Property investing 101 - everything you need to know to get started

Everyone has to start somewhere, so rather than launching straight into building a 5-storey apartment block complete with underground parking and tennis courts, it’s smarter to start out a bit smaller and closer to home.

Home-and-income properties make sense on so many levels, including that they can help you buy in an area you might not otherwise be able to afford. It’s a great idea to look for actual grannies to live in your granny flat.

They tend to value the security of having a family close by, are reliable and quiet and much more tolerant of family noise than other types of tenants. Good old nan.

You need to add value to your properties so you have more equity to borrow against. Home and income properties are popular and perform well in every market as long as they are compliant.

Sacrificing higher rents in the short term can be a hard decision, but it’s much smarter to invest in a lower quality property where you can own more equity. This is the old “location, location, location” thing. Good school zones and proximity to public transport and shops will always perform better than poorly located isolated properties.

You’ll want to put as much into your investment property as possible so it’s tax efficient.

One way to do this is to sell your existing home to a Look Through Company or an LTC, which you own. The LTC buys the home at a fair market price and then borrows 100% against it. You then provide a personal guarantee to the lender using your new investment property as additional security. You use the proceeds of the sale to clear the mortgage on your own home and put any extra into your new property. In this way you can move the equity from your old property to the new one.

The benefits of using LTCs to hold investment properties have started to shrink in recent years, however, and it may make more sense from a tax perspective to hold them in a regular company instead. Your Squirrel adviser can put you in touch with a specialised property accountant who can help you work out the best way forward on this.

Town planning rules artificially drive land values, so it’s worth understanding them and keeping up to date. For example, under the current Auckland plan, land that has changed from commercial or residential to mixed-use can significantly change the value of land.

For example, have you got the money to cover three months’ home loan payments if your property lies empty or the rent is unpaid for a time? It’s a good idea to have a flexi overdraft home loan account for say, $20,000 to cover unforeseen expenses and gaps in income.

Only if you are going to hold them to the same standard as a tenant. If you make the rent too cheap then IRD may consider you are depriving yourself of income and that discount may be subject to taxation so ensure you are within an acceptable and comparable range of like properties. You can be at the low end, but not $200 a week for a property that could be earning you twice that. Ask yourself: when family don’t or can’t pay, what are your rules?

The bank could be fully entitled to request all proceeds of the sale.

Sometimes investors have many properties, plus their home, funded by multiple loans. Although you’ll attribute a certain loan to a certain property, the bank looks at your lending and security as a whole.

When you sell, any remaining loans you have will also be considered, because the bank wants to ensure you can still afford the loans that you want to keep.

You don’t always have to pay down the loan that relates to the property you’re selling. There may be a loan with a lower break fee, or a way that you can split the settlement proceeds to reduce a few of your loans. Be sure you have a plan on the way in, and on the way out, that’s both understood and supported by your lender.

Ensure you’re educated and informed prior to settlement day of your rental property and that you have engaged with your mortgage adviser, so you’re not hit with any nasty surprises.

The banks are subject to a responsible lending code, which means they will have approved your loan for a maximum term of 25 or 30 years.

If, for example, you have a 25-year loan, and you’re on interest only payments for 5 years, you’ll then only have 20 years left to pay the loan principal off – meaning your payments could be substantially higher.

Interest-only is basically renting your money from the bank. If the goal is to have passive income in retirement, then you need to work towards paying the loan off in time – and the most efficient way to get there is a principal-and-interest strategy from day one.

A reduction in value would only matter to the bank if you were to sell the property. It might assess the loans you want to retain and the value of the securities the bank has, coupled with the reserve bank LVR policy of the day.

Interest-only is a strategy for cashflow efficiency, and that’s it.

Firstly, why is the bank saying no?

If it’s down to affordability, then you need to ask yourself whether the bank might be right. Can you really afford it? And does the bank have a clear picture of your income and expenses from all sources?

It might be a no because the bank has concerns about the quality of the property as security for the loan – such as if there have been unconsented works or improvements made. That could be if it has a granny flat with no permit, no firewall for a kitchen, load bearing walls removed – the list is endless.

In that case, you’ll need to understand the insurance risk involved with the issue, and if you still want the property you’ll need extra time from the bank so you can pay to get a COA (certificate of acceptance) from the council and insurance company. That will need to be presented to the bank along with a quote for any and all work needed to get the property compliant.

If it’s a plaster house with potential weathertightness problems, or issues that may mean the property may not be able to be legally tenanted, you may need comprehensive testing to prove to the lender the home is ok. If it needs a re-clad, then full costs and quotes will be required and those will be assessed for affordability as well.

If you’ve weighed up all considerations and you still want the property, but the banks are saying no, then there are non-bank lending solutions that range in price. There’s often a “Yes” out there but it comes at a price – such as higher rates, needing to front a bigger deposit or multiple securities. Still, non-bank options can be a great interim solution until you can get back to main bank lending.

Your mortgage adviser can explain the cost of different options and what’s required of you – and help you get that clear exit plan in place, back to best-priced lending.