Buying as an investment
If you already own a home and are now looking to purchase a property purely for investment reasons, your motivation — and the way you should analyse the purchase — is completely different. The emotional benefits of home ownership don’t apply here. You’re making a business decision, and business decisions need to be evaluated on their financial merit and risk.
Before running the numbers, consider the nature of property as an investment:
Property is an active investment. Unlike a term deposit or an index fund you can “set and forget,” owning a rental requires time: tenant selection, maintenance, inspections, compliance, and occasional issues.
Tenancy law is strict. Being a landlord is more like running a small business than holding a passive asset. You must comply with Healthy Homes standards, notice periods, bond lodgement, and various obligations under the Residential Tenancies Act.
All investments carry risk. Vacancy, repairs, regulation changes, interest rate shifts, and adverse market cycles all affect returns.
Returns must be analysed, not assumed. Rental properties should be evaluated on cashflow and total return (capital gain + cashflow – expenses).
Below is an example illustrating why, in my personal situation, residential investment property has not stacked up financially.
A worked example: Blockhouse Bay investment property
Let’s take a hypothetical investment property in Blockhouse Bay:
Value: $1,000,000
Market rent: $800 per week (very generous for this price point)
Assumed full occupancy (also generous)
Annual rent: $41,600
After subtracting rates, insurance and basic maintenance, you might have around $34,800 left. I’ve assumed:
No property manager (which would normally cost around 7% of rent),
No vacancy,
A modest maintenance allowance of $2,000 per year (about $20k every decade for repainting, carpet, and general upkeep).
These assumptions already lean in favour of the investment performing well.
Rent
$41,600
Fully occupied year-round in perpetuity
Rates
-$3,300
Approximate rateable valuation for a $1M property
Insurance
-$1,500
Approx. landlord insurance
Maintenance and Fund
-$2,000
Allocating budget for short and long term maintenance (e.g. painting, roof, etc)
Income from property
$34,800
Rent - Property Expenses
So you have your property rented for $41,600, and less rates, insurance and maintenance, you will have about $34,800 left over. Some big assumptions are being made around the property always being fully let. I am also NOT including the cost of a property manager which is about 7% of your rent, on the basis you've got good tenants and a solid property. I am including a 2k maintenance fund, which is about 20K over 10 years, to account for painting weatherboard every 10 years, carpets, etc.
We then need to account for the financing costs. Even if you are buying with cash outright - there is an opportunity cost, but lets assume a 20% LVR, you will be borrowing $800,000 from the bank, and providing a deposit of $200,000. Because this is an investment property, you need to consider the opportunity cost of losing interest on your deposit AND the principal repayments made during the mortgage period, even if it is a different rate to the borrowing interest rate. Let's go through that:
800K @ 6.5% borrowed
$52,000
Interest on borrowed amount
200K @ 6% invested
$12,000
Lost interest to withdraw from a term investment
Total financing costs
$64,000
Based on the above, you will spend $64,000 in interest alone during the first year, either paying interest on mortgage, or losing out on having the money invested somewhere else. To break even on financing costs, the blended interest rate would have to be 3.48% and stay there.
There is an element here of rising rents but do consider rising expenses and the overall rental market as well, rent is determined based on the market, not on your own costs.
In summary, reviewing the income and expenses above, you would be making a yearly loss on your investment property almost in perpetuity unless interest rates were at or below 3.48% - which I think is a pretty bold bet.
Buying for capital gain
If the cashflow doesn’t stack up, what about capital gain? It’s true that many Aucklanders have built substantial wealth through long-term capital growth. Over several decades, most Auckland property has increased in value significantly.
But capital gain is not guaranteed. It involves speculation — educated speculation, but speculation nonetheless. You must understand the risk that:
the market can fall,
growth periods can stall for many years,
and regulatory or economic changes can affect values.
If you choose to invest for capital gain, do so with your eyes open and an understanding of both the upside and the downside.
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