Investing in rental properties has been a great method for many New Zealanders to build their assets and make money. However the property market has changed, and continues to evolve, which subsequently affects the profitability of investment properties. Are they still worth it?
New rules and regulations
With the new ring fencing rules, that were implemented on April 1st 2019, it is harder to offset any rental property losses against other income. Investors are facing higher compliance costs due to the tenancy terms (that are more favourable for tenants) which have been proposed, alongside additional heating and insulation costs. As a result of these changes, returns on rental investments are becoming too low to make a positive cashflow.
There is also potential for a capital gains tax on properties sold within 5 years of purchase, which will scare away many traditional property investors. While future legislation can’t be predicted, it’s logical that if the intention of owning investment property is to primarily make capital gain, investors can expect to face some form of future taxation.
Advantages & gaining success
One major advantage of property is the banks willingness to lend against it as they’re not as willing to lend against other land or business investments. Having the ability to take out a loan from your bank is essential for property investment success, and with the increase of house prices there will be opportunity to borrow more.
To maximise the potential of your success it is important to exist in a favourable tax position, and necessary to increase the rent of your property to cover increased rental investment costs.
Our advice
We are hearing that there is a shortage of housing, in which case, house prices should continue to rise. However there is evidence that otherwise suggests house prices are remaining static across the nation, and can be expected to fall in selected areas over coming years.
If property investment is one part of a well-diversified portfolio, then think carefully about the risks and expenses in owning such an investment. We advise you assess the cash flow profit against the risk adjusted return of other investments to help make your decision.
FAQs
New Zealand needs rental properties. The number of households renting is increasing each year and the bulk of those are living in homes provided by private landlords. This creates plenty of opportunity to use property as a way of building your own wealth.
What is the 1 rule in rental investment? ›
What is the 1% rule in relation to the property's purchase price? The 1% rule states that a rental property's income should be at least 1% of the property's purchase price. For example, if a rental property is purchased for $200,000, the monthly rental income should be at least $2,000.
Is my rental property worth keeping? ›
Your investment's cash flow is the cash transferred in and out of the property. If the property's outflows (the money spent on expenses like insurance, taxes and repairs) are greater than its inflows (the money you make from rent) it might be time to sell.
What rental properties are most profitable? ›
Single-family homes are often favored for their steady appreciation and lower management costs, while multifamily properties can generate higher cash flow due to multiple rental units. Vacation rentals offer lucrative short-term returns, especially in tourist hotspots, but may require more active management.
How do I avoid paying tax on rental income NZ? ›
It is not possible to avoid paying tax on a rental property, as a rental property is essentially a business that generates income.
Is now a good time to invest in property in NZ? ›
Now is a good time to buy a house in New Zealand. Property prices are much lower than they were in 2021, and it is a buyer's market. That means that property buyers have the upper hand. On top of this, property prices bottomed out in May 2023.
What is the 50% rule in rental property? ›
The 50 Percent Rule is a shortcut that real estate investors can use to quickly predict the total operating expenses that a rental property investment is likely to generate. To work out a property's monthly operating expenses using the 50 rule, you simply multiply the property 's gross rent income by 50%.
What is the 2% rule for investment property? ›
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
What is the 4 3 2 1 rule in real estate? ›
Analyzing the 4-3-2-1 Rule in Real Estate
This rule outlines the ideal financial outcomes for a rental property. It suggests that for every rental property, investors should aim for a minimum of 4 properties to achieve financial stability, 3 of those properties should be debt-free, generating consistent income.
What adds the most value to a rental? ›
Top 8 Best Renovations to Boost Your Rental Property's Value
- #1 Paint Your Property. ...
- #2 Upgrade the Kitchen. ...
- #3 Have a Look at Curb Appeal. ...
- #4 Remodel the Bathrooms. ...
- #5 Add Popular Amenities. ...
- #6 Invest in New Floors. ...
- #7 Brighten Up Your Rental with New Lighting. ...
- #8 Stick to Modern Design.
The drawbacks of having rental properties include a lack of liquidity, the cost of upkeep, and the potential for difficult tenants and for the neighborhood's appeal to decline.
How to figure out if a property is a good investment? ›
It's called the 2% rule. This applies to any investment, and says that an investor will risk no more than 2% of their available capital on any single investment. In real estate, this means that a property is only a good investment if it will generate at least 2% of the property's purchase price each month in cash flow.
How many rental properties to make $100,000 a year? ›
The amount of capital needed to generate $100,000 in annual income from rental properties depends on factors like cash flow, financing, and property types. For example, if you have an average cash flow of $1,000 per month per property, you would need approximately 8-10 properties to achieve $100,000 in annual income.
What type of property makes the most money? ›
Commercial properties are considered one of the best types of real estate investments because of their potential for higher cash flow. If you decide to invest in a commercial property, you could enjoy these attractive benefits: Higher-income potential.
Where do landlords make the most money? ›
Zillow has also named the best places for landlords interested in long-term profitsii. When looking at rental income, tax benefits and accumulated home equity (thanks to rapid home value appreciation), landlords in San Jose, California, make the most money: $8,927 per month, or $107,122 per year.
Can foreigners rent property in New Zealand? ›
And with the resident visa comes the right to purchase residential property in New Zealand. For all people coming to New Zealand on a work visa, you will have the option to rent, weekly, before you become a resident and commit to purchasing a house.
How much deposit do you need for an investment property in New Zealand? ›
Investment property deposit requirements New Zealand
The banks generally require a 35% deposit to buy an investment property. These requirements are in force due to loan to value restrictions (LVR) imposed by the Reserve Bank that limit the amount of lending retail banks can offer to low deposit borrowers.
What is the average house rent in New Zealand? ›
The rent cost in New Zealand largely depends on the location. Rent in New Zealand is calculated weekly. The average rent in New Zealand is approximately NZD 400 a week for a small home (one or two bedrooms) and NZD 530 for a two- or four-bedroom apartment or house.
How long before a rental property is profitable? ›
Most of the time, you can get positive cash flow right from day one with your rental. Figuring out your profit for the year is a matter of taking how much rent comes in and subtract how much money goes out for expenses like taxes, insurance, and mortgage payments. What you're left with is your profit for the year.
