in your best interests
As you’ve no doubt spotted, buying your first home in Wellington is becoming harder and harder to achieve. So why not buy an investment property in the provinces instead?
They’re cheap (well, a lot cheaper than in Wellington) and you get a tenant who covers most of your mortgage payments. Couldn’t be more straightforward!
Well, maybe...However, there are a few things that need to be added into the mix before you leap into purchasing your first rental.
Let’s use Upper Hutt as an example. The average house price in July 2017 in Upper Hutt was $448,000 (or thereabouts). Across Wellington the average house price in the same period was $747,000.
1.Deposits - You Need 40% for an Investment Property
That’s the cold, hard truth at this point in time. If we look at the average property in Upper Hutt as our example you would need a deposit of $179,000 to meet the 40% deposit criteria. How many first home buyers have a deposit of $179k?!...Not many I can tell you. Realistically the deposit for a first homebuyer is more likely to be $40-80k, with a few stretching just over $100k. Achieving a whopping deposit of $179k when you are just starting out is not common at all.
If you had managed to save up $179k (which would be impressive!) this would potentially allow you to buy an owner-occupied property in Wellington (where you probably work, live, socialise etc) up to a value of $895,000.
So the question would be - would you prefer a rental property valued at $448k or your own home valued at $895k?...
If you are buying a rental property you also need to consider that any KiwiSaver funds you have saved can’t be accessed for this purpose. The vast majority of first home buyers we see have a significant portion of their deposit in KiwiSaver funds, so achieving a $179k deposit excluding this part is as rare as hens teeth.
3.The Next Step
Assuming you do decide to purchase a rental property (using your $179k cash deposit) the question is then “where to from here?”.
If you ultimately want to purchase your own home to live in you will need to save up another 20% deposit to achieve this and/or rely on capital growth to create some equity.
Building equity on a $448k rental property in Upper Hutt could be a long process. However, if you had opted for the $895k home in Wellington, achieving capital growth of $179k (which would be enough equity to purchase the UH rental) is far more realistic.
You would still need to see 20% growth, but it’s worth bearing in mind we’ve seen 14% growth in the last 12 months across the city. Sure, this won’t continue forever, but capital growth on a more expensive property, in a more desirable area will always outstrip cheaper properties in less desirable areas.
So, if you see articles suggesting a rental property outside the main centres is the way to go, just remember not all is as straightforward as it initially looks!
If you've got plans, questions or just want to say g'day then click the button below now!
Buying your first home or a new property is an exciting time. Banks are advertising great rates. Choosing a bank couldn't be easier. Right?!...
Unfortunately, it’s not always as simple as it looks. For a lot of buyers, especially first home buyers, your first property may be purchased with a deposit less than 20% of the purchase price.
If borrowing more than 80% the advertised ‘special’ rates you see in the press may not apply to you. It is more likely that you will be offered the bank’s ‘standard’ rates (that are seldom advertised) and you may be subject to a Low Equity Fee or Low Equity Margin which can add a further 0.75%pa to your interest rates.
For those that have managed to save up a 20% deposit (or more) borrowing can be a lot less expensive. However, be careful not to immediately plump for the bank with the best advertised rate. Sure, it may look like a good rate but the very best rates are never advertised. These are the rates that an experienced mortgage broker sees daily, but the public don’t.
Engaging a mortgage broker gives you an advantage over the normal customer that deals direct with a bank. We know which banks to approach based on your circumstances, and we know what rates are achievable as we negotiate these each and every week.
As an example, one of the main banks is currently offering rates around 0.5%pa lower than their ‘special’ rates for the right deals. These aren’t advertised, so without a broker's’ insight knowledge you would never be aware of this.
The key to ensuring you get the best deal is to shop around - and that is where your mortgage broker can really add value. Our services are completely free, so make sure you contact us today to discuss your plans.
NOT SURE WHAT CONDITIONS TO INCLUDE?
This is always a tough one to answer, but ultimately it comes down to your own preference and appetite for risk. You can effectively put anything you want as a condition, and you don’t have to proceed with the purchase if any of your conditions are not met satisfactorily. However, the more conditions you add in the less attractive your offer will be to the vendor, and the lower your chance of a successful purchase.
Common conditions used with an initial offer are as follows:
Registered Valuers Report (RVR)
Building Inspection - unless you are a qualified builder, or can bring one along with you, this would be a report I would highly recommend. Saving a few hundred dollars by not getting a report done may turn out to be a very expensive mistake if you buy a property that has ‘issues’ not immediately obvious to the untrained eye.
A Registered Valuer’s Report (RVR) is often a requirement of the lender, rather than a condition initiated by a purchaser. If you are borrowing over 80% of the property value then this will almost certainly be a condition of finance, and without the valuation report they will not approve funding.
Finance - if you don’t have finance approved by your bank then you need to include this clause. Buying a property without putting finance in place first is a very, very bad idea!...
Title check - your solicitor will do this for you. This is another ‘must have’. Making sure you are actually buying the land/property that you think you are is imperative!
LIM Report - a lot of people are unsure of the need for this. The LIM report covers off any relevant information the council has on a property. This includes consents, notices or orders affecting the land/property. Still not convinced? I recently had a client looking to purchase a property but thankfully discovered in the LIM that the building was never given its final Code of Compliance Certificate as the framework hadn’t been signed off by the council. A building inspection wouldn’t have picked this up and remedial work was estimated at $50k...They were very pleased they got the LIM!...
It is important that the wording of each of conditions states that the results be satisfactory to you, then only you can decide if the condition has been satisfied.
You may also have a house to sell as a condition of sale - this needs to be carefully worded in the conditions. This sort of condition usually includes a 'cash out' or 'escape' clause. These clauses allow the vendor to keep marketing the house until you go unconditional. If they get another offer before this happens the vendor gives you a specified amount of time (as per the clause) to go unconditional (usually around 3 working days) or your offer will be considered cancelled.
Another condition that can be used is 'due diligence'. This clause covers all the standard conditions and more, and can be used when you have unusual or sensitive conditions to cover off. Real estate agents are never keen on buyers with this clause as it is effectively a ‘get-out’ card and allows potential buyers to walk away from an offer at any point. However, from a buyer's’ perspective it provides considerable protection.
If you’re unsure which conditions to include then it’s best to discuss this with your solicitor. They can advise which clauses are necessary and which offer you the required level of protection.
Brian MacLean looks into tips, ideas and strategies you can use to get ahead financially..