For most New Zealanders, their largest investment is their home. It’s a special kind of investment – it doubles as the place you live, and it has a strong emotional element. Be careful to separate your emotional ties to your home from your investment objectives. You should think about how much of your net worth is tied up in your home. Would it be wiser to buy a smaller house and spread your money across other investments as well? Check out how your home fits into your retirement plan.
Rental Property Investment
Owning houses rented to individuals can be a profitable investment. Returns from property investment come from rental income, after deducting expenses, and from the increase in the value of property over time.
The key questions to ask yourself are
- How am I going to make money out of this investment? and
- How am I going to take money out of this investment? (particularly if you are looking at an investment in a syndicated property trust investment).
People debate whether property is a better investment than shares. What’s important to remember is that they’re different forms of investment. If well managed both can provide good long-term results. If not, and without the right knowledge and attention, investment in shares and property can result in significant losses.
It’s easy to see losses on the share market because the prices are available almost daily. Losses on property investment are generally not published, so don’t believe anyone who suggests “you can’t go wrong with property investment”. You need to be particularly cautious of ‘leaky building issues’ in investing in homes as well.
We don’t encourage anyone to rush into investment in shares in particular companies or investment in a particular property. Unless you’re prepared to put the time into understanding and managing the many aspects and issues of property investment, then we suggest you leave it to others.
That’s not to say you can’t benefit from property as an investment. There are several different ways in investing in property – directly or indirectly.
If you’re interested in direct property investment, you can manage the day-to-day administration of your rental property yourself, or use a property management company to do it for you. A property management company takes on the tasks of finding tenants, collecting the rent and bond monies, and attending to maintenance issues etc on your behalf. The fees charged for these services are usually a percentage of the rental income.
For an indirect property investment, you can invest in a managed investment fund that invests some of your money in property. This could be by way of ownership of rented buildings or by way of an investment in shares of public companies, which specialise in property ownership.
This is another option that gives you the many advantages of property ownership without having to find the property and do the hands on management yourself. This type of indirect property investment also makes it easier for the average investor to get the benefits of diversification. Also take a look at direct investment in property.