10 Steps to Property Investment - Beginners Guide
About this Property Investment Beginners Guide
While the team at Property Investors Club are always glad to help our clients navigate the process of investing in property for the first time, we understand some people prefer to just do it themselves. If that sounds like you, here’s a bit of information to get you started. Enjoy!
Step 1: Consider the risks of property investment
Rates are currently the lowest on record, but that won’t last forever. Investors who aren’t budgeting for higher rates in the future could find themselves in trouble.
Without proper pre-tenant screening, you could find yourself needing to evict bad tenants and chasing money owed for damage or unpaid rent.
Legislation designed for the protection of tenants rights make property managers responsible for adhering to strict rules which can be costly if broken.
While long term growth is reliable, property values have dipped or remained stagnant before, and will do so again. Without the financial capability to retain your property during tough times, investors can find themselves having to sell their properties at a loss.
It can take some time to get tenants if you set your rent price too high. We normally budget for a property to be vacant 5% of the time, so about 5 weeks every couple of years.
There have been a number of tough regulations introduced in recent times, mostly in a bid to take some heat out of the booming market. Tax changes, tenancy regulations, healthy home standards and banking rules have all been tightened, but there could be more to come.
Step 2: Choose your strategy
There is more than one way to invest in property successfully.
Some investors prefer a speculative investment strategy, whereby quick cash gains can be made buying and selling (flipping) properties quickly, either trying to time the market or making renovations/improvements to the property to increase its value.
Other investors will be chasing higher ‘yields’ – meaning their goal is to purchase properties which can earn them a high rental income, relative to the original purchase price of the property. Often positive cashflow can be achieved, meaning the investor receives a regular cash income after all costs are paid.
At the other end of the scale is the growth strategy, where rental income is disregarded entirely, to achieve the maximum amount of gains over a long period of time.
Our Property Club members are usually looking for some balance between how their weekly cash flow is affected, with the ultimate goal of making gains long-term. The Property Investors Club promotes an investment strategy to suit this ‘middleground’, but can also help if you’re considering other investment strategies.
This strategy usually involves buying and selling frequently.
Potential for very fast and high profit
Boom or bust, dependent on short erm property value movement
Investor with high net worth who can afford to lose some. High tolerance for risk.
This strategy involves chasing high rents to remain cashflow positive.
No weekly cash input required
Properties less likely to increase in value over long period of time
Low income earner who needs additional weekly cash income. Short term focus but adverse to risk. Possibly already retired to needs ongoing cash supplement.
This strategy focusses on balance between yield and growth.
Invests in family homes or townhouses
Potential for high gains over 10 year period
Unlikely to make short terms gains
A home owner with good equity level who can afford small weekly payments. Prepared to sacrifice short term gains for Interim Growth.
This strategy sacrifices yield to make greater long-term gains from increasing property values.
Expensive holding costs
Cash-rich investor. Probably able to buy land without bank finance and no requirement for rental income
Step 3: Work out what you can afford
Most investors need a mortgage, but there is obviously a limit to what a bank will lend you. In order to borrow money, you need to satisfy the bank on three levels.
Whoever is lending you money wants to know that it’s secure. That there’s a way to get it back if something goes wrong. While the investment property you purchase will ultimately provide the bulk of this security, you’ll need to provide a buffer – usually around 20% of the purchase amount.
There are two ways to do that:
- Cash eg. $100,000 cash deposit paid for a $500,000 purchase.
- Cross security eg. Leverage existing equity in your own home.
Most investors don’t have $100,000 cash lying around, so it’s most common to merely use your family home as security. Generally speaking, you need to have at least 20% equity in both your home and investment property.
You’ll need to prove to the bank that you can afford to repay the loan. Although rental income will often be sufficient to do that in reality, once again the bank requires an additional buffer. General rule of thumb, if you have regular household income over $80,000 there is a good chance you can afford to service your debt, but there are too many variables to give a definite assurance in this guide.
If you have a history of crime, bad credit or any other unsavory behaviour recently, you are unlikely to receive a mortgage loan.
