Property investment - Investing 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 we can’t withdraw our investment quickly. To get money out we 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. If we sell within two years of buying, we will also have to pay income tax on the sale.

How to invest in property

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

Guide to getting a mortgage

Risks of investing in property

Property requires much more work than other investments such as bank deposits, shares and bonds.

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

• A lender can ask us to repay the mortgage unexpectedly and we may not be able to sell, or sell for enough to cover the mortgage.
• If the investment property is mortgaged with the same bank as our own home, there is the risk that the bank could sell both properties if we run into difficulty with paying either mortgage.
• We 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.
• Interest rates may increase, so the money we make from the property is reduced.

Paying off the mortgage as fast as we can reduces these risks. 

How much work is involved?

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 our behalf.

Other ways to invest in property

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

Property funds give us the advantages of property ownership without having to find the property and do the hands-on management ourselves. 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.

With KiwiSaver, many funds have commercial property as part of their investment mix.

Property syndicates are another way to invest in property, although these have a different legal structure to managed funds and can be riskier. The Financial Markets Authority website has more on these.