Despite slowing down in recent times, property prices are still high. So, if you’re planning to buy your first home, purchasing a rental property could be a realistic way for you to get a foot into the property market.
At BNZ, we’re keen to do all we can to help our customers purchase their first homes. For example, we offer mortgages tailored especially for property investors, and we can help customers find rental properties that suit their needs.
What is capital gain and yield?
The thing to remember when purchasing a rental property is that you are making an investment—you are an investor — so, the idea is to generate a financial return.
You can earn a return on a rental property in two ways: through capital gain and rental yield.
- Capital gain: If you buy a property worth $600,000 and then sell it a few years later for $700,000, you will enjoy a capital gain of $100,000 before costs.
- Rental yield: If you purchase the same $600,000 property and charge tenants $400 per week rent, you will earn $20,800 per year. So, the yield is about 3.5%. This is a gross percentage, so, you still need to take into account expenses like maintenance, rates, property management fees, and periods when your rental may be vacant. If you need cash flow for mortgage payments, the higher the yield, the better.
For a first-home buyer, the beauty of purchasing a rental property is that someone else pays off the mortgage. And if you buy it at a reasonable price and are able to charge a decent level of rent, you may end up having very few outgoings.
Where should you buy?
That’s the burning question. But, figuring out where to look for a rental property depends mostly on what you want to achieve. For example, do you aim to make a good capital gain when you eventually sell? Or, is earning a stable rental income what matters?
Working toward a capital gain is a long-term strategy, and any profit you make will vary considerably depending on the location of your property.
Last year, for example, the highest median capital gain in less than three years was in Queenstown Lakes District at $378,000; in contrast, at neighbouring Invercargill, it was just $28,125. Interesting, the figure for Auckland was $250,000.
As for rents, Wellington holds the top spot, and in January, the median asking rent was $550 per week; Auckland came a close second at $540 per week. Another part of the country where there is a severe rental shortage, and opportunities for high rental yields, is in Tauranga.
As a rule, regardless of where in the country you buy, the closer a property is to town, the more rent you should be able to ask for. The reason, of course, is the proximity to amenities and shops, etc. Also, the more expensive a property is (often closer to town), the less capital gain you are likely to make.
What to consider when buying a rental
As mentioned, when choosing a rental, it is important to find a property that will provide you with a good return. Depending on your priorities (capital gain or yield), the place you’d most like to live in won’t necessarily be the best investment, so don’t let your emotions get in the way.
What should you look for? Well, particularly if you need a high rental yield, keep in mind the phrase ‘location, location, location.'
Is the property close to:
- public transport
- and amenities such as hospitals?
All these factors will influence the value of a property and the amount of rent you will be able to charge.
Current property market trends to watch
As a prospective buyer of a rental property, it pays to keep up to date with what’s happening in the marketplace.
Here are some trends to keep an eye on:
Housing stock: Supply—or lack of it— has been a significant factor in rising property prices. There is, though, a little ‘light at the end of the tunnel.' For example, this year, 44,044 new homes are expected to receive consent, which is good news for first-home buyers.
Government legislation: The new Labour Government has put in place legislation that prohibits foreign investors from purchasing existing properties, and this also could make finding an affordable property easier.
Three regions with the highest median capital gains:
1. Queenstown Lake District
Three regions with the highest median asking rents:
3. Bay of Plenty
Three regions with stagnant or declining median asking rents: