By Lance Shearman
Lance provides three steps on how aspiring investors can get their start in the property market, even amidst sky-high prices.
Let’s paint a picture: It has been a while since you have done what seemed like the impossible, purchasing your first home! With this, it has given you an internal conflict of pride, joy and guilt as you downplay your purchase to your friends who are still desperately trying to get theirs. As time has passed, and prices have increased, you believe there is opportunity looming that maybe, just maybe, you have the ability to buy your first rental.
Now, you are definitely not going to talk to your friends about this, unless you have an abundance of buddies, and you are looking to lose a few of them. How then do you find out if you now have an opportunity to “go again”? And what should you purchase?
Step 1: Replace the word “deposit” with the word “equity”.
Equity is the difference between the value of your property and the debt you owe to the bank (mortgage).
Let’s say the property you own is now worth $1,000,000 (jump on homes.co.nz to get a rough guide or the ANZ app also shows you what they believe it is worth). Your mortgage debt is $400,000. You need to leave 20% equity in this property ($200,000). Now, take away your mortgage debt from the difference ($800,000 minus $400,000), giving you the grand total of $400,000 equity to “shop” with!
Note: Something that can confuse people is that you will need to borrow the total cost of your next purchase, as equity is not cash but rather “potential” to purchase.
There are different rules around equity requirements for a brand-new rental property vs a property that already exists. If you are looking to purchase a pre-existing property, you will need 40% equity, so in this example you could purchase a $1,000,000 rental. If you purchased a brand-new rental property, you would only need 20% equity meaning that with your $400,000, you could purchase as high as $2,000,000 (don’t, but you could!).
Step 2:Income and Debt.
Just like when you purchased your first home, the bank still needs to confirm you can afford this new mortgage amount on top of your existing debt. Each bank will lend different amounts, based on the different ways of measuring how much of your income, minus expenses, they will calculate. They do obviously add the rental income, however, the bank will not calculate the full rental amount.They will allow for some weeks each year that the property may not be rented.You will need to get a rental appraisal from a real estate agent or property manager.
Step 3:What should you buy? New vs pre-loved home?
There are some very real benefits with purchasing new. Less equity for one, tax benefits, minimum bright line requirements from recent Government changes (seek advice from your accountant for these two), and they are up to code for healthy home requirements. You will however need to wait 12 months or so for them to be built, and you would need to stay in at least the same financial position until the property is finished and settled.
Pre-loved homes as rentals have now been seen as less attractive to purchase due to increased equity needs, tax and full bright line requirements (again, see your accountant for full advice on this). New Zealand homes can be very cold and you will often need to do some work in order to meet the criteria suitable for a rental. Butt hey can still be worth a look. One reason is that there is no waiting around for them to be built.
Hopefully this has confirmed for you that there could be a very real possibility to do something in this space.
In Wellington? I'm running free seminars for first investment property buyers. We will be delving deeper on how the banks lend, tax implications, and the how to protect your assets. Contact me for more information or click here for seminar dates and times.
Lance Shearman (FSP431426) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. A disclosure statement is available here on our website.