Where in Tauranga to invest?

[Denzil]

Partner and I are looking to buy our first investment property in Tauranga. Primarily to build rental income, but capital gain is important for funding future properties.

Our budget is around $600k, stretching to $700k if we have to. I was focusing on Papamoa because we've lived there before. However I don't know if that is the best place to 'invest' with yields only being around 4.5% on a 600k house.

All advice is appreciated.

[bob76]

You'll only get 450-480 per week for a 3 bedroom in Papamoa... Brookfield or Judea being closer to the city will have better yield.. and capital gains, no more land available there, but plenty of land to build on out Papamoa way.. in the next 5-8 years they are planning 40,000 new houses.

[Rosco]

Hi Denzil,

If your aim is to build rental income, does the kind of property you mention above achieve that?

If you have a personal home loan (most people do), then you would be borrowing 100% to buy the rental. Then rental income won't cover all the costs, and you will be running at a loss on the rental.

If interest rates go up at some point, then this is likely to increase costs more than any rent increases, making the rental more negative.

If you have paid of your personal home or very close to it, and then you see yourself paying off rental debt over the next 5 years, then that could work better.

Ross

[Denzil]

Hi Denzil,

If your aim is to build rental income, does the kind of property you mention above achieve that?

If you have a personal home loan (most people do), then you would be borrowing 100% to buy the rental. Then rental income won't cover all the costs, and you will be running at a loss on the rental.

If interest rates go up at some point, then this is likely to increase costs more than any rent increases, making the rental more negative.

If you have paid of your personal home or very close to it, and then you see yourself paying off rental debt over the next 5 years, then that could work better.

Ross

Hi Ross, thanks for the reply and giving me more to think about.

This is our first property purchase so feel free to correct me.

There are a couple of variables we are considering.

1) My partner and I are still early 20's with good professional careers ahead of us. We expect our incomes to increase fairly rapidly over the next 5 years. We are quite conscious about lifestyle creep and actively avoid it whenever possible.

2) We have about $200k deposit to put down, which equates to about 30% of the $600k. We calculate on a 20yr loan we have to top it up by about $600 whilst tenanted.

3) Capital gains are important however not critical. Once our incomes increase further, I want to roll the equity from our first property to purchase our second rental.

Is there other parts of the North Island you would recommend we look at for better yields? In an ideal world we would buy a property in the $300-400k range, pay it off within 5 years whilst tenanted and then look for another to purchase.

Denzil

[Denzil]

You'll only get 450-480 per week for a 3 bedroom in Papamoa... Brookfield or Judea being closer to the city will have better yield.. and capital gains, no more land available there, but plenty of land to build on out Papamoa way.. in the next 5-8 years they are planning 40,000 new houses.

Thanks for the reply Bob.

Based on your comment and what Ross has said I will look at other areas in Tauranga. I think we were falling into the trap of seeing it as "our home" rather than a investment property and focusing on value for money. We do however want to ensure we avoid areas in Tauranga that are difficult to find tenants in, or have any sort of gang affiliation (that's what some locals told me).

I am looking into the Brookfield and Judea areas you suggested. I am unable to post links, but there were a few properties on TradeMe that I would have appreciated getting an opinion on. I have included the addresses below on the off-chance you could take a look, however I am definitely not expecting you to.


151 Otumoetai - Brookfield

244A Waihi Road - Judea


Thank you very much, it's a bit of a minefield out there when you don't know what to look for!

[Rosco]

Hi Denzil,

Where do you live?

Are you renting?

Have you looked at buying a personal home with income? ie two houses on one section etc

This could be a good option for you too

Ross

[Denzil]

Hi Denzil,

Where do you live?

Are you renting?

Have you looked at buying a personal home with income? ie two houses on one section etc

This could be a good option for you too

Ross

Hi Ross,

I live in Auckland but my partner lives in Tauranga.

We are both currently renting.

We wouldn't consider buying a personal home in Auckland, but my partner would consider living in the 'rental' property we purchase in Tauranga and renting out the other rooms to help pay off the mortgage. We are both at the start of our careers and moving around on grad rotations and such.

Could you please clarify what you mean by two houses on one section? Would that be similar to purchasing two granny flats and renting one out whilst living in the other? Or purchasing a larger land area and building a second home?

I would be quite happy if we could get a $300k property with 5-6% yield. We could pay that off within two or three years if we set our minds to it. Would also open the option to purchase another similar property within 3-5 years.

I am trying to wrap my head around the benefits of paying a larger price (eg $600k) and purchasing in a growing area that has a better change of increasing in capital value over the next 10 years. Downside is we can't purchase anything for the next 5 years at least with the larger mortgage repayments.

