Wanting To Buy Your First Investment Property This Year? Here’s How To Get Started.
If you’re considering taking your first step into property investment, 2025 presents a unique opportunity that shouldn’t be overlooked.
In this week's update, I’ll check out why the NZ property market is ripe for investment and how you can navigate this exciting journey.
Why Invest in Property Now?
1. Market Recovery and Growth Potential
The New Zealand property market is showing signs of recovery after a difficult period. CoreLogic’s latest Home Value Index (HVI) reports that property values decreased by only 0.1% in January 2025. This small change has been consistent for five months, suggesting the market may be stabilising. The national median property value is now $803,819. While this is 17.5% lower than the peak prices seen in late 2021 and early 2022, it’s important to note that it’s still 16.3% higher than pre-COVID levels in March 2020. This information indicates that despite recent ups and downs, the market has grown over the long term.
2. Favourable Economic Conditions
The Reserve Bank of New Zealand has been proactive in stimulating economic growth. With interest rates on the decline, borrowing costs for property investors are becoming more attractive. This creates a prime environment for those looking to finance their first investment property.
3. Rental Market Strength
With housing shortages persisting in major cities, the rental market remains robust. This ensures a steady stream of potential tenants for your investment property, reducing vacancy risks and potentially providing strong rental yields.
Navigating Recent Laws and Regulations
As a responsible mortgage adviser, it’s important to highlight recent changes in property investment regulations:
1. Tax Deductibility Changes
From 1 April 2025, property investors will be able to claim 100% of the interest incurred on loans for residential rental properties as a tax deduction. This marks the end of the phased approach to reintroducing interest deductibility.
The repeal of these rules is expected to significantly improve cash flow for many property investors, as they will be able to offset their full interest costs against rental income when calculating their tax obligations.
2. Bright-line Test
The bright-line test, which determines tax on property sales, has undergone substantial changes, simplifying the rules and potentially reducing tax liability for property investors.
From 1 July 2024, the bright-line period was reduced to 2 years for all residential properties, regardless of when they were purchased. This means any residential property sold within two years of its purchase date will be subject to tax on any profit made from the sale, unless an exclusion applies.
These changes offer more flexibility for property investors and could potentially increase returns on investment by reducing the holding period required to avoid bright-line taxation.
3. Healthy Homes Standards
By July 1, 2025, all private rental properties must comply with the Healthy Homes Standards, regardless of when the tenancy began. These standards were introduced to ensure rental properties are warm, dry, and safe for tenants. The Healthy Homes Standards are a crucial aspect of property investment that landlords need to be well-versed in, so it’s worth checking out the requirements here before you purchase a property as a rental. The Healthy Homes Standards represent a significant shift in the New Zealand rental market. While they present challenges, they also offer opportunities for property investors to improve their assets and potentially increase returns.
Steps to Buying Your First Investment Property
Leveraging Home Equity for Your Investment Property
Home equity is the difference between your home’s current market value and the amount you still owe on your mortgage. As you pay down your mortgage and as property values increase, your equity grows. One powerful strategy for entering the investment property market is utilising the equity in your existing home.
It’s important to note that you can’t use all of the equity from your home.? The bank will usually want you to leave at least 20% of the property value so it's essential to work with a Mortgage Adviser to explore the best options for leveraging your equity effectively and structuring it correctly to take advantage of the tax breaks.
Deposit Requirements for Rental Properties
When purchasing a rental property, the banks generally require a significant deposit. While the exact deposit amount may vary, you will need at least 30% of the property's purchase price.? However, if you are buying a new build to rent out, you will need a minimum deposit of 20% of the property's purchase price. There are specific requirements when funding new builds so it's best to have a chat through this option with an experienced Mortgage Adviser.
Loan Options
The most common way to turn equity in your home into “cash” for a deposit on a rental property, is by setting up a revolving credit facility against your home. A revolving credit facility is like a large overdraft that gives you the flexibility to move quickly on purchasing a rental property as the “cash” for the deposit is available to draw upon immediately. The second part of this is to make sure you are pre-approved for the balance of the purchase price before you go shopping. This may come from a different lender in order to spread your risk across different banks i.e not having the rental property cross securitised with your home. Let's look at an example to simplify things:
??Your home is worth $1,000,000.
??You already have a mortgage of $550,000.
??Your equity in your home is $450,000.
If all the figures stack up in terms of serviceability, the bank will most likely allow you to borrow up to 80% of your home's value, which in this example would be $800,000 (80% of $1,000,000). Given that you already owe $550,000 on the mortgage you will have what we call “usable equity” of $250,000 to use to fund the deposit on a rental property ($800,000 - $550,000 = $250,000).
As you will require a deposit of at least 30% on the new rental, you could possibly purchase something for up to $700,000 as the deposit required will be around $245,000.
This would also leave you with a bit of a buffer to pay for things like, building inspections, legal fees or costs to meet the healthy homes standards required on the property before you rent it out.
And all of this of course assumes that you can afford to actually service this level of borrowing. That's where working closely with your Mortgage Adviser can help you work out the best strategy for buying a rental property and make sure you are set up correctly from the start so you can keep growing your property portfolio.
Your Next Steps
CoreLogic’s chief property economist, Kelvin Davidson, notes that while any turning point for house prices won’t be sudden or strong, the current conditions present good opportunities for finance-approved buyers. This underscores the importance of being well-prepared and informed as you enter the market.
So feel free to reach out to discuss your investment goals and let's create a tailored strategy for your success!
Dallas
?? 027 218 8795