Showhomes & Tools

Should I Buy?

Should I Buy?

Why Do You Want To Buy A House?

Buying a house is, for most people, the single largest investment they will undertake in a lifetime. It’s therefore critical to understand what is involved in the investment (market, costs, risks) so the investment is undertaken wisely. Simple questions are: Will you live in the home long-term? Are you willing to renovate? Do you plan to rent out the property? Or are you looking for investments with a quick return?

Here we detail the different reasons for buying a property and offer insights into how much you should invest and for how long. We also provide tips and resources to help you understand the level of commitment needed to ensure your purchase returns the investment you want.

Categories of Property Investment

Four options, as outlined above are:

1. Buy a section and build a new home

One option is to find a section in an area you like and build a home on it to suit your family. This method can require a large deposit as major banks only loan up to 80% of the purchase price when purchasing bare land.

An alternative to this is to buy a house and land package, where a minimum of 5% deposit is required. Most house and land packages are located in new subdivisions. These may have design covenants as part of their contracts, so you need to make sure these are not going to limit you in your materials or style of home when you come to build. When planning to build your dream home, you can either buy a section first and design a house to suit it or vice versa. Keep in mind however that if you buy a section with a plan already drawn up, changes may need to be made to accommodate the section.

2. Buy an existing house or renovating where you currently live

This is where many people choose to start. There is a greater likelihood of being able to negotiate a lower purchase price with an existing home than in commissioning a new build. Renovations to the existing building can also be staged over a period of time to fit in with your financial resources.
This type of investment may be either long or short term. As long as you have scope for renovation, you can alter the existing building to allow for your family’s changing needs, or to align it with resale value of other homes in the neighbourhood.

Pay the ‘right’ purchase price: When buying a renovation property it is crucial that you pay the right purchase price to ensure you are going to make money once you renovate. If you pay too much for the property you will be behind before you even begin. When working out what is a fair price for the property:

  • Determine what the end value of the property will be once you have completed the works. Look at comparable sales in the area.
  • Draw up your renovation budget. Consider a professional building inspection so that there are no surprises.
  • Subtract all costs from the end value, allow a profit margin, and that will give you a fair idea of what you should pay for the property to make your investment viable
  • A new kitchen? Spend between 4% and 6% of the total property value
  • A new bathroom? Spend between 2% and 3% of the total property value
  • Landscaping? Spend between 1% and 2% of the total property value
  • Dampness – In general, avoid homes with damp basements (unless you know the source of the water). Many causes of dampness can be remedied with proper drainage installation but if the source of the dampness is from rising ground water tables there is very little you can do to prevent it. So be cautious around dampness
  • Structural damage – Any significant cracks can be caused by foundation movement. If you have any doubts you should get a structural engineer and a professional building inspector to investigate before purchasing.
  • Bad location – You may be attracted to a property in poor condition in a poor location because it is a bargain – but they take longer to sell and appreciate less than equivalent properties in better locations
  • Sound Structure: Check the walls are straight, look to see that doors open and shut property and the floors don’t slope – this can be a sign the property may need new piles. Make sure there is no rot especially in wet areas.
  • Foundations: Any obvious cracks or shifts.
  • Roof: Does it appear old or new? What is its condition?
  • Electrical: Has the wiring being replaced? Does the house have a modern switchboard? These can be expensive items if they need to be replaced.
  • Plumbing: Check the age of the hot water system. Check the water pressure around the house.
  • Waterproofing: Check for rot in the corners of the windows sills, roof lining and walls. If the interior has been newly painted you may need to check under the floor and up in the ceiling.
  • Basement/Under house: Any dampness? Any insulation?
  • Appliance condition: What is the age and condition of stove, dishwasher, etc?
  • Exterior: Is the house going to need repairs or paint soon?
  • Drainage: Are the grounds dry and drains in sound working order?

When you are purchasing a house to renovate either to be your home or your investment property you need to look at the house from every angle taking into consideration the following:

Realistic budgets: Renovations normally cost more and take longer than you planned – so factor a contingency into your budget. 10% is an acceptable average. More could be appropriate for larger and\or more complex properties.

Look for ways to save money day-to-day running costs: Look for opportunites for ongoing cost savings – to save money on energy and water bills. Right House takes a whole house approach to creating comfortable, healthy and energy-efficient homes. If you’re building a house or want to make your existing home more energy-efficient and comfortable, Right House are experts at providing advice that will save you in the long run.

If you are making a significant renovation a good guide is not to spend more than half the total value of the property. For example, if you spent $500,000 on an old house do not spend more than $250,000 on the renovation.

 

3. Buy as a rental property
Contrary to what many people think, what you initially pay for a rental property has more effect on your eventual profit than what you sell it for. This is due to several factors:

  • Buying cheaper increases the likelihood that you can sell at a profit, merely because you have bought well
  • Buying cheaper means you might borrow less and therefore pay less interest on the loan
  • A larger deposit and lower borrowing increases the amount of rent that is returned as profit instead of paid back in interest – that’s money in your pocket to keep or re-invest
  • Rental property loans can be operated under a LAQC, that is, buying a rental property and declaring it as a loss-making enterprise for tax purposes

Rental Property Tips

  • Don’t get personal: Remember you are not living in the house, so don’t let your emotions get involved. Keep things simple and neutral, if you keep things simple and make the property livable and functional you can’t go wrong.
  • Neighbours: What is the neighbourhood like? Are the neighbouring properties well maintained? This will have an impact when you are trying to attract tenants and keep them.
  • Currently a rental property: If you are looking at an existing rental property ask about the tenancy history. Have there been periods when the house has been empty? Has it got a history that makes it difficult to rent? Was it a family home?
  • Existing Tenants: If the property is already let, be aware that you will inherit the tenancy and the obligations unless you ensure you are buying the house ‘vacant possession’. Of course if the tenant profile and rental income is favorable then it would pay to ensure that the tenants are aware they can stay.
  • Ongoing management: If you do not have the skills or time required to manage an investment property leave it to a professional property management company. It can save you headaches and does not put your investment at risk. On average a property management company charges around 7% -8% of the rental income.
  • Buy what you can afford: Over committing is not a sensible move.

