5 Things you must know before investing in the NZ property market
Investing in the New Zealand property market can be a great way to diversify and fast-track your property wealth. Whether you are building wealth for retirement or seeking an alternative lifestyle residence, these are five key things that you must know to ensure that you are making the right decisions.
Eligibility for Foreign Investors
Foreign investors need to be aware of their eligibility to buy property in New Zealand. The country has strict rules regarding foreign ownership of property. In 2018, a ban on all foreign ownership came into effect, disallowing overseas investors from owning New Zealand properties. This is on the back of strong international demand for residential properties in New Zealand over the past decades and many overseas investors were suddenly stopped in their tracks while trying to expand their property portfolio in this beautiful country. Known for its stability, low corruption and continued strong market performance over the years, market access was closed to the foreign world in an instance.
However, the silver lining for foreign investors is that, Singaporean and Australian citizens are fortunately exempted from this ban and thus can continue to buy property in New Zealand without any restrictions.
This citizen advantage has prompted many of my investors to make use of market access and started building their portfolio of New Zealand properties. If you are a Singaporean investor reading this and haven't had NZ property in your portfolio, this is an unfair advantage you must not overlook to elevate your portfolio performance. Why NZ you may ask? Check out this page.
Not a Singaporean but has a Singaporean Spouse?
For non-Singaporean citizens including Singapore Permanent residents (PRs), it is still possible to purchase and own New Zealand property through co-ownership with a Singapore citizen spouse.
All others?
For all other foreign investors who are not Singaporean or Australian citizens and who do not have a Singaporean citizen spouse, fret not as it is not a dead end. Foreign investors are still able to invest in certain developments which has prior OIO (Overseas Investment Office) approval. While such options may be limited and harder to come by, it remains as a viable investment option to gain access to this market with a proven track record. The ban on foreign ownership of property in New Zealand has certainly affected many potential overseas investors, but the exemption for Singaporean and Australian citizens provides a unique opening for investors to take advantage of.
As such, before you start your property investing journey in New Zealand, it is important to ensure that you meet the eligibility criteria to maximize your investment potential.
2. Understand Your roadmap and Identify your GAP
Before investing in the New Zealand property market, it is crucial to understand your investment roadmap before putting out your investment goals. While it is easy to generalize your goal as wanting to make more money / generate ROI out of your property investment, there is more than meets the eye than just anchoring your objective on making money. You may balk at what I just said since an investment property, after all, should be just about making money right? Most people will skip this step and is eager to get started on the property ladder but only to realize later on that what they are achieving from the property is not exactly what they would have hoped for.
Your specific wealth goals will determine the type of property you should be investing in, the location, and your investment strategy such as an exit plan. For example, some properties will enjoy a faster speed of potential capital gains, while others may be slower in appreciation but tradeoff with a higher yield. An investor who is coming into retirement as compared to another investor who has another 20 years to retire, is likely to have a different risk appetite and goals to achieve from their property investment. Understanding yourself first and then setting your goals will eventually help you make better investment decisions.
Are you looking to build your cash pot or your priority is to build a passive income stream for an upcoming retirement? Or perhaps you are seeking out a lifestyle property to unwind and build memories during periods of stays there?
What is your Gap?
Take time to reflect on where you are right now in terms of your overall financial situation, runaway time and risk tolerance. Until you get clarity on your current position, you would not be in the best position to figure out where you want to go eventually in terms of your desired property goal. Check out my goal-setting quiz to get this started for you:
I give you an example:
Many new investors whom I have met get very excited with the idea of building passive income from property investment. Who doesn't like a lifestyle entirely funded by rental income generated from your properties? What most people tend to miss out on is the fact that you need a large asset base to generate a decent passive income to fund the lifestyle you want. As a simple example, assume you can deploy 300K to invest in properties for the long term and your goal is to generate a passive income of $5k a month from your property portfolio. It would not be surprising that most investors will go out there and search for the highest-yielding property or product to fulfill this passive income goal. What they often realize is that after netting all expenses, little is left over in cash flow. However, a better approach would be to first determine how much assets you need to generate a passive income of $5k per month.
The gap they face is building the asset base, not the passive income part. While there is nothing wrong to focus on the end game of passive income, we must not lose focus on the short-mid term goal of building a solid asset base.
