Rental charge rule
Question from Tony updated on 23rd June 2017:
I'm a complete property investment novice - with a freehold house. I know the wisest thing to do is to invest with the equity I have. I am considering dipping my toe into the shark pool of the Auckland apartment market. I've read plenty, looked on plenty of sales and rental website sites to gauge pricing, and played around with a few property calculators.
Is it the “basic” rule of thumb that a house/apartment which is purchased for say $650,000 would be rented for approximately $650? This “basic” rule seems to make the apartment fit into the market - but as a capital gain investment rather than a positive cash flow one.
Our expert Kris Pedersen responded:
I wouldn’t say that there is a basic rule like that as such. Yields differ widely depending on the location as well as the purchase price. But you will find that as prices get higher their weekly rent equivalent as per your example doesn’t keep up in most cases.
You want to decide, based on your circumstances, whether you want to target properties more for cash flow or for capital gain. Look to become an expert on what particular properties are going for: it should be pretty easy to find data on what similar apartments are selling or renting for.
It’s worth noting that if you are looking for yield then smaller apartments tend to have a better return. However, in many cases you can’t get the same level of leverage as you can with larger apartments because banks won’t lend to the same LVR on them.
Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.krispedersen.co.nz