Most Kiwis aren’t great savers and while the introduction of KiwiSaver has been effective, it is unlikely that KiwiSaver funds alone will be enough to see you through retirement on their own. While property investing is not the only way to prepare for retirement, it has proven very effective for many and with some education nearly every homeowner can do it.
The questions you want answered is how, right?
Here are 7 main steps to starting a property investment portfolio to prepare for retirement.
01 Decide if property investment is right for you.
Have a think about if you need to become a property investor. The main reasons for needing to become a property investor is because you want to make the most of your situation plus you want to provide financially for yourself and your family in retirement.
If you believe you’ll be rolling in cash upon retiring then you don’t really need to worry too much. But if you’d like to prepare for a time in your life when you won’t have your day jobs anymore, then property investment now is a great way to put money in your pocket later.
02 Decide how you want to replace your income in retirement.
You can get creative here, but there are two main retirement investing approaches. The first is to buy multiple properties and then at a later date sell half the properties (if required), to pay off any debt on the remaining properties. This means you now have debt free rental properties which will provide an income for you in your golden years.
The second approach is to purchase properties now and then when you need the cash in retirement you can sell off one property at a time as required and pocket the capital growth. The remaining properties will be taken care of by your tenants.
To be successful in either strategy you need to start early as both recipes take time.
03 Calculate usable equity.
How do you know if you equity is in a position to start property investing? The first step is to understand how much ‘usable equity’ you have.
The usable equity in your house is what is essentially used as the deposit on your rental property purchase. If you have enough equity, then you don’t need to provide any cash at all for your rental purchase – not a single dollar.
This is the power of leverage. The bank will use both houses as security for the lending, which allows the bank to accept your level of debt when spread across both properties.
04 Get advice from a mortgage adviser about lending.
Talk to a mortgage adviser to find out if you are in a position to purchase. They’ll look at your equity, income and lending criteria and create competition for your business to get you the best deal.
Mortgage advisers who specialise in property investment, like Futurebound advisers, will also give you structure advice and how to pay off your mortgages as fast as possible in the best way for your financial goals. This advice will help you to build equity quickly and accelerate how many investment properties you can buy.
Be aware that lenders will usually allow you to have the rental mortgage at interest only for up to five years and this means that the repayments would be low. For many investors the rental income covers the mortgage, rates, insurance and property management, so they don’t have to pay any of these out of pocket.
It’s the closest that you’ll ever get to a free house. After the five year interest only period has expired you can either move to another bank for another 5 years or rent increases may make it viable to switch to principle and interest repayments.
The key is to start early so that the magic of capital growth can happen overtime.
05 Choose in which type of properties to invest.
If you intend to buy existing properties that you can renovate and add value to then you need to be careful here. Be very aware of your target market, so that you renovate appropriately. Have a budget and stick to it. Have a contingency fund just in case. If you intend to do the work yourself, then be realistic about your skill level and limitations.
Remember, just because you like baking cakes doesn’t mean you should open a cake shop. It’s often the same for DIY and a rental property business. A lot of people lose money because they overestimate their renovating skills or underestimate what’s needed to complete the job.
An existing house that is tidy already and low maintenance is often a desirable option, but keep in mind bank LVR rules for existing houses usually require a 30% equity deposit while new builds only attract a 20% equity deposit.
New builds bought off the plans has become very popular with property investors who want to keep their day jobs, want to prepare for retirement and don’t want the hassle of renovations and maintenance. Houses with double glazed windows, insulated walls, ceiling and floors and dry living conditions are sought after by tenants, so many investors have been successful with this strategy.
Apartments generally don’t get as much capital growth as stand alone houses and town houses, so if you’re going to consider apartments then you’d want high rental income to make it worth your while. This is a question of yield and new investors should understand that properties with good yields don’t always have great capital growth and vice versa. If you can find a property with a good yield and also good capital growth then you’ve done well.
06 Get the right experts on your team.
One of the most important factors to getting started as an investor is having a good team around you. You’ll need a lawyer or conveyancer who understands property investment to check contracts.
An accountant should advise on your entity structure before you buy a property and do your annual returns.
As mentioned before, a mortgage broker should help you get the finance and advise on loan structures and debt management.
If you’re subdividing or renovating, be sure to find builders, landscape designers, surveyors and land consultants who understand your financial goals and have the experience and relationships that will get your project running smoothly.
Build relationships with real estate agents who have relationships with buyers and/or who can help you find the right property to invest in.
Property management is vital if you are renting a home out and you don’t want to deal with tenants and maintenance yourself.
Family support is also important.
Watch our video series, Property Pros, to get insider tips from property professionals.
07 Before buying, do the numbers.
Whichever your strategy, make sure you know how much it will cost and how much you are expected to make with each house you buy as an investment property.
How to measure yield? Rental income per year divided by the purchase price is the gross yield.
For example, $525 (weekly rent) x 52 (weeks in a year) = $27,300 annually. Then divide that by $550,000 (purchase price) =4.96% gross yield. Make sure the yield for a house you want to invest in fits in your strategy and financial goals.
Consider all the expenses to buy, renovate, and/or maintain the property. If you will be renting it out, make sure you have some money set aside for times when there won’t be a tenant in it.
Property investing can be fun and incredibly rewarding. It pays to research which strategy is right for you. Develop your understanding and position well. It also helps to surround yourself with experienced property professionals and other investors. Rubbing shoulders with investors who are further in their journey than you is a great way to get ideas and support.