Before shopping for an investment property, it pays to nail down your investment strategy. You can then narrow your search to the properties that suit your needs and not get overwhelmed by options. With a clear plan, choosing a property becomes simple; either the numbers stack up or they don’t.
Investment property strategies focus on two primary goals: yields and capital growth. A yield-focused investor prioritises income from rental returns, while a capital growth-focused investor prioritises the likelihood of a long-term healthy appreciation of the property’s value. The choice depends on individual goals, financial circumstances, and risk tolerance. For some investors, finding a balance between yield and capital growth is their chosen strategy.
What do I need to consider when making an investment property strategy?
- Clarify your goals and priorities. Do you want regular income, or are you more interested in the capital gains when it comes time to sell?
- Assess your finances: Evaluate your financial situation, including your available capital, ongoing expenses (including tax), and ability to handle potential vacancies or market downturns. Consider property management and maintenance costs.
- Identify your risk tolerance. Capital growth strategies may involve higher risks as they depend on future market conditions and economic factors. Yield-focused strategies offer more stable income and typically have a lower potential for long-term capital gains.
- Understand the market conditions: Educate yourself on the property market, specifically for the location you want to buy in. Consider supply and demand, market trends, economic growth projections, and infrastructure development. These factors will allow you to assess whether the current market conditions are more conducive to yields or capital growth.
- Consider diversification: If you are looking at getting more than one investment property, consider diversifying your portfolio. This means a mix of properties with different risk and return profiles, balancing yield and capital growth-focused investments. Diversifying the locations between your properties (including your own home) can also reduce risk.
- Be strategic in your property search: For yield-focused investment, seek properties with high rental yields compared to the purchase price. Look for areas with strong rental demand and potential for rental income growth. For capital growth-focused investment, look for emerging markets or regions undergoing economic development. Consulting with local real estate agents can provide valuable insights and alert you to properties on the market that may suit your needs.
What sort of properties are high yield, and which are capital growth?
CoreLogic analysed its Buyer Classification data to understand the current market, specifically focusing on multiple property owners (MPOs) in Auckland City and Manukau. While Auckland-focused, we believe the insights have value for the wider New Zealand property market.
The analysis suggests that apartment rental yields tend to be higher than houses, while houses generally have greater capital gains over the medium to long term. Of course, this is indicative only; there will be opportunities for buying homes with good rental yields and solid apartments in sought-after areas that will appreciate nicely. But this insight is a valuable starting point for those looking to get into the property market who are not sure where to start looking. A real estate agent can help you navigate your local market.
There is a lot to consider when buying an investment property, and as you will not be living in the property, the finance options are different also. Building a property investment portfolio means you need to look at the big picture and leverage off your mortgage adviser, accountant, lawyer and property manager.
If you’re interested in purchasing an investment property and would like to know how much you can borrow or are ready to start the mortgage application process, get in touch, and we can do the hard work for you.