Buying an investment property

Investment advisers tell you never to put all your eggs in one basket. But there are many good reasons why a homeowner with a bit of spare cash would be wise to consider the residential property market over other forms of investment.

Kieran Trass, a property analyst at Hybrid Property Consulting, prefers residential property investment over commercial property due to a bad experience in the late 1980s. While working in the finance industry, he saw many businesses downsize and move out "to operate from a post office box".

"Worse still, they were placed in receivership, meaning the lease they had in place on their premises became worthless to their landlord!" he says. "This saw many vacant commercial properties and bought financial hardship for many commercial property investors while they had to support a mortgage with no income from their vacant properties."

Trass recalls that it was almost standard practice to offer new tenants "a 12-month rent holiday" on commercial properties, which meant landlords forfeited rent for the first 12 months to entice a tenant to sign a long-term lease. "Not many investors can afford 12 months of mortgage payments with no rental income," he says.

Independent investment analyst Rozanna Wozniak says residential property has some clear advantages over other forms of investment.

"There is validity in the argument that investors should try to get some diversification in their investments. However, this can be difficult to achieve unless you are very wealthy or want to invest in a managed fund."

Wozniak says investing in property has tax benefits that many other investments don't. Expenses, including interest and depreciation, can be offset against your earnings to reduce your overall tax bill.

Commercial property can be more expensive than residential property, so it's easier to get started buying residential property. And for many people buying commercial property is too daunting. People tend to understand residential property, since they are already renting or own their home.

One of the major advantages of investing in property is that you don't need significant amounts of cash or savings to purchase. If you have equity in the home you are living in, then you may not even need an additional deposit. And it's relatively easy to borrow money to invest in a term deposit. The lending criteria are also less strict for residential property than commercial, or shares and deposit requirements are lower.

Returns vary worldwide, but New Zealand's current levels are very sound when compared with those of other countries. Auckland's returns compare favourably with Sydney, where you can expect between 3 percent and 5 percent, or Singapore, where you're looking at 2 percent to 4 percent. Trass says you can easily get 6 percent in Auckland.

Deborah Kelland, of Kellands Real Estate, says inner-city apartments offer a particularly good return of up to 11 percent, which is attractive to overseas investors.

Wozniak says it's worth noting that capital gains on property are taxed in many countries, but not New Zealand. "This probably helps explain why so many New Zealanders continue to invest in residential property and why our holdings of property relative to shares are higher than in many other countries," she adds.

Next week, Vicki Holder consults the experts on what property to buy and how to go about it.