Owning an investment property can present both challenges and opportunities. The property market in New Zealand is dynamic, driven by diverse geography and growing urban centres. This demands careful financial planning, especially for landlords aiming for long-term success. As property management experts, we at The Rent Shop recognise the importance of a well-crafted budget in achieving this success. This article provides a comprehensive guide for landlords on financial planning, including understanding the local nuances of the New Zealand property market, from regulatory requirements to market trends.
Introduction to Property Investment
Investing in property can be a lucrative venture if handled correctly. The returns from property investment come in two forms: rental income and any increase in the value of the property over time (capital gains).
However, property investments are not liquid, meaning that to extract money from the investment, you would either need to sell the property or increase the mortgage. This process can incur extra costs such as valuation and real estate agent fees.
While property investment can often be seen as 'safe as houses', there are risks involved. For instance, a lender may require unexpected repayment of the mortgage, and you may not be able to sell the property for enough to cover the mortgage. Additionally, changes in interest rates may reduce the profitability of the property.
Calculating Your Returns
As property management experts, we advise that there are two types of returns to consider when choosing an investment property - capital gain and yield from rental income.
Capital gains are earned when you sell a property for more than what you paid for it. It's crucial to consult with a tax adviser when you buy or sell an investment property, as the rules around the potential taxation of capital gains can be complicated.
Yield from Rental Income
The second consideration is the yield from rental income. This calculation involves understanding what you could earn from renting out your property. You can determine this by looking at similar properties on property websites or asking a rental agency to do a rental appraisal for you.
Expenses to Consider
When planning your investment property budget, it's essential to take into account both ongoing and one-off expenses. These costs can range from interest on your loan and property management fees, to insurance costs and potential repairs or upgrades.
Some of the critical expenses to consider include:
- Purchase and set-up expenses
- Lawyer's fees
- Property management fees
- Accountant or tax adviser fees
- Rental property insurance
- Repairs and maintenance
- Council rates
- Valuation fee
- Insurance for you
- Body corporate expenses
- Any initial repairs or upgrades
- Cleaning between tenants
- Gardening and lawns
- Water bills
While a vacant property isn't a direct expense, it can sometimes be challenging to keep tenants, leading to a potential loss in rental income. It's advisable to budget for any potential loss from having a vacant property every year.
Owning a residential investment property has tax implications. Income generated from rent is taxable, which means you'll need to complete a tax return each year. Gains from the sale of a property may also be taxed.
Tax rules often change and can be complex, so it's essential to get regular guidance on your personal circumstances from an independent tax adviser or accountant.
Gearing refers to the financial strategy of funding a company by borrowing and can have significant implications for your investment property.
If your expenses, including loan repayments, are higher than your rental income, you are negatively geared. In this case, you may have rental tax losses, which will generally need to be carried forward to later tax years.
On the other hand, if your rental income is higher than your expenses, then you are positively geared. Rent is an income source, and therefore it's taxable.
Both scenarios have potential benefits, but your individual circumstances and the property you're looking to purchase will determine the best investment strategy.
Financial Forecasting and Modelling
Financial forecasting and modelling are essential tools for making informed decisions about your property investments. These processes can help you understand if a project or change is worth the expense and effort, identify potential risks to your cash flow, and determine how much money you’ll need from lenders or investors.
A forecast is an educated guess at your business’s costs and income over a period of time. To forecast future financial figures, use information such as your current operating costs, sales, expected ups and downs in your sales, and insights on sales trends.
Financial modelling takes your financial forecasts to the next level. It shows how much free cash flow you have to spend during a project and casts light on whether that project makes good financial sense.
Stress Testing Your Numbers
It's important to stress test your numbers to see what happens to your finances in a range of scenarios. This helps you understand potential risks and rewards in detail. It will also help you set targets and limits for your investment — including the point at which to quit if sales stall below a certain number and show no signs of improving.
Once you have analysed your figures, it's time to make a decision. If the finances stack up, and you’re ready to take the plunge, the next step is to confirm how to fund your project.
Regularly checking your financial statements and comparing your actual figures with those you predicted is vital. Projects rarely go 100% to plan, so it's crucial to check how you’re going against the targets and limits you set.
Seek Expert Advice
Whether you’re new to property investment or a seasoned investor, it's always beneficial to seek expert advice. Property management experts can help ensure your numbers are realistic, and test if you have thought through important factors.
Investment properties present unique challenges and opportunities, particularly in the dynamic New Zealand property market. Ensuring you have a comprehensive financial plan in place is key to long-term success.
At The Rent Shop, our property management experts can guide you in creating a comprehensive financial plan that aligns with your investment goals. Whether you're a seasoned investor or a first-time landlord, we have the expertise to help you achieve success in your property investment journey.