In August this year, the Reserve Bank reduced New Zealand’s official cash rate to a record low 1%. In response, the major banks reduced the amount of interest they pay on their term deposits, which is bad news if you are one of the many New Zealanders relying on term deposit interest to supplement your retirement income.
If you find yourself in this situation, you might be wondering about alternative ways to invest your money. Due to New Zealand’s often-buoyant housing market, property investment has traditionally been a popular method of generating a passive income, offering better returns than bank deposits. But is it something you should consider? We look at the pros and cons of residential property investment.
There are two ways of making a return on an investment property – capital gains and rental income. A capital gain occurs when the property value rises over time, and you sell it for a profit, having accounted for legal costs and real estate agent sales fees.
Income earned from renting out the property is the difference between what the tenant pays you in rent and any ongoing expenses you are required to cover such as tax, mortgage payments, rates, maintenance and compliance costs (such as insulation and heating).
There are risks attached to property investment.
- If you have borrowed money to purchase the property, the lender could unexpectedly ask you to repay it. You may be unable to sell – or sell for enough money to cover your debt.
- House prices may fall, resulting in a loss if you had to sell the property.
- When you buy a property, your money is locked up in that asset, and it is not easy to liquidate quickly. A property may take months to sell.
- If you have taken out a mortgage to buy the property, and interest rates rise, you may not make a profit on the rental income.
- You may struggle to rent the property out consistently, or your tenants may not pay their rent.
- Your tenants may damage the property, resulting in a large repair bill.
So, while there are opportunities to make a better return than investing your money in the bank, you could also lose money, depending on the housing market, the economy, and the people who rent your house.
There are also additional expenses you may need to consider. If you plan to purchase a rental property, you might want to hire a property manager to look after the rental process, collect rent and bonds on your behalf, deal with tenant complaints, conduct property inspections and arrange property maintenance. You may also need to employ an accountant to ensure that you comply with the tax obligations that accompany owning a rental property.
Before making any major investment decision, it’s a good idea to consult a financial advisor who specialises in property investment. They will analyse your financial situation and guide you towards the solution that suits you best. When engaging the services of a financial advisor, ensure that they are fully qualified as an Authorised Financial Adviser by New Zealand’s Financial Markets Authority.