Jeremy Tauri: Research before you purchase

If you want to make some money quickly, your best bet is probably to buy a property where you can add value.

I saw, on the back of my local paper, an advertisement from a real estate agency looking to entice local investors to buy apartments in Auckland.

I can understand why this would appeal if you live in a part of the country that's had single digit percentage growth in property prices while Auckland's market increased 13 per cent last year alone.

But it's important to approach the decision calmly.

If you're thinking about property investment, it helps to start off with an assessment of what you hope to achieve. Do you want cashflow or capital gains? Are you hoping to make some money in the short term, or do you want something to help you in retirement?

If you want cashflow, you'll need to look for cheaper properties. Apartments are virtually the only properties in Auckland that have a hope of generating more rental return than they'll cost to own if you're buying now because rent increases have not kept pace at all with price rises.

But there are lots of opportunities in regional NZ. If you live in a smaller centre, there may be benefits to owning a property locally that you can check on as you need to.

The downside to cashflow investing is that -- usually -- you get fewer capital gains. Cheaper places generally don't increase in value as fast or as much as the more expensive areas. Is that a tradeoff you're willing to make?

If you want to make some money quickly, your best bet is probably to buy a property where you can add value. That could be somewhere you can renovate or subdivide. This comes with a big warning, though -- the IRD will want to tax you when you a sell a property if you bought it with the intention of sale. And then sometimes, after the tax, effort and finance the return might not be as great as you'd expected, you'll need to do your research and sums on how much the property's able to realise.

Most property investors in New Zealand are of the buy-and-hold persuasion. They add to their portfolios over a number of years. Over time, rental increases improve the rental return and cashflow from those investments and price increases boost the equity in their properties. Sometimes they use that equity to buy more houses.

It's easy to get caught up in the hype of a market that's doing well but the worst investment decisions are made when people buy at the peak of the market and sell when it drops. If you're thinking about investing, make sure you do your homework and talk to some impartial advisers.

Jeremy Tauri is an associate at Plus Chartered Accountants.