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Property Investing

March 22, 2013

ConveyancingProperty Investing

Owning rental property has been a popular investment for many Kiwis over the years. The difference between an investment property and your own home is that you earn an income from it. Returns from property investment come from rental income and from any increase in the value of property over time.

Returns from property
Borrowing for investment property
Risk of investing in property
How much work is involved?
Other ways to invest in property

Returns from property

Property has two types of potential returns. One is from rent paid by tenants and the other is from the property increasing in value – called capital gain.

Property investments are not considered to be ‘liquid’ because you can’t withdraw your investment quickly. To get money out you need to sell the property or increase the mortgage. This may not be easy – and there can be extra costs such as valuation and real-estate agent fees.

People buy investment properties to make a long-term profit as prices rise. In the short term there may be little or no profit from rent after expenses like mortgage, insurance, rates and maintenance are taken into account.

Borrowing for investment property

It is usually harder to borrow money for a rental property than for your own home. Some lenders may have lower lending limits for investment properties. As with ordinary home loans, lenders will look at what you can afford to repay.

Some lenders and mortgage brokers have particular expertise in lending for investment.

Risk of investing in property

Property investment is often described as ‘safe as houses’. Yet there are risks, for example:

  1. Your lender can ask you to repay the mortgage unexpectedly and you may not be able to sell, or sell for enough to cover the mortgage.
  2. If the investment property is mortgaged with the same bank as your own home, there is the risk that the bank could sell both properties if you run into difficulty with paying either mortgage.
  3. You might need, for some reason, to sell the property at a time when it has dropped in value, and be left still owing the lender money after the sale.
  4. Interest rates may increase, so the money you make from the property is reduced.
  5. Paying off the mortgage as fast as you can, reduces these risks.

How much work is involved?

Property investment usually involves more work than saving money in the bank or investing in shares and managed funds. Most investors spend a lot of time looking for suitable properties to buy, finding and managing tenants, and arranging for maintenance work to be done.

A property manager can do some of this work in return for a percentage of the weekly rent. The manager will take on the tasks of finding tenants, collecting the rent and bond, and dealing with maintenance issues and tenant communications on your behalf.

Other ways to invest in property

As well as buying property directly, you can also invest in managed funds that buy and sell commercial property. These funds may own properties such as office buildings, factories, and shopping centres directly, or they may own shares in other funds that own the property (known as property securities). As an investor you receive income if the managed fund makes a profit on rents it receives, or sells the buildings or shares at a profit.

You can also receive a capital gain if the fund price has risen by the time you sell.

Property funds give you the advantages of property ownership without having to find the property and do the hands-on management yourself. They also make it possible for small investors to own a diversified portfolio of commercial property, which has a different cycle of ups and downs to residential property.

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