Owners who rent
Thinking about buying a rental as your first property purchase? Here’s what you need to know.
First-home buyers are often told they need to lower their expectations if they want to buy a house. Look at something smaller. Be willing to take on a longer commute. But what if there is another option?
Some buyers choose to purchase a house in a cheaper suburb, and continue to rent in the areas they want to live.
For example, Auckland resident Sarah Moore bought in Whangaparaoa but lives in Newmarket, which she said gave her the best of both worlds.
From a financial point of view this decision can make sense. Rents are comparatively cheaper in expensive suburbs.
Investors in cheaper suburbs get a better return on their money, and tenants in pricey suburbs pay only slightly more in rent for a property that is worth double.
Barfoot and Thompson data shows that, in central suburban Auckland, a three-bedroom house on its books rents for an average $598 a week, while the average sale price was $1.2 million for that area. Compare that with South Auckland, where the average price was $691,268 but the average rent is still $471.
Here are some things to consider.
Time on your hands
Do you have the time to manage the property yourself, or the resources to pay someone else to do it? Finding tenants and dealing with their inquiries can take more time than you expect.
But paying a property manager takes a chunk of your rent payments – often between 7.5 per cent and 9 per cent.
Consider also how you will deal with maintenance and repairs. It is a good idea to have an emergency fund set aside for this.
Local knowledge
How well do you know the area? If you are buying a house in a cheaper part of town that you are not familiar with, you will need to do some research.
Find out what the good streets are, the sought-after schools and where the sort of tenants you want would like to live. Ask local property managers what things are desirable in a rental property – this might be things like a lockable garage or a good-sized garden if it’s an area popular with young families.
Long-term plans
If you eventually want to sell the property and buy in the area you want to live in, you will need to have a plan for how to do so.
If house prices move up by 10 per cent across the city, you will make a capital gain on the cheaper property, but the leap to the more expensive one will have become bigger.
This is particularly an issue when you buy an investment property in a cheaper city because the two areas’ long-term fortunes could be quite different.
Tax obligations
Are you on top of your tax obligations? If you make a profit from your investment, you will need to pay tax on that. But if your costs including insurance, rates, maintenance and the interest portion of the mortgage outweigh the rent coming in, you may be able to claim the loss against your other income.
If you decide to sell within two years, or you buy with the explicit intention of selling the property on, you will also be hit with capital gains tax.