Easy to rent features: The following features appeal to tenants making your property easier to rent:

  • Outdoor living – small private areas, courtyards, decks or terraces add to the properties appea
  • Good sized rooms, at least two double bedrooms
  • Good clean functional kitchens and bathrooms
  • Neutral décor to complement your tenant’s style, furniture and art
  • Lock-up garaging or off street parking
  • Dishwasher – not essential but a big plus
  • Low maintenance, small section as the property will be easy to maintain will stay in good shape
  • Sunny outlook
  • Security features like alarms, fences, etc
  • Schools zones – especially if there are desirable schools in the area

Resources for Rental Property Owners

A useful site for property and real estate investors ishttp://www.landlords.co.nz/. It contains property related news and articles including information on:

Residential Tenancy Documents: These are forms and letters you can download which are helpful when communicating with tenants such as:
Fact Sheets: Sheets and brochures for tenants and landlords from the Department of Building and Housing on such areas as:

  • 10 working days notice from landlord regarding rent arrears
  • 10 working days notice from landlord regarding breach of responsibilities
  • Bond lodgement form
  • Bond refund form
  • Pre-letting checklists for landlords
  • Pre-tenancy application form
  • Rent summary from start of tenancy
  • Request for repairs from tenant
  • Residential Tenancy Agreement

    • Abandoned goods
    • Abandoned premises
    • All about tenancy bonds
    • Buying and selling residential property IR313
    • Get it right – a landlords guide to practical property management
    • New IRD tax book
    • Rent arrears – information for landlords
    • Rental income IR264
    • Rental income schedule IR3R
    • Rental properties used in the manufacture of methamphetamine
    • Renting and You – a guide to the law about renting
    • Renting out your property – a landlords introduction to the law
    • Sorting out rental problems – disputes and mediation
    • Tenancy information
    • Tenant and landlord rights and obligations
    • Water charges – who pays

What insurance do I need?

4. Speculating

These types of investments are typically for very short periods of time, say 6 to 12 months. The goal is to buy cheap, pay as little interest as possible, and sell the property at a significant profit. While this may sound attractive, it is also the highest-risk type purchase.

Generally, banks will want larger deposits and even higher equity than for other properties. Additionally, short-term interest rates, particularly if you plan to renovate to achieve profits, are likely to be higher because of the increased risk to the bank that your investment might not return the profit you anticipated. For example, it might take longer to sell the property than you anticipated – that extra time means extra interest payments.

Speed is of the essence: When you are speculating, or renovating for a quick profit you need to take into account holding/carrying costs, so if interest rates are high you want to get it back on the market as quickly as possible.

Unless you are a seasoned investor or have construction expertise, there are some projects that the average property investor will want to avoid, such as properties that will require extensive earthworks, geotechnical challenges, engineering and structural complexity and potential weather tightness issues.

 

Benefits of property investment:

  • No capital gains
  • No interest claw back
  • No stamp duty
  • No limit on losses claimable
  • Favourable depreciation rates

Risks of investing in residential property:

  • Interest rates could rise
  • The property could be untenanted for a period of time, if renting out the property
  • You could get bad tenants, if renting out the property
  • It could take up a lot of your personal time

What Can I Afford?

Working out what you can afford to spend on your home is the first step. A good place to start is www.sorted.org.nz. Sorted is an independent site that has tools and calculators to help you work out a budget and loan repayment schedule.

For interest rate comparatives, check out www.interest.co.nz. Established in 1999, it is a key source of research on banks and other financial institutions that provide both lending and deposits.

Tax Structures

Purchasing a property as an investment: As your investment generates income either now or in the future there will be issues of tax deductibility or tax payments to be made. The impact of these will depend on how you structure your ownership when you first purchase the property. Options for ownership structures are:

  • Sole trader
  • Company
  • Partnership
  • Qualifying company
  • Family trust
  • Trading trust

All these structures have their tax advantages and disadvantages; you should consult your lawyer or accountant to discuss the implications of your particular circumstances.

Taken from approved.co.nz:

“A loss attributing qualifying company (LAQC) is simply a normal company that has elected to be an LAQC. LAQC stands for loss attributing qualifying company, which means that the losses your rental property makes are allocated to the individual shareholders to offset against their personal income, thus resulting in a lower provisional liability or a refund of PAYE paid.

With a normal company, if the company were to make a loss, losses can only be offset against future profits. For example, if you make a loss of $10,000 then you must wait until the company has a profit of $10,000 and then you will pay no tax on the $10,000 profit. This can be problematic for rental property investors because, if the property is geared to the maximum and making the full depreciation claims, it may be many years before the company is profitable and can then make use of the tax losses that it has to carry forward.

With an LAQC the larger income earner can own all the shares and have all the losses claimed at the higher tax rate, which may amount to many thousands of dollars in tax refunds. Furthermore, you can sell the shares to a family trust without depreciation clawback (and you don’t have the legal fees to change the title of the house).”

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