Step 4: Choose a location
Some people want an investment close to home, while others want to spread their bets.
Small Town or Larger City?
It can be very tempting to buy in small towns; especially during a boom, but we don’t recommend it. They’re often cheaper than the main centres, and appear to rise quickly when times are good. They can be boom or bust though.
Small towns typically have only one or two main industries to sustain them. Queenstown, for example, relied almost solely on tourism. Values skyrocketed on the back of a rise in visitor numbers from 1.6 million in 1999 to 3.9 million in 2019. Then Coronavirus hit.
In a larger city you have multiple industries offering different work opportunities. When something like Coronavirus takes out tourism, people from Queenstown will migrate to the cities which can provide other work opportunities.
Pick Your City
Auckland has been a star performer for a few years now. Wellington had experienced good growth more recently. Christchurch values have been flat for quite a while, so there is an expectation it will eventually catch up.
Pick a Suburb
Whereabouts in the city you choose to invest will be determined by your investment strategy and budget. Generally speaking, if you want high growth you should buy in more expensive areas, but if the best rental income is important to you, cheaper neighbourhoods will perform well.
For example, a townhouse in an expensive area like Merivale might cost you $200 per week to maintain, while a house in Aranui which is much cheaper could actually make you $100 per week. The catch is, you’ll likely make more money long term investing in Merivale.
If in doubt, go for something in the middle – a nice family suburb at the middle of the price range.
Step 5: Choose a property type
Your chosen strategy will inform your choice of property.
Choosing what kind of property to invest in comes down to your strategy and budget. Land increases in value, giving you capital gains, but buildings will get you good rent. Whatever your budget, the smaller the land: the higher your rental yield, but the lower your long-term growth.
In other words, an apartment will give you a great rental yield, but terrible capital gains. On the other side of the scale, for maximum growth and no rental income at all, you could buy a bare piece of land. Chances are, you’ll want something in between like a townhouse or family home.
The following illustration gives a rough idea of what a brand new property in Christchurch would cost you each week, after paying all expenses, based on 4% interest rates.
Brand new, or older?
Another important thing to consider is whether you will want to purchase a brand new building or something which is older. There are pros and cons for both. Assuming all else is constant, you’ll be able to find an older property cheaper than a brand new one, but new property is considered a safer option with better rent potential.
While the extra price can seem a lot at the time of purchase, based on actual cash costs it is almost the same price to own a brand new place compared to an older one of a similar size and spec. If you were to quantify higher maintenance and vacancy costs, you might discover a new property is actually cheaper.
Step 6: Assemble a Team
You will need the assistance of a few professionals throughout the investment process. Some are essential, while others are just nice to have. Below we recommend our favourites, which most of our clients choose to work with.
A lawyer will advise you on a purchase agreement, process your deposit and settlement funds, check titles and transfer property ownership to you. The legal costs associated with purchasing a property is usually between $1,800 and $2,500.
Property Club recommends:
Andrew Logie – Malley & Co
If you have just one rental property it can be simple enough to prepare your own tax returns, but there are some valuable tax savings which a good accountant will identify for you, not to mention making the process a bit easier. An accountant will cost about $1,000 per year.
Property Club recommends:
Cameron Robertson – Sidekick CA
Property managers are worth their weight in gold. Being a landlord is a lot less fun than an investor. You’ll normally pay 7 – 9% of your rental income, plus the occasional letting fee. Inspections can be an additional cost too.
Property Club recommends:
Shona Saunders – Rentwise
Real Estate Agent
Nice to have
Sometimes being friends with a real estate agent has its perks. You’d be surprised how many properties are sold everyday, often the best deals, without ever being advertised. A friendly agent can help you find a good rental property, do the running around for you, and is normally paid by the vendor, so won’t charge you a fee.
