A good property can still be a bad investment: What NZ investors need to know
A property can be brand new, beautifully presented, in a desirable suburb and easy to rent - and still be a poor investment.
That might sound strange.
After all, when you're looking at an investment property, it's natural to ask whether the property itself is good.
Is it well built?
Is the location good?
Will tenants want to live there?
Does it have the features people are looking for?
These are all important questions, but there is a bigger question that is often overlooked:
Does the property make sense as an investment?
A property can be a great home but a mediocre investment; it can have a strong rental yield but limited capital growth; it can be in a popular suburb but have characteristics that make it difficult to sell later.
For property investors in New Zealand, understanding this difference is one of the most important parts of making a good investment decision.
What makes a good investment property?
There is no single feature that makes a property a good investment.
It's not simply the purchase price, the rental yield, the number of bedrooms or even the suburb. A good investment property is one where the income, growth potential, risk and long-term demand make sense relative to the price you're paying.
That's an important distinction.
Investors can easily get caught focusing on one attractive number or feature while overlooking the bigger picture.
For example, a property might have a 6% gross rental yield. On paper, that looks attractive, but what if the property has higher ongoing costs, limited demand and weaker long-term growth prospects?
Another property might have a lower rental yield but stronger tenant demand, better resale appeal and a more compelling capital growth profile.
Which is the better investment?
You can't answer that from yield alone.
1. The numbers need to make sense
The first place to start when assessing an investment property is the cashflow. Ask questions like:
What rent is realistically achievable?
What will the mortgage cost?
What are the rates, insurance, property management and maintenance costs?
And what happens to the cashflow if interest rates or other costs change?
These questions matter because gross rental yield isn't the same as actual cashflow.
Gross yield is useful for comparing properties, but it only looks at the relationship between rental income and the purchase price. It doesn't tell you what the property will actually cost you to own.
Two properties can have a similar rental yield while producing very different cashflow once the full costs of ownership are considered.
That doesn't mean an investment needs to be positively geared to be good. It means investors should understand what they're buying and what it will cost them to hold.
The question isn't simply:
“What's the yield?”
It's:
“What return am I getting for the money I've invested?”
2. A good investment needs a reason to grow
Rental income is only one part of a property investment.
For many long-term investors, capital growth is an equally important, and often much larger, part of the overall return.
But capital growth shouldn't simply be assumed because a property is in a particular suburb or because prices have risen in the past.
Investors should ask why the property is likely to become more valuable over time. Relevant questions about the location include:
Is the population growing?
Is employment growing?
Is infrastructure improving?
Is the area attracting new businesses and amenities?
Is there strong underlying demand for housing?
Or, is a large amount of new housing being built that could compete with the property in the future? These factors can influence the long-term performance of an investment property.
A property doesn't become a good investment simply because prices have gone up recently. The more important question is whether there are fundamentals that support future demand.
3. Don't confuse a good-looking property with a good investment
This is where things can get particularly subjective.
A property might have a beautiful kitchen, high-end appliances, a large living area and all the features you'd want in your own home, but that doesn't necessarily make it a better investment.
Investors aren't buying a property simply to enjoy it - they're buying an asset that needs to perform.
The extra $50,000 spent on a larger floor plan might make a property more appealing to an owner-occupier. But does it generate enough additional rent to justify the extra cost?
Does it make the property easier to sell?
Does it improve its long-term demand?
Or are you simply paying more for something that looks better?
This is why it's important to separate property quality from investment quality. They overlap, but they aren't identical.
4. Location matters - but not in the way you might think
“Location, location, location” is probably the most repeated piece of property advice in New Zealand, or globally for that matter.
But the definition of a good location isn't as clear as you might be led to beleive.
It isn't necessarily the most expensive suburb, nor is it isn't necessarily the suburb that's receiving the most attention. And it certainly doesn't mean every property within a desirable suburb will make a good investment.
The more useful question is:
Does this particular location have the characteristics that support long-term demand?
That could include access to employment, transport, schools, amenities and other services. It also means looking at the immediate surroundings.
Two properties can be in the same suburb but have very different investment prospects because of their street, neighbouring properties, outlook, access or surrounding development.
The suburb is only part of the location story.
5. Think about who will want to buy it later
One of the biggest mistakes investors can make is thinking only about the immediate purchase.
You also need to think about the exit because eventually, you may want to sell the property.
So ask:
Who is likely to want to buy this property from me in 10+ years?
If the answer is a large and diverse group of buyers, that's a positive. If the property appeals to a very narrow group of people, it may be more difficult to sell - particularly if market conditions aren't favourable.
This is sometimes referred to as liquidity, and it is an important part of investment risk.
A property doesn't have to be universally appealing, but, investors should think carefully about whether there is likely to be sufficient demand when they eventually need to sell.
6. Understand the risks before you buy
Every investment property comes with some level of risk, but the objective isn't to find a property with no risk because that's unrealistic.
The objective is to understand the risks you're taking and decide whether the potential return justifies them.
Some risks are obvious; others are much easier to overlook.
Flooding and other natural hazards, insurance availability, building quality, oversupply, weak tenant demand and poor resale appeal can all affect the performance of an investment property.
Some of these risks might have little impact today but become increasingly important over the life of a 10, 15 or 20-year investment.
That's why due diligence matters. A property can look excellent in a listing and still have issues that aren't immediately obvious.
So, what actually makes a good property investment?
There isn't a magic formula.
The strongest investment properties tend to make sense across several areas at the same time:
Cashflow: The income and ongoing costs are understood and sustainable
Capital growth: There are credible fundamentals supporting future demand and value growth
Location: The property is positioned in an area with strong underlying demand
Risk: The major risks have been identified and are appropriate for the expected return
Resale: There is likely to be a broad enough pool of future buyers
None of these factors should be looked at in isolation.
A high-yield property with poor long-term prospects isn't necessarily a good investment. A beautiful property in an excellent suburb isn't necessarily a good investment if you've paid too much. And a cheap property isn't necessarily good value.
The investment only makes sense when the different pieces work together.
The question investors should really be asking
When you're looking at an investment property, it's easy to ask:
“Is this a good property?”
Instead, try asking:
“Is this a good investment at this price?”
That one change can completely alter the way you assess a property because you stop looking only at the kitchen, the floor area or the suburb, and you start looking at the relationship between price, income, growth, risk and future demand.
And that's ultimately what property investment is about.
The bottom line
Before buying your next investment property, don't stop at asking whether it's a good property.
Ask whether the price, cashflow, capital growth potential, location, risk and future demand all stack up.
Because the most expensive mistake in property isn't necessarily buying a bad property. It can be buying a perfectly good property that simply isn't a good investment.
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Common questions about capital growth:
What makes a good investment property in New Zealand?
A good investment property needs to make sense across several areas, including cashflow, capital growth potential, location, risk and future resale demand. No single factor makes a property a good investment. The key is how these factors work together relative to the price you pay.
Is a high rental yield always a good investment?
No. A high rental yield can be attractive, but it doesn't necessarily mean a property is a good investment. Investors should also consider ongoing costs, capital growth potential, tenant demand, location and the risks associated with the property.
What should I look for when buying an investment property?
Start by looking at the property's expected rental income and costs, then consider its location, potential for capital growth, key investment risks and future resale appeal. Looking at all of these factors together gives you a much clearer picture than focusing on purchase price or rental yield alone.
Can a property be a good home but a bad investment?
Yes. A property can be a great home but still be a poor investment if the price is too high relative to its rental income, growth potential or risk. Investment decisions should be based on how the property is likely to perform as an asset, rather than simply whether you would personally want to live there.
