Why do you want to get into property investments?

Understanding the purpose of buying property is crucial. Successful property investors always have a strategy in place and understand WHY. Why are you doing it? Once you’ve figured it out, then it’s time to put the strategy and plan in place. 

For example, when I bought my properties, the purpose was that it was going to help me travel the world and come back with a financial backbone once I've finished. Others may want to continue building up their investment property portfolio, so that they can retire significantly earlier. 

It can come in many forms of why you want to get into investing in property, especially in New Zealand! Some examples are below:

1. Future proof my child’s education (Private Schooling, University, Overseas Universities)
2. Build up a nest egg to comfortably retire on
3. Purchase a super car   
4. DIVERSIFICATION! Not have all your eggs in one basket
5. Travelling 
6. Supporting family
7. Assist my children into their first homes
8. You get the idea

As you continue to build your property empire, your WHY’s will typically change as you meet those goals that you’ve set. 

By doing this first exercise, the numbers will just naturally come. I see a lot of people just pluck a number out of thin air and think that’s how much they think they need to retire. Do you think you need $10,000,000 or $25,000,000? More often than not, that number is a lot less! Even with all the toys and travel you desire. 

Say you want to own a brand new 2020 Lamborghini Huracan as one of the reasons why you want to get into investing in property in New Zealand. A new one would set you back approximately $500,000. A preowned one could cost approximately $400,000. The question is, how often would you drive it and did you want to take it on track to really give it a good run. Well, you can get the same experience by booking a driving experience at a track without the added extra cost of maintaining a super car. 

Don’t believe me? Ok, here’s the cost.

The interest rate at the moment is 2.55% (September 2020). Just the interest alone on $400,000 would cost you $10,200/year. I had a look online in New Zealand if there are track driving experiences, however the only event I could find was having a professional sit next to you at Hampton Downs. Instead, you could do it across the ditch in Australia! Well even better! Now you can travel, live in good accommodation and drive the super car you want for less than $10,200 and can probably do it a few times a year along with the travel. 

Investment property with no deposit? $0 Money Down? 

First, we have to understand leverage and what it means. 

From the dictionary, it means “the action or advantage of using a lever”

Imagine that you’re struggling with moving a large rock with your stick. You try and try but it still wouldn’t move or budge. You then get a stick twice the length of the original one. You then pull on it and the rock begins to move because you’ve got more length on the wood to leverage off. 

How does leverage work in an investment property?

From the definition above, the same can be applied with money. Over the years, you’ve paid down your mortgage and the house has got more equity in it. Here are some other ways that you’ve built equity in your home:

• Improved or modernised your home i.e. new kitchen and bathroom
• Added an extra bedroom
• Capital gains (such as the location has become more appealing) 

Following the same analogy, if you were to buy a home but you’re lacking deposit or small deposit (stick) you now use the equity in your existing home that you’ve built up (larger stick) to add towards a smaller deposit. Combine that and now you've got leverage! 

How do I buy an investment property with no deposit?

With an understanding of leverage, what do banks actually look for and how do I buy a property with no deposit? Similar to how you bought your first home, you need to get a pre-approval.

There were restrictions with buying investment properties. One of them, before COVID-19 happened, was that you required a 30% deposit for investment properties while your own home required a 20% deposit. I wrote a blog about it here, explaining what LVR means for you.

However, since COVID-19 the RBNZ has lifted LVR restrictions and the majority of banks have moved their investment property deposit to only require 20%. 

So, I need to have 20% deposit, but I thought we can buy with no deposit? Here is the trick. 

Remember when you bought your first home, you’ve now got some equity in it. This is how you can work it out. 

Let’s assume: 

• You bought your home for $700,000 
• Your current mortgage is $325,000.
• The current value of your home is now worth $900,000.

Banks only allow a maximum LVR on own homes of 80%. In other words, you have to always maintain a 20% equity (think of it as a deposit) within the property. 

You take $900,000 x 0.80 = $720,000 is the maximum amount the bank will lend you, assuming you can afford it. You’ll need to get your mortgage adviser/broker to run the numbers.

You take $720,000 - $325,000 (existing mortgage) = $395,000 which is the available margin or equity you currently have in your property.