Property Club recommends:
Daniel Andrew – House Real Estate
Nice to have
Some people prefer to approach their bank directly for a loan, which can work out just fine. There are a couple of issues with that though, which should be considered:
1. You might not get the best deal if the bank doesn’t think you’re shopping around.
2. You ought to consider separating your investment liabilities from your personal assets.
3. Your bank might not be the best for you.
Using a mortgage broker is usually free, so it pays to talk to one before you approach your own bank. They’ll be able to tell you which bank is most suitable for your own circumstances.
Or, Property Investors Club: Our top pick!
We offer a one stop solution for most types of investment strategies, by working through a four step investment program with our clients, alongside the other top performing professionals we’ve listed above. Most of the services we offer are free – we’re industry funded – but some of the external services we recommend are charged at or below normal market rates.
STEP ONE: INTRODUCTORY EVENT
Join us at an introductory event in Christchurch. There are different types, mostly with the same content, but varying times, venues and perks. We try to make them fun, usually with food and drink provided, but ultimately these are about educating you to become a savvy investor or landlord. Event sizes vary between 30 and 50, with tickets priced from $20 (all ticket revenue is donated to Christchurch City Mission). You can see all our upcoming events on our events page.
STEP TWO: PLANNING SESSION
After you’ve been to one of our events, you’ll have the opportunity to book a free planning meeting with one of our consultants, to establish what investment strategy is the best fit for you, the types of properties you could consider, the best location to buy, and an action plan which will set you on the path to bring all this information to fruition.
STEP THREE: CHOOSE YOUR FIRST RENTAL PROPERTY
Finally, once you know your investment strategy and what type of property is best for you, we present a selection of purchase options from private listings, developers, real estate agents and exclusive property finder stock lists which we’ve curated, so you can be comfortable knowing you’re choosing from only the best investment options available, and won’t end up buying the wrong property for your strategy.
STEP FOUR: DECISION TIME
Before you buy a property, we’ll guide you through a two to three week due diligence process, giving you a complete understanding of your property choice and financial implications.
• Contract advice – Free
• Accounting advice – Free
• Valuation – $500 – $700
• Rental appraisal – Free
• Mortgage approval – Free
• Building inspections – $500 – $800
• LIM & Title reviews – $500 – $700
Step 7: Find a Property
There are several ways to find a good property deal:
Real Estate Agents
Aside from selling real estate, some agents will also act for a purchaser to help them find a property. They will normally negotiate a commission split with another agent if they introduce you as a buyer to a property which isn’t a listing of their own. If you find the right agent, this can be a great option, but don’t go in with blind trust. If you’re going to work with an agent to find your first property investment, make sure they have a clear understanding of the type of property you want, as their own idea of a good investment could be vastly different from what is best for you.
Some real estate agencies specialise in finding properties. They are also known as ‘buyers agents’. This can be a good option if you don’t have the time to look at too many properties yourself, but can be an expensive option, around $10,000.
Property advisers will create an investment strategy for you, get an understanding of your finances and point you in the right direction. Do be aware that they often only have one or two preferred investment strategies, so are unlikely to work for all clients. For example, some have great access to high growth properties, but can’t help with speculative buy & flip opportunities. Some charge a fee, while others are paid by the other professionals they introduce you to.
Direct to Developers
If you’re buying brand new, you’ll be surrounded by home building companies wanting to sell you something. Be aware that some will not be entirely upfront about costs and exclusions, but there are plenty that can offer a good honest deal. It is extremely rare that a developer will offer you a cheaper price when you buy from them directly, rather than through an agent. They risk devaluing their entire stock by doing so, as all sales values are recorded on a public register.
Step 8: Make an offer
When you think you’ve found the right property, it doesn’t need to be an all-in situation.
Most investors make a conditional offer to purchase a property first, meaning they get a period of time (usually a couple of weeks) to complete a due diligence process. If the vendor agrees, you will have the right to purchase the property at the agreed price, but if it doesn’t stack up after you’ve completed all your checks, you don’t need to follow through with the purchase.
Here are the clauses we usually include in purchase contracts, to ensure you have a chance for your solicitor to view the contract, and allow a due diligence period to check all the important aspects of the transaction:
This agreement is subject to and conditional upon the Purchasers solicitors’ approval as to form, content, and (underlying) title within five (5) working days from the date of this agreement.”