3. Identify Your Strategy and Region
The next step is to identify your investment strategy and the region you want to invest in. New Zealand has a diverse property market, with different regions experiencing different levels of growth and demand. Identifying the investment strategy and then the region subsequently is essential to achieving your investment goals.
The strategy you choose will dictate the type of property you invest in and the level of risk you are willing to take. There are three main broad types of property investment strategies: active, passive, and semi-active. Each strategy has its advantages and disadvantages, and it is essential to understand them before deciding which one works best for you.
Active Investor
An active investor is willing to undertake renovation works to force equity growth out of an existing property. This strategy requires a more hands-on approach, as the investor will need to put in the time, effort, and money to renovate and improve the property. Even before that can happen, it requires extensive research work to identify undervalued existing properties that have the potential for improvement. This includes having an eye to spot the equity value you could achieve thru renovations, versus the renovation cost involved. Any cost oversights or overblown renovation costs could quickly eat into your potential profit margin or even wipe out the equity gain envision. Active investors must have a solid understanding of property renovation and building work, as well as the property market. This strategy is commonly known as Buy, Refurbish, Rent, Refinance, Repeat (BRRRR) and is suitable for investors who have the expertise and are willing to take on more significant risks for higher potential returns.
Besides the risks, BRRR can also be a much more cash-intensive strategy as they usually demand a much larger upfront investment due to higher deposit requirements for resale property and payment for renovation works. If you are not living in New Zealand, you would also need to remotely manage a team on the ground to ensure that the renovation work are completed on budget, on time, and to the desired standard that is compliant to drive equity growth. While you may pass on these responsibilities to a 3rd party project manager, do watch out for the cost involved and weigh the eventual profitability of the investment versus the total cost incurred. From successful cases of this strategy in NZ that I have come across, many did it because they can put in lots of their sweat equity; time, energy and even down to physically getting their hands dirty during renovations. Being a Singapore investor not based in NZ all the time, I have found this strategy hard to execute and not worth the risks, the additional cost involved and also the stiff competition against very experienced local investors who uses this strategy when it comes to hunting down a suitable existing property.
Passive Investor
A passive investor is someone who invests in New builds where value has or will be added to the land, and the risk is fully undertaken by developers. Developers will undertake the task to buy suitable land, obtaining building consent from the local council, designing the property and managing the entire complex processes of building the residential development. While developers make a profit margin doing all of these, a significant portion of the risk has been taken away for you as the property investor. Your job as an investor is to identify a region that is right for you and partner with the right developer to start your journey. This strategy requires less involvement from the investor, as the developer handles most of the work. It is also the easiest for an investor to get started from a cash outlay perspective, as most developers only ask for a small 10% deposit to secure a property unit, with the balance only called for when it's completed. In most cases with reputable New Builds developers, your deposits are also protected during the construction phase as they are commonly held in a lawyer's trust account as escrow, until property completion. In other words, your funds are not released to the developer (unlike progressive build payment that is common here in SG) until they deliver the property to you eventually, which if they do not deliver by a certain time on the contract, you may have the right to ask for a refund under a sunset clause.
The investor typically invests in a development project at an early stage, with the possibility of an equity uplift once the development is complete. This could involve investing in off-plan apartments, townhouses, and standalone homes that are earmarked for development.
This strategy is suitable for property investors who are looking for a lower level of risk, a smaller initial cash outlay and who do not want to take an active role in the development process.
Semi-Active Investor
A semi-active investor is quite often a hybrid of the above two, with varying weight-age depending on the actual strategy deployed. The investment process often involves buying a section of land first and building their own investment property. Investors would need to understand various elements even before the land purchase, such as investigating the quality of the land, and identifying any restrictive land covenants, to maximize the development site. This strategy is more cash-intensive and risky than passive investing, even if it's just building one property, as the investor is responsible for the entire development process. This includes getting involved with designing the property, obtaining consents and permits, and managing the construction process with a qualified builder. On the financing side, it is also more limited in terms of the options available and the amount borrow-able, requiring a larger cash outlay from the investor.
This strategy certainly requires a solid understanding of property development and building work, as well as the property market. It is suitable for investors who are looking for a higher level of involvement in the investment process and who are willing to take on more significant risks for higher potential returns. Investors who have the cash and time to deploy can benefit from this strategy as well, as the potential equity uplift and rental yields from a tailored investment property could be substantial. As such, it is not suitable for everyone and requires careful consideration of the individual's investment goals, risk tolerance and expertise in property development.
