Leveraging your estate for an investment property can be a great way to generate passive income and build wealth, but it’s crucial to consider the legal aspects before diving in.

A little due diligence upfront can be the difference between making a smart investment that sets you up for success and gambling it all away.

Here are some top tips:

Legal compliance: Before proceeding with any investment property it’s essential to ensure compliance with all applicable laws and regulations. Familiarise yourself with the bright-line test as it applies to real estate investments, landlord-tenant relationships, property management, zoning and any other relevant regulations.

Financing and contracts: When obtaining financing for your investment property, review and understand all the legal terms and conditions of the mortgage or loan agreement. Consider consulting a property lawyer to ensure the terms are fair and protect your interests. Often banks will have different lending criteria for investment properties versus borrowing to purchase your own home. It’s important to allow enough time to work through loan applications.

Loan and other expense deductibility: The rules around what costs can be deducted from a tax viewpoint change fairly regularly. It’s important to also get advice from your accountant to understand any tax obligations. Take time to understand the New Zealand tax laws and assess the potential tax implications of your investment.

Insurances: Additionally, explore insurance options to protect your property from unforeseen events and liability. Extreme weather earlier this year has placed renewed relevance to this.

Landlord-tenant laws: If you plan to rent out your investment property, understand your responsibilities as a landlord under the Residential Tenancies Act, including meeting Healthy Homes criteria and understand what your rights are when a tenant defaults. Ending a tenancy is often not a simple process.

Property condition and disclosures: To mitigate potential legal issues, it is crucial to thoroughly inspect the property before purchasing. Hire a qualified inspector to identify any structural or safety concerns. Additionally, be aware of your legal obligations to disclose any known defects or issues to potential tenants or buyers if on-selling.

Contracts and lease agreements: When entering rental agreements with tenants it is advisable to have legally sound documents in place. Best practice is to work with a specialist property lawyer to draft leases that protect your rights as a landlord and are compliant with applicable laws.

Liability protection: Property investments come with inherent risks, and it is essential to protect yourself from potential liability. Consider forming a legal entity, such as a limited liability company, to separate your personal assets from those associated with the investment property.

Local regulations and zoning: Research local regulations, zoning laws, and any restrictions that may impact your investment property. Think about surrounding activity and any implications for the value of your property. You also need to ensure that your property’s use complies with zoning regulations and obtain any necessary permits or licences.

Exit strategy: Having a clear exit strategy is essential for your long-term plan. If you intend to sell the property, understand the legal requirements for the sale process and consult with your real estate agent, lawyer and bank, to ensure a smooth transaction.

Investing in real estate can be rewarding, but being legally informed is key to mitigating risks and maximising your investment potential.

Annabel Sheppard is an accredited property law specialist and partner at Wynn Williams. She advises on property as a strategic asset in the wider area of estate planning and protection.