Why New Zealanders Invest in Residential Property Investment

In New Zealand, investing in a residential investment property is a popular choice for individuals looking to grow their wealth. Several factors make this type of investment particularly appealing, ranging from ease of financing to historical gains in property value. Let’s delve into the key reasons why New Zealanders invest in residential rental property and why so many Kiwis choose this form of investment.

Ease of Access to Financing

One of the primary drivers behind the popularity of residential property investment in New Zealand is the relative ease with which individuals can obtain financing for an investment property. Banks and other financial institutions are often more willing to lend for property purchases, especially residential properties, because they are considered lower-risk compared to other types of investments.

Moreover, the leverage available when buying property means that investors can borrow a significant portion of the purchase price. With low interest rates, this makes property investment accessible to a broader range of people, enabling them to potentially earn returns on a larger asset base than they could otherwise afford.

Tangible Asset with Perceived Security

Residential properties are tangible assets that provide a sense of security for investors. Unlike shares or other financial instruments, property is something physical that investors can see and touch. This tangibility often makes it easier for individuals to trust in their investment, especially those who may not be comfortable with more abstract financial products.

Investing in an existing property can offer unique benefits, such as the immediate potential for renovations to add value and generally higher cash flow after improvements.

Additionally, owning a rental property means having a real, usable asset. Even if property prices fluctuate, the investor still owns a piece of land and a building that can be used, rented, or sold. This inherent value in the physical asset itself provides a level of security that is particularly appealing in uncertain economic times.

Tax Advantages of Residential Rental Property in NZ

Tax treatment is another significant factor driving investment in rental properties in New Zealand. While the tax landscape has changed over the years, certain benefits still make property investment attractive. For instance, the ability to deduct interest on mortgages, as well as expenses like maintenance and property management, can lower the overall tax burden on rental income.

A property manager can play a crucial role in managing tax-related aspects of rental properties, ensuring that all deductible expenses are accurately accounted for and compliance with tax regulations is maintained.

Additionally, capital gains on property have historically been untaxed, though this has changed with the introduction of measures like the bright-line test. This taxes gains on properties sold within a certain period of purchase. Nevertheless, the perception of favorable tax treatment continues to make residential properties a preferred investment.

Historical Residential Property Capital Gains in NZ

New Zealand’s property market has a long history of strong performance, with significant capital gains recorded over the decades. This historical trend of rising property values has created a widespread belief that investing in real estate is a reliable way to build wealth.

Many investors have seen substantial returns from property investments, reinforcing the notion that residential real estate is a sound, long-term investment. Even with market fluctuations, the general upward trajectory of property prices has led to the perception that property is a “sure thing,” especially for those looking to secure their financial future.

Property Investment Strategies for Capital Gains

Investing in residential property can be a lucrative option for those looking to generate passive income and achieve long-term capital growth. Two popular property investment strategies for capital gains are the Buy and Hold strategy and the Buy and Flip strategy.

Buy and Hold Strategy for Long-term Growth

The Buy and Hold strategy involves purchasing a property with the intention of holding onto it for an extended period, typically 10-20 years. This strategy is ideal for investors who are looking for long-term capital growth and are willing to ride out market fluctuations. The key benefits of the Buy and Hold strategy include:

• Long-term capital growth: Property values tend to appreciate over time, making it a great option for investors who are looking for long-term growth.

• Rental income: Investors can earn rental income from tenants, providing a regular stream of income.

• Tax benefits: Investors can claim tax deductions on mortgage interest, property management fees, and maintenance costs.

However, the Buy and Hold strategy also has some drawbacks, including:

• Illiquidity: Property is an illiquid asset, making it difficult to sell quickly if needed.

• Market fluctuations: Property markets can be volatile, and market fluctuations can affect property values.

Buy and Flip Strategy for Quick Returns

The Buy and Flip strategy involves purchasing a property, renovating it, and then selling it for a profit. This strategy is ideal for investors who are looking for quick returns and are willing to take on more risk. The key benefits of the Buy and Flip strategy include:

• Quick returns: Investors can earn a profit from the sale of the property, providing a quick return on investment.

• Potential for high returns: Renovating a property can increase its value, providing a potential for high returns.

However, the Buy and Flip strategy also has some drawbacks, including:

• High risk: Renovating a property can be costly, and there is a risk that the property may not sell for a profit.

• Time-consuming: Renovating a property can be time-consuming, and investors need to be prepared to put in the time and effort required.

• Taxable gains: When the intention is to buy and sell for a profit, gains will always be taxable. 

Due Diligence and Research for Investing in Residential

Investing in residential property requires thorough research and due diligence to ensure that investors make informed decisions. Here are some key factors to consider when researching cities and property markets:

Researching Cities and Property Markets for House Prices

When researching cities and property markets, investors should consider the following factors:

• Median house price: The median house price is a good indicator of the overall health of the property market.

• Property prices: Investors should research property prices in the area to determine if they are increasing or decreasing.

• Rental yields: Investors should research rental yields in the area to determine if they are high or low.

• Population growth: A growing population can drive up demand for housing, making it a good investment opportunity.

• Economic growth: A strong economy can drive up property prices, making it a good investment opportunity.

Conducting Due Diligence on Potential Investment Properties

When conducting due diligence on potential investment properties, investors should consider the following factors:

• Property condition: Investors should inspect the property to determine its condition and any potential maintenance costs.

• Property management fees: Investors should research property management fees in the area to determine if they are high or low.

• Rental income: Investors should research rental income in the area to determine if it is high or low.

• Capital gains: Investors should research capital gains in the area to determine if they are high or low.

• Future tenants: Investors should research the local rental market to determine if there is a high demand for rental properties.

By conducting thorough research and due diligence, investors can make informed decisions and minimize the risk of investing in residential property.

Summary – Why New Zealanders Invest in Residential Rental Property

Investing in residential rental properties remains a popular strategy among New Zealanders. This is due to a combination of factors: accessible financing, the security of owning a tangible asset, tax advantages, and a strong history of property value appreciation. These elements work together to create an environment where property investment is seen as both attainable and potentially lucrative.

Having a well-thought-out property investment strategy is crucial for achieving your investment goals, whether you plan to buy and flip properties or hold them for long-term capital gain.

For those considering this path, it’s essential to stay informed about the market and tax changes to maximize the benefits and mitigate risks associated with property investment.

Auckland Rental Property Accountants

At Business Like NZ Ltd we have extensive experience in NZ rental property accounting. Our team comprises current and former property investors, ensuring we bring practical, hands-on knowledge to the table. If you are a current or future property investor, get in touch with us today to see how we can help you maximize your investment returns and navigate the complexities of property accounting.

Managing multiple properties can present significant financial and regulatory challenges, but our firm is well-equipped to assist you in overcoming these obstacles.

If you would like to discuss your current or future rental investments, please contact us at the office.