Help yourself: how to invest in bricks and mortar

The returns from property can be excellent, but they take more effort than simply placing your money in the bank or with a fund manager.

However, there are many ways in which you can help yourself:

* Treat your investment as a business - whether you buy one or 10 properties. This means you need a business plan so you know where you are going and how you are going to get there.

* You need to know how to organise finance and how to structure your debt, which is usually your largest expense.

A common mistake many people make is to borrow to buy a new home and then rent out their previous house. In this situation the debt is taken out to buy the new home, not a rental property, and is therefore not tax deductible.

This mistake has ruined many investments from the beginning, where other structures could have been used to make sure interest costs can be claimed against tax.

* Interest rates are a key consideration. Right now rates are low, which makes it easier to buy a rental property. However you need to plan for the possibility of higher rates in the future.

A 2 per cent rise in interest rates on a $200,000 mortgage would cost an extra $4000 a year.

Many new investors do not allow for this contingency and are forced to sell the property because they cannot afford the higher interest rates and cannot pass on the cost by raising the rent - the tenants would simply move to another rental property.

Fixed-term mortgages can cost a little more but they can also help provide a level of certainty for mortgage payments and give you time to react to changing situations.

* When buying property you need to think about the tenant you are likely to get. Are they young or old, families or groups, high or low income, students, working or unemployed? Most importantly, does the property match their requirements?

Remember that you won't be living there yourself so you shouldn't think about what you want in a home. Think about what the tenant wants in a home.

* Know how to judge a property by its potential financial returns. Investigate yourself what the rent should be rather than relying on estimates. Check out the to-let columns and rental statistics from Residential Property Investor magazine.

* Allow 4 per cent of the rent for maintenance if it is a brick and tile building with aluminium joinery, but 10 per cent if it is an old villa. If the area tends to attract a rough element of the community, allow 10 per cent of rental income for vacancies; otherwise allow 4 per cent.

* Compare the yields of different properties by dividing the annual rent by the purchase price and multiplying by 100. If it isn't showing at least a 7.5 per cent yield then it is unlikely to be a good buy and you will be relying on capital gains to make the investment work.

* Look for ways to add value to the property. If you buy it on a 5 per cent yield but can enhance the property to get a 10 per cent yield then it is probably a good buy.

* Take your time when looking to purchase a property as this is a long-term investment. The good thing about a slow market is that you don't need to rush. Use this benefit wisely.

* Think hard about whether you are willing to deal with tenants on an ongoing basis. Most tenants are very good, but not all landlords have the right temperament to deal effectively with tenants. If you fit into this category, allocate 7.5 per cent of your rental income to provide for a property manager.

* Have the property inspected by a builder or building inspector so there are no nasty surprises that eliminate any future investment gain.

* Depreciation is a key issue. It can turn a loss-making property into an income-earning property.

Depreciation is an allowance from Inland Revenue which takes account of the fact that income-producing assets wear out and lose value over time. It applies to most assets in any business, not just property investment.

The advantage of depreciation is that it reduces your taxable income without you having to pay any actual money. This is how a property that produces a positive cashflow can still make a book loss.

However, depreciation comes with a catch: most properties tend to increase in value over time, rather than decreasing.

If you sell the property for more than you paid for it, you have to pay the depreciation refund you received back to the IRD. This is called depreciation clawback and is quite fair and reasonable.

Because of clawback, depreciation refunds you receive should be thought of as an interest-free loan that you will have to repay if you sell at a profit.

There are ways you can more accurately value your property, allowing you to claim higher depreciation refunds while minimising the amount of clawback you have to pay.

Your property consists of three elements: the land, the building and the chattels/fitout. Land cannot be depreciated, the building is depreciated at 4 per cent a year but the chattels and fitout can be depreciated at between 7.5 per cent and 50 per cent.

It is usually wise to employ a specialised valuer to provide a report on the value of your chattels and fitout. This maximises your depreciation claim and when you sell the property you may be able to sell the chattels and fitout at book value, thereby reducing the amount of clawback.

* If you are going to manage the property yourself, buy a copy of the Residential Tenancies Act. This document sets out all the rights and obligations of you as a landlord and your tenant. It is a dry but essential read.

* Have good office systems so you keep up to date with rental payments, expenses, book-keeping etc.

* Seek impartial and current information from sources such as Residential Property Investor magazine and property investment associations.

There are 17 property investment associations through New Zealand and they provide a wonderful resource that will help you be professional and profitable, while saving time and effort.

It is incredible what you can learn from meeting other property investors.

Even if you don't own an investment property yet, joining an association can provide you with invaluable information on how to take the best first step.

There is also a website for property investors at Property Investor

This has advice for investors and items such as standard forms.