Based on available equity, you then work out what you can buy with that amount as a deposit. This is calculated by taking $395,000 divide by 20% = $1.975M.

You reverse engineer the equation as I stated earlier, the banks now only require a 20% deposit. 

Now there are some assumptions being made in the example above, one of them being the value of the property. Some banks accept E-Val on your property, but other times banks may request a Registered Valuation to determine the market value of your property. 

Every bank’s credit policy is different and it can change in an instant. What you may think you could get at your bank may now not be available or not favorable for your changing needs. For example, one bank requires 30% deposit vs 20% for investment properties. 

The banks will assess your overall financial position with the current home and the investment property. They look at two fundamental things:

1. Deposit - do you have enough equity for the next purchase?
2. Affordability - can you afford the extra equity being extracted?

Following on with the example, it is unlikely you’ll get to borrow the full $1.975M to purchase your next investment property because you need to show to the banks you can afford a $1.975M home.

To get a better understanding of numbers, it’s always best to seek out professional financial advice from your mortgage adviser or broker like Simply Finance. You can book in a call with me and we can work through the numbers in under 10 minutes. My booking times are below. 

This is how a lot of New Zealanders have bought their investment properties with no deposit, especially with the recent property booms in Auckland. A lot of Kiwi’s have used this extra equity and leverage it off to build up their monopoly empire. It’s an amazing thing to do and can allow you to retire early if you know what you are doing.

There is always an inherent risk with leveraging so having an understanding of the property market and the numbers will give you an advantage over the average mum and dad investor! 

Tips on property investing in New Zealand. 

Investment property calculator 

Investment property calculators are just a guide. They don't show you the true numbers on what it actually means for your needs. A calculator is only as good as the user. If the user doesn’t have a full understanding of how to invest in property in New Zealand, you could be implementing the wrong plan and strategy for you. 

Investment property accountant

Having a professional Chartered Accountant that specialises in property and investment properties will save you a ton of money! One example is seeking professional advice on forming a company, such as a Look Through Company (LTC). Is it still the correct thing to do and does it meet your needs? They will advise on how to best properly structure your portfolio. 

I work with an awesome accountant and if you want me to refer them to you, please get in contact. 

Gross Rental Yield vs Net Rental Yield

This is one of the critical numbers you need to wrap your head around. What is considered a good rental yield and should you be focused on gross or net? 

With interest rates so low, most properties are now cash flow positive from a gross yield perspective.

How do you calculate gross rental yield?

Let’s say the investment property you purchased is $700,000 with a rental income of $580/week. You multiply $580 by 52 weeks in a year = $30,160/year in rent.

Using the annual figure in rent, you divide it by the purchase price of the investment property. 

$30,160/$700,000 X 100 = 4.30% is the gross rental yield. Now you compare that to the current interest rate at 2.55% or vs the 1.40% term deposit rate (less tax!).

How do you calculate net rental yield?

This is a little different because every property has different expenses. But you take the annual rental income minus the annual expenses and divide it by the purchase price. 

Capital Gains 

Capital gains is a tricky one to calculate as no one has a crystal ball to forecast what the property market will do. 

However, there is tax to be paid on capital gains if you sold your property but had only held the property for less than 5 years. It’s what they called the Bright Line Test. It is best to speak to a tax advisor or your property accountant and get professional advice on this. 

Here is a link to the IRD website outlining capital gains tax.

Summary

BOOM! Are you stunned or amazed that you could buy an investment property with no deposit? I was when I first got into property investing.

To recap:

1. Understand the purchase and why you want to buy an investment property in New Zealand
2. How leveraging works
3. Use existing equity to purchase the next property
4. Seek a mortgage adviser to provide you with the numbers of what you can borrow and what is the maximum purchase price you can buy for your investment property
5. Seek an investment property accountant 

Point 4 is crucial because you want to identify advisers that have invested in property before and can give you guidance rather than just doing standard home loan approvals! 

Investing in property is not for everyone. As mentioned, it depends on the individual financial circumstances and at what stage in life they are at. 

If you want to learn more about your own situation and see if you are eligible to purchase an investment property with no deposit, then get in contact with me. Book me in for a call or send me an email at will@simplyfinance.co.nz.