Many people are happy to discuss their thoughts on the real estate market with me. The most common question is “What is happening with the real estate market?” The second most common question is “Is it still wise to invest in residential property?”

The answer almost always is “Yes, but do your sums.”

New Zealand’s residential property market has long been a popular investment choice, offering stability and potential for capital gains over time. The “starting position” financially in the current market means it can take considerably longer for some properties to become cash flow positive.

Existing investors are finding that the additional costs over recent years have made both lending and servicing loans much more difficult, and many I work with are consolidating their position rather than buying again. The upcoming election and potential changes of political focus affecting landlords, tenants and property investment mean that investors are taking a “wait and see” approach to what they should do next.

Yields Key To Success

It’s vital in the current market (of little or no capital gain) that buyers of rental properties concentrate on purchasing properties at a good price and making sure rents are at market levels to get the best start you can.

Most landlords in this country own between one and three rental properties. Any shortfall from a rental property generally needs to be made up from their household budget, affecting their day-to-day living directly. The current market means investing is becoming more appealing as the purchase prices drop, while rents continue to rise – improving this equation.

A number of years ago friends of mine decided to purchase an investment property and manage a relatively small weekly loss on their rental property. There was a shortfall between expenses and income, which is often the case when first purchasing a property. They were “cash flow negative” – effectively running at a loss for a period of time. Like many investors, they treated this as a sort of savings scheme requiring “top-ups” while allowing for future capital growth as the main goal. Over time, rents increased until they were no longer running at a loss, but rather a profit.

They have found recent changes removing tax deductibility, ring-fencing of rental properties and higher interest rates have meant they are back to a shortfall again. Thankfully they can manage it financially, although I have been working with investors of multiple properties who are currently considering whether to sell one to reduce debt against others, because of increasing costs.

When deciding on a purchase decision you need to factor in expenses such as maintenance, insurance, property management fees, rates and potential tax liabilities. Understanding the financial obligations associated with property ownership is vital for accurate financial planning, so getting extra help can be wise.

Here Is The Good News …

In the past 18 months purchase prices have dropped yet the median rents have increased in almost all parts of the country as demand outstrips supply. The effect of this is increasingly stronger relative yields on residential rental properties.

In my opinion it is probably the most affordable time to purchase a property in this country since the market peaked in late 2021. Signs are that the market is getting very close to, or is already at the bottom of a dip.

Do Your Research!

Researching areas to buy around the country can be a good idea when looking for the best possible yields. While the main centres in the country feature often in real estate news, for higher yields it is important to also look at investing in regional centres and provinces. Purchase prices can be lower, rents relatively strong but research is needed as supply and demand can vary depending on the localised market.

Things May Change

During an election year house sales are generally slow as there can be uncertainty around what will happen if there is a change of government, this can impact purchase prices in a way that is favourable for investors right now. Many investors are in a bit of a holding pattern, waiting to see what changes may come. Some are hoping for the reinstatement of tax deductibility, this would change the yield equation very positively – time will tell.