It is very tricky looking outside in, and the numbers are big.

[Nick G]

We just sold a rental in Tauranga, I think mid 4's. The population is growing rapidly there and I think it is a good place to invest for the long term. You seem to be good savers and interest rates are low so if you keep that up you have very low risk. Te Puke and Katikati are satellite towns that are now functioning like suburbs. They could be an option also. I'm from Te Puke so if you want to know about it shoot me a PM :-)

We also have a dual income rental for sale in Rotorua for just over $300K, just as an example to consider. Historically not the same growth as the rest of the BOP but it's cashflow positive.

Other areas I like right now are satellite areas around Wellington and Dunedin. You'll get better yields down south while Wellington offers a nice blend of size, probable growth and yield. Yields are dropping in Wellington but that's the same everywhere.

Personally I think Christchurch is going to be seen as undervalued very soon. The property market there is weird with the supply/demand equation in flux so yields don't look great, but in time that should fall in line with other main cities surely.

[Denzil]

We just sold a rental in Tauranga, I think mid 4's. The population is growing rapidly there and I think it is a good place to invest for the long term. You seem to be good savers and interest rates are low so if you keep that up you have very low risk. Te Puke and Katikati are satellite towns that are now functioning like suburbs. They could be an option also. I'm from Te Puke so if you want to know about it shoot me a PM :-)

We also have a dual income rental for sale in Rotorua for just over $300K, just as an example to consider. Historically not the same growth as the rest of the BOP but it's cashflow positive.

Other areas I like right now are satellite areas around Wellington and Dunedin. You'll get better yields down south while Wellington offers a nice blend of size, probable growth and yield. Yields are dropping in Wellington but that's the same everywhere.

Personally I think Christchurch is going to be seen as undervalued very soon. The property market there is weird with the supply/demand equation in flux so yields don't look great, but in time that should fall in line with other main cities surely.

Hi Nick,

We agree with your view on Tauranga being good for a long term investment. My partner is a great saver and I've learned a little from her. We are fairly risk averse, although with 20 years of working life ahead of us, we can probably take a few larger risks that we wouldn't consider later in life.

I'm not overly confident on Rotorua, although the house prices look good.

When you consider properties in the South Island, do you often have a good knowledge of the area's or is it more of a ballpark figure? My concern is purchasing something without ever having seen it. I know people do it, I just don't know if I could.

Also is the best way to gauge rental pricing in an area to simply go on TradeMe and look at what similar houses are renting in that area? It almost seems too straightforward.

Thank you for the suggestions!

[Layered Dip]

Hi Denzil,

We are building a 3 bedroom 2 bathroom Brick and tile house in Papamoa with Golden Homes.
The house will be complete around Feb/March next year. Price range will be around 550-600k. PM me if you are interested, I can send you the floor plan etc.

cheers,

[Don't believe the Hype]

Hi Ross, thanks for the reply and giving me more to think about.

This is our first property purchase so feel free to correct me.

There are a couple of variables we are considering.

1) My partner and I are still early 20's with good professional careers ahead of us. We expect our incomes to increase fairly rapidly over the next 5 years. We are quite conscious about lifestyle creep and actively avoid it whenever possible.

2) We have about $200k deposit to put down, which equates to about 30% of the $600k. We calculate on a 20yr loan we have to top it up by about $600 whilst tenanted.

3) Capital gains are important however not critical. Once our incomes increase further, I want to roll the equity from our first property to purchase our second rental.

Is there other parts of the North Island you would recommend we look at for better yields? In an ideal world we would buy a property in the $300-400k range, pay it off within 5 years whilst tenanted and then look for another to purchase.

Denzil

couple of thoughts -

1) If you expect your income to increase you may want to talk to your accountant about how to make the interest component of your planned property portfolio tax effective.

2) Your order of priority in your investing is rental income before gain - if this is truly your priority then stay focused on the income buy in a location that has strong economic fundamentals don't be fooled by dying towns with super high yields.

3) consider multiple housed for your budget 3x$200k houses or 2x$300k houses - some will argue higher cost of maintaining and rates etc but it also provides diversification in that your cashflow impact of one being vacant is lower and you tend to get a better yield at the lower end of the market.

4) wherever you choose to invest - get a great property manager that you can work with... They will be your eyes and ears on the ground in your chosen location (potential future purchases or emerging issues) and the protector of your investment

5) if you're going to buy in a location far from you're home location you need to get some scale - no point buying one property in a location... Scale will help you be more important to buth your property manager and local selling agents (who will help you get better and better deals as they start to recognize you as a real buyer)