Lynda Moore says property can be a useful part of a long-term wealth-building strategy, but it isn't automatically a good investment just because it is property

I remember going to a property investment seminar years ago.  It’s the only one I’ve ever been to, I was curious, so with my accountant’s hat firmly on, off I went.  The only piece of advice that stuck in my mind, was, buy a property that you could live in, that way you’ll attract tenants who you are more likely to relate to, and, if it all turns to custard you can live in it yourself!

Buying an investment property can feel like a sensible financial decision. It’s also very tightly wrapped up in rules, not just tax, but tenancy rules and expectations as well. So, whilst you have an asset you can see and touch, tenants helping to pay the mortgage, and hopefully a property that increases in value over time. It’s a huge decision to make and all the aspects need to be considered.  Not just financial, but emotional as well. 

For many New Zealanders, property feels like the familiar path to building wealth.  But there is a big difference between owning a property and owning a good investment. I had this discussion with a girlfriend at the weekend. She’s got several investment properties, and over the years is quite clear about the difference between buying a home that you rent, and an investment property. 

Before you get caught up in the excitement of finding the right house, it is worth taking a step back and looking at the bigger picture. The purchase price and mortgage are only part of the story.

The real financial question is: Can you afford to own this property when things don't go exactly to plan?

The mortgage isn't the only cost, and as we have seen over the past few years, the amount you pay for the mortgage can change dramatically. 

It is easy to look at the expected rent and mortgage repayments and think, "The tenant will cover most of it, so we'll be fine."

Unfortunately, it is rarely that simple.

There are rates, insurance, property management costs, maintenance and other expenses to consider. You also need to think about what happens when the property is empty between tenants.

Then there are those lovely surprises that come with owning any property.  The hot water cylinder stops working. The roof needs attention. The carpet needs replacing. Something needs fixing just when you thought you were getting ahead.

These things aren't necessarily signs that you have made a bad investment. They are simply part of owning property.

The mistake is assuming they won't happen, or back in the day when you could get a tax refund on your rental loss, using that for the maintenance fund.

Now, you need a good investment property budget that makes room for these costs before they arrive. We should also do this when we buy a home as well… just a thought. 

This is where many new landlords can get caught out. If every dollar of rental income is already committed to the mortgage and other expenses, there is very little room when something unexpected happens.

Imagine the property is vacant for a few weeks and then needs a $4,000 repair before the next tenant moves in. Suddenly, you have a large bill to deal with and no rental income coming in. That can turn what looked like a great investment into a stressful one very quickly.

Before buying, think about the "what ifs". What if the property is vacant for a month or two? What if interest rates increase? What if a major repair is needed? What if your own financial circumstances change?

You don't need to assume the worst. You just need to make sure you have enough breathing room if things don't go perfectly.

Don't forget the boring stuff. Nobody gets excited about record keeping. But if you are going to become a landlord, getting organised from day one can save you plenty of headaches later.

Keep records of the property's income and expenses and make sure you know what each payment relates to. Keep your invoices, receipts and statements somewhere you can easily find them.

It is much easier to do this as you go than to sit down 12 months later and try to remember what a mysterious bank transaction was for. It is also important to understand that not every cost associated with your property will necessarily be treated the same way for tax purposes.

Property tax rules can be complicated and they can change, so don't rely on something a friend told you about their investment property five years ago. Your property is your investment, and you need to understand how the current rules apply to you.

Please, talk to an independent accountant before you buy.  Google, AI, or your mate at the pub might not have all the tax rules right for your situation. 

It is surprisingly common for people to find the property, fall in love with the idea of owning it, make an offer and then ask their accountant what it means from a tax perspective.

By that point, some of the important decisions have already been made.  Having a conversation before you buy gives you a chance to look at the numbers properly. You can consider the expected rental income, mortgage costs, other expenses, ownership arrangements and potential tax implications.

It also gives you someone to challenge your thinking. This is very important when the excitement is at its height.  We can see the property we want to buy rather than the investment we are actually buying.

Don't let FOMO make the decision! You’ve been to the seminar or listened to the webinar and everyone else is saying YES! You don’t want to feel left out, even though you might be at the ‘maybe’ stage. 

There is a big money psychology element to property investing.

You can become emotionally attached to the idea of becoming a landlord. Perhaps everyone around you seems to be buying property, or you are worried that if you don't buy now, you will miss your chance.

That feeling of "I have to do this now" can make it very difficult to step back and look at the numbers objectively.

Before you commit, ask yourself a simple question:

If this property doesn't perform exactly as I expect, can I still comfortably afford to own it?

If the answer is no, it may not be the right investment for you right now.

There is nothing wrong with walking away from a property that doesn't stack up. Another opportunity will come along. Property can absolutely be a useful part of a long-term wealth-building strategy, but it isn't automatically a good investment just because it is property.

Before you buy, look beyond the mortgage. Budget for the unexpected. Keep good records. Understand the current tax rules and, most importantly, get advice before you sign on the dotted line.

Ask yourself if owning property fits with your own retirement plan.  It’s not the only option, so explore others as well.  You are making a long-term decision; there will be ups and downs over the years that you can’t predict. All you can do is make the decision based on what you know now and then look at the potential risk and reward factors and decide if you can live with them for the next 20 years (or longer). 

The best investment decisions aren't made when you're caught up in the excitement of buying.

They're made when you have the numbers in front of you, you've considered the risks, and you can make the decision with your head as well as your heart.

*Lynda Moore is a Money Mentalist coach and New Zealand’s only certified New Money Story® mentor. Lynda helps you understand why you do the things you do with your money, when we all know we should spend less than we earn. You can contact her here.