how well they perform, can give Become members a helping hand.
Become provide a tailored planning service and where appropriate will refer you to specialist services delivered by people like Rick who understand how doctors work and the types of solutions that would suit their plan.
Your planning solutions start with a complimentary financial health check – get in touch to arrange yours.
*Emma is a representative client only. This fictional case study is designed to be illustrative of typical issues and solutions we deal with at Become and to demonstrate the types of specialist services we may refer you to – this should not be taken as personalised advice.