Identifying Region to invest
Once you have identified your investment strategy, the next step is to identify the region you want to invest in. The region you choose will have a significant impact on the potential returns of your investment.
There are several factors to consider when choosing a region to invest in, including the local property market, demographics, infrastructure, and economic indicators. For example, if you are looking for a long-term investment, you may want to consider areas with a growing population, as this is likely to increase demand for property in the future.
Another factor to consider is the local property market. Each region will have its own property market, with unique characteristics and trends. It is essential to understand the local property market to identify opportunities and potential risks.
Infrastructure is another crucial factor to consider. Areas with good infrastructure, such as public transport, schools, and healthcare facilities, are likely to be more desirable for tenants and buyers, which can lead to higher rental yields and capital growth.
Economic indicators, such as employment rates and GDP growth, are also essential to consider. Areas with strong economic indicators are likely to attract more investment and can lead to higher demand for property.
4. Partner with a Team on Your Investment Journey
Investing in overseas property can be a daunting task, especially if you are new to the market. There are many elements we have to navigate through, such as understanding the region and growth potential, property taxation, the rental market, property management, mortgage financing, bank account opening, FX remittance and down to even identifying a specific deal opportunity. I have written some useful resources regarding these and that may be a great start for you.
To make the most of your investment journey, having the right professionals on your team could mean a whole world of difference. This includes on-the-ground property managers, loan brokers, lawyers, builders, land sourcing, and, most importantly, an experienced person who can walk you through the journey and avoid any potential pitfalls. This will help you navigate the complex world of property investment, providing guidance and support every step of the way. Especially if you are investing in New Zealand for the first time, useful perspectives can go a long way and make a significant impact. Without these, many new investors would it extremely time-consuming and challenging to work through the local rules and administrative process, resulting in some early investors giving up on what could have been a great investment opportunity. Partnering with a team of experts can make all the difference and ensure that your investment journey is as smooth and successful as possible.
5. Work Out Your Numbers
Before investing in property, it is essential to work out your numbers. This means understanding the affordability of the property, the future cash flows, and an exit strategy. Understanding these factors will help you make better investment decisions and ensure that you are investing in the right property that aligns well with your investment goals / plan. Working out the numbers requires an understanding of the costs involved in buying and owning a property, such as taxation, legal fees, ongoing maintenance costs and other expenses. It also requires an understanding of the potential rental income, as well as any potential tax implications.
Here is a quick summary of the essential numbers to keep in check:
Your cash outlay as your investment capital
One-off acquisition costs
Incoming Projected rental income
Ongoing expenses
Risk management reserves
Exits expenses
Working out your numbers is essential to ensuring that you are making a sound investment decision that aligns with your comfort zone of affordability and holding period.
In conclusion, investing in the New Zealand property market can be a great way to build your wealth and secure your financial future. In summary, before you start investing, it is important to, 1) understand your purchase eligibility, 2) Know your roadmap plus identifying your GAP, 3) identify your strategy and region that best suit your plans, 4) partner with a team of professionals and lastly, 5) work out your numbers before making any investment decisions.
By following these five key steps, you could be well on your way to building your portfolio and elevating your financial success.
What’s the best way to find out more? How can i get started?
If you are reading this, you are probably keen to explore and get started on the investment journey in the New Zealand property market.
Perhaps you are unfamiliar with New Zealand or perhaps you already owned property there and looking to scale? Will New Zealand market be a right fit for you and your family? Is this a good time to buy an overseas property, or should you wait and see?
Well, everyone’s situation is different. There is no one size fits all advice. What has worked for someone, may not necessarily work for you.
At Brickzwealth New Zealand, our aim is to bring clarity to your investment decisions with extensive on the ground experience for the overseas market.
Whether you are a first time property investor or a seasoned buyer with a portfolio, we are here to provide an honest and objective view to your investment journey.
We can help you by:
1) Providing Strategic property advice that best fit the outcome you desire
2) Identify & spot investment opportunities that align with your goals
3) Providing access to value-able partners in your investment journey with us
Besides the resources available on this website, the best way to get started is to kick-start a conversation with us today.
Invest differently. Inspire your future.
Ryan Quah
Founder
Brickzwealth New Zealand
