In the 10 years we have been helping Kiwis get ahead financially by investing in property, one thing that has become abundantly clear is that there is no such thing as one size fits all when it comes to purchasing an investment property. You might be surprised that many people launch into property investment without even a basic understanding about rental returns, return on deposit, or an investment plan. Also, many Aucklanders might feel that buying a home is hard enough, let alone being able to afford to buy a rental property.
If you have owned your own home for a few years, you might already have enough available equity to fund a deposit on a rental property, so you don’t need to worry about trying to save for another house deposit. Now you will just need to have enough provable income to enable you to service a mortgage on a rental property in addition to your current mortgage. How much you can borrow will depend on your current financial position. Do you have any other debt? Do you have dependents? Any credit cards (even if you don’t use them), what sort of rental return are you looking for etc.
If you don’t yet own your own home, but have saved a deposit (or have help from the “Bank of Mum & Dad”), you might be better off to consider purchasing a rental property before you buy your own home. Let’s face it, rent in Auckland tends to be a lot cheaper than paying a mortgage, but even though you might live in Auckland, there are plenty of other areas around the country where market rent is enough to cover the cost of owning the property, and the purchase prices tend to be lower too! So it might make more sense for you to stay renting, and buy rental properties elsewhere to get you started.
Now you need to put a plan in place so that you can reach your long term goals (whatever they might be), taking into account your starting financial position, what you want to achieve from property investment, what your borrowing capacity is, and what level of risk you feel comfortable with.
We have worked with clients who are on minimum wage, right through to people with 6 or 7-figure incomes. Some clients have purchased their home first, while others have purchased investment properties as their first step. We often find that the clients with limited borrowing capacity can end up with at least as much success (sometimes more) than the clients on higher incomes. One of the reasons for this could be that people on higher incomes can sometimes be more “comfortable” with their status quo, compared to people on lower incomes who are often strongly motivated and determined to improve their financial position. Another reason could be that people with lower incomes tend to have lower borrowing capacity, so they may have fewer choices as to where and what they can purchase. This means that they are unlikely to get confused or overwhelmed with all of the different options available in the property market, as their choices are more limited, so it can be easier to make that purchasing decision. They just need to make sure that they are buying properties with a good balance between cashflow and long term capital growth, and depending on their financial position, this might require purchasing outside of Auckland in order to get higher rental returns.
The hardest part about purchasing your first property is getting your deposit together, so surely people on higher incomes would find it easier to save that deposit? What we have noticed is that this is not necessarily true, because what often tends to be the case, is that “the more you earn, the more you spend”! The amount of money that people save for their deposit often boils down to the strength of their desire to own a property. Some of the best budgets are born out of necessity, and we have seen first hand how you don’t need to have a high income to be able to be a great manager of your money. You might just need to make a few short-term sacrifices in order to achieve your long term goals.
So if you don’t have a 6-figure income, don’t let that stop you! All you need is a good plan, a strong desire and determination to succeed. If you want help with that, then feel free to get in touch, because that is part of what we do.
ABOUT THE AUTHOR
Debbie Roberts
Debbie is an Investment Coach and Director of Property Apprentice. Property Apprentice provides ongoing training for investors as well as regular free seminars for beginners.
