Purchasing an investment property is a popular investment choice for many Kiwis as it provides a greater feeling of security compared to intangible investments such as shares or bonds. Recent market trends have also allowed property investors to reap rewards from both capital growth and rental returns.
Aside from deciding whether or not purchasing an investment property would align with your risk profile, an important first step is to investigate if it is in fact a viable option for you.
As of January 2019, the Reserve Bank has set new loan to value ratio restrictions. The general rule is that if you are buying a residential investment property, you will now require at least a 30% deposit – higher than the 20% required for own occupied property, although there are some exceptions to this. However, the good news is that a deposit for an investment property can come from the equity you may already have in an existing property that you own, not just from savings.
For example, if your primary residence is valued at $750,000 and you have a mortgage of $400,000 remaining, you effectively have equity of $350,000.
Home Value: $750,000
Mortgage Value: $400,000
Equity Value: $350,000
Of this equity, 20% must remain held against your primary residence, being $150,000 (20% of $750,000), which leaves $200,000 to be used as leverage in the purchase of an investment property.
The above figures provide an insight into how you can effectively leverage equity from your existing home to build an investment portfolio. However, the best first step is to speak with a professional. A suitably qualified financial adviser will be able to give you an indication of your borrowing capacity and guide you through the planning, implementation and monitoring of your investment strategy. Furthermore, a professional will be able to point you in the right direction for expert tax advise so that you can maximize any potential returns or losses from your property. Some adviser companies, such as Home Advantage, even have access to professionally vetted investment properties which save you the hassle of having to find and research potential properties.
If you would like more information on property investment or would like a no-obligation consultation with a professional, please feel free to contact us.