# Do the maths

Most people need help with a home loan before they buy an investment property, which is a big financial commitment. So before you take the plunge, make sure the numbers work for you.

The best way to get an idea of whether you can afford to invest in property is by talking to one of our Investment Property Lending Specialists, who can come to you to talk through your lending options.

Borrowing to invest

#### Borrowing to invest

Borrowing to invest can sometimes be called leveraging. You’re leveraging the assets you currently have to invest in something larger than you’d otherwise be able to purchase.

If you’ve already built up equity in your home, you may be surprised at how much equity you actually have and the amount you might be able to borrow for an investment property.

First you’ll want to find out how much equity you have in your current property or properties. Have a look at Lin's story below to give you an idea of how you can use equity on your current home to purchase an investment property.

##### Lin's story

Lin has a home worth \$800,000, and owes \$250,000 on her home loan. This means she has \$550,000 in equity – equity is the portion of your property you’ve paid for. When Lin first put down a deposit for her home, the deposit was her equity in the home, but as she’s paid off more her equity has grown.

Lin decided to use \$180,000 from her equity to purchase an investment property for \$450,000, using this equity instead of needing to save for a deposit.

After her purchase Lin now has two homes worth a total of \$1,250,000. She has borrowed a total of \$700,000.

Remember that your equity is based on what your property is worth now, which is probably different to what you paid for it, and that your lending will still need to meet the LVR restrictions and Westpac's home loan lending criteria.

Returns

### Getting returns from investment property

There are two types of returns to consider when choosing your property – yield from rental income and capital gain. Some properties might give you a balance of both returns, some properties could give you good rental yield with modest capital gains in the future, while others are the opposite.

#### Capital gains

Capital gains are earned when you sell a property for more than what you paid for it. Rules around capital gains and potential tax tend to be complicated so we recommend you always speak to your tax adviser.

Different suburbs will provide different levels of return and some may have better capital gain opportunities than others. View our Property Investor Report to see which suburbs have the best rental yield and capital gains.

Buying in an area that you think will have above average capital gains could be a good way to maximise your investment – but there’s no guarantee. Although house prices in New Zealand have historically trended upwards, there’s no certainty that you’ll make capital gains from selling your property, especially if something unexpected happens and you need to sell quickly.

Keep an eye on the market, do lots of research and make sure you have a team of people you can trust to help you.

#### Investigating rental prices and yield

One of the key steps in doing the maths is figuring out how much rent you could earn from renting out your property, and there are a number of resources that can help.

• our Property Investor Report looks at which suburbs provide top rental yields and capital gains, throughout New Zealand for the last 12 months
• check out what similar places are renting for on sites like TradeMe or with rental agencies
• ask a rental agency to do an appraisal for you. If the property’s currently for sale the agent will often have an appraisal prepared, but it might be worth getting an appraisal done by a different, impartial agency.
##### Once you know the rent, work out your yield

Remember, yield is the return you receive from renting out your investment property.

A potential way to try to increase your yield could be to find a property to which you can make minor, low cost, improvements – making it more appealing to tenants so they may be willing to pay higher rent. These improvements could be things like painting, converting a room into another bedroom, adding a carport, a deck or an outdoor living area.

The example below shows how yield from your investment property can be calculated using our Property Investment Calculator.

This calculator provides indicative estimates (with some rounding used), and should be treated as a guide only. It does not take into account your personal financial situation or goals and does not constitute a quotation or offer by Westpac in relation to any product or service. The calculations are intended to be illustrative only, are based on the accuracy of information entered and incorporate a number of assumptions to do this (please see list of “calculation assumptions” above for details). No reliance should be placed on these numbers. We recommend you seek independent legal, financial and /or tax advice.

Expenses

### Expenses to consider

Keep in mind that investing in property is about making money – so you need to weigh up whether your rental income is likely to outweigh all your different types of expenses. Good budgeting as well as giving yourself room for the unexpected is key to making sure you’re at least breaking even (unless you’re intentionally negatively gearing). It’s important to remember that investing in property is usually a long-term game, so you’re unlikely to break even in year one.

Here are some of the expenses you may encounter:

#### Potential expenses

##### Purchase and set-up expenses
Interest costs on your loan Lawyers' fees
Property management (if you choose not to manage the property yourself) - generally ranging from 8-10% of the rental income. Accountant or tax adviser fees
Insurance for the property that covers extra risks of owning a rental property LIM report
Insurance for you - such as life and income protection insurance, depending on your personal situation Building inspection report
Repairs and maintenance Engineer's report
Council rates Valuation fee
Body corporate expenses, if applicable Your share of rates pre-paid by current owners
Ground rent, if your property is leasehold Purchase of whiteware, if you're planning on supplying this
Ongoing professional service fees (accountant, tax adviser etc.) Any initial repairs or upgrades you want to do
Cleaning between tenants
Gardening and lawns
Water bills

One last tip: calculate, calculate, calculate. Try some different expense scenarios to see how costs can impact on meeting your overall objectives.

Here are a few examples:

• what impact would an increase in interest rates have?
• what if there were major repairs required?
• how would a fall in house valuation affect you?

#### Tax considerations

There are tax implications associated with owning a residential investment property. Income generated from rent is taxable, which means that you'll need to complete a tax return each year. Gains from the sale of a property may also sometimes be taxed. As tax rules change often and can be complex, it's essential to seek regular guidance on your personal circumstances from your independent tax adviser or accountant. You can also find a tax guide on rental income on the IRD website.

We strongly advise that you always speak with an independent tax adviser before you invest in residential property.

If your property is negatively geared you could receive a tax benefit for the year, if you claim the tax loss in your return and have other income against which to set your loss.

Gearing

### What is gearing?

When you borrow money to invest in residential property you may find that your loan repayments and other expenses are higher than your rental income. In this situation you would be “negatively geared”. Because of this, you may have tax losses, which you could use to reduce the tax you pay on your other taxable income.

If your rental income is higher than your expenses, then you will be “positively geared”. Rent is an income source, and therefore it’s taxable.

There are benefits to both of these approaches, but your individual circumstances and the property you’re looking to purchase will dictate which is the better strategy for you to adopt. Make sure you consult an independent tax adviser, accountant or financial planner to understand all the specific tax considerations for your situation before you start investing in residential property.