This agreement is conditional upon the Purchaser undertaking and being entirely satisfied in its absolute discretion with the outcome of a “due and diligent” investigation of all aspects of the property and all areas of enquiry in relation to the property which the Purchaser deems appropriate, including (but not limited to) investigation and satisfaction of the following:
(a) Title to the property and any encumbrances on the property;
(b) The overall financial suitability and commercial viability of the Purchasers proposed investment in the property;
(c) Any outstanding requirements or requisitions relating to the property;
(d) The zoning, statutory requirements and any consents relating to the property; and
(e) Tenancies and lease arrangement.
The parties acknowledge that this condition is inserted for the sole benefit of the Purchaser and the date for satisfaction of that condition shall be ten (10) working days following satisfaction of the condition in Clause XX (Solicitor Approval).”
Other important things to consider when making are written offer include:
How much are you required to pay, at what point (upon confirmation of your due diligence is common), and who to? Normally you would want your deposit held in a solicitor’s or real estate agent’s trust account, until you take possession of the property).
When will take possession of the property and pay the balance?
What are you prepared to pay?
What fixed features are included in the sale eg. Heat pumps, oven, dishwasher, drapes etc.
Step 9: Due Diligence
Seek independent legal advice from a solicitor. This is your first priority. Ideally, get legal advice before you sign a contract at all, even if you’ve used the due diligence and solicitor approval clauses we’ve provided.
Most property managers will be glad to provide a rental appraisal free of charge, so you know what to expect in terms of rental income. Beware of vendors who provide one to you. Get your own from a property manager you’ve engaged yourself.
Crunch the Numbers
Create a simple budget for at least the first year. Calculate how much rent you will receive, minus all the costs you might incur. Interest payments are likely the biggest expense to allow for, along with rates, insurance, maintenance, body corp fees (if any), property management, and vacancy.
Example of a simple property budget:
If you want to be particularly diligent, do a forecast over several years, to account for inflation (costs and rent increasing), changes in mortgage rates, and growth in value.
Click here to view an example.
Applying for a mortgage tends to be easier when you have already chosen a potential purchase and have a signed purchase agreement. Banks and brokers understand there is a short window of opportunity and that you’re serious about buying, so tend to prioritise the application above others which are merely seeking a pre-approval.
The bank will require you to prove the value of your property is sufficient to meet the security requirement of the mortgage. It’s also nice to get some reassurance you’re not over-paying.
Banks have varying requirements in terms of what valuations they will accept, so it’s best to finish your mortgage application before acquiring a valuation.
Some banks will arrange your valuation for you, through an intermediary portal like Velocity, which randomly allocates the valuation to a qualified valuer. This tends to be the most common method preferred by banks as it provides a level of certainty that the valuation result is unbiased and not influenced by the purchaser or vendor.
Other banks will accept valuations from a valuer of your choosing, provided that valuer is on an approved supplier list of the bank’s.
In rare cases, particularly if the borrower is in a very strong position, the bank might accept an e-valuation (online), which is generally much cheaper, but doesn’t provide anywhere near the level of accuracy you would expect from a real person.
Step 10: Confirm your purchase!
After your due diligence is complete, you can confirm or cancel the purchase. Assuming you are still keen to purchase the property, you will instruct your solicitor to confirm the purchase.
You also have the option to confirm with an adjustment, whereby you would propose new terms to the Vendor, which they may or may not accept. For example, if your valuation is lower than expected and you think the property is worth less, you could ask for the purchase price to be reduced, but it is entirely at the discretion of the vendor, whether they will agree or not.
Most agree that property investment is a sensible solution for building wealth, but for a number of reasons many choose not to. For some it is fear – concern that something might go wrong, or prices will fall – but for most it is merely procrastination. Maybe it’s a bit of both. Either way, you can overcome both of these very common issues with education and action – both of which you will get by coming to our next property investment event.
Keen to get started? Learn more at our next property investment event.
Register for our next property investment talk in Christchurch