First you should think about what is your Financial Goal.

Financial freedom is probably the dream of most.
The ability to do what you want whenever you want.

Wealth and Financial freedom tend to go hand in hand, the only differing factor is how much each person considers they need to be Wealthy or Financially free.

If you look at any of the World's Richest People (US "Forbes 400 Richest Americans", or Australia's "BRW Rich 200 List"), you will see these people have generated their wealth from a wide variety of businesses and professions, and all invest in real-estate as an important Wealth creation mechanism.
90% of millionaires get there by investing in real-estate.

The attraction with New Zealand property as an investment is the low barrier to entry, favourable and stable exchange rates and the tax system. Property price growth is closely linked to population  growth.  Expected population growth in New Zealand's major cities provides a sound basis for increasing property value. Property prices are also relatively undervalued compared to its trading partners and closest neighbour Australia.

One of the barriers to Overseas investors can be their own perception that they lack the local market knowledge required to achieve good capital gain or rental income. They also often have difficulty finding good professional contacts in New Zealand, such as a qualified mortgage broker, lawyer, accountant or property manager. Working with us puts aside these fears and gets profitable property into your portfolio.

You'd Like To Build Wealth In Real Estate?

What makes real estate stand out as the vehicle of choice for wealth creation?

There are a number of reasons, but four principle ones:

1. Leverage

When Financing a property purchase in NZ, particularly for a house and land package, investors can borrow 80% or 90% of the purchase price. Depending on the location, the lender, and your financial status (i.e. whether you already have other assets or secure  employment), 100% -110 % borrowing is also possible.
 
Whereas borrowing for other investments tends to have much less leverage due to the perceived risks involved.
Asking your bank for money to buy their publicly listed shares in most cases would only get you up to 70% as a margin loan, on listed shares in their very own bank! Yet this same bank would probably lend you 80% or 90% to purchase a well located property.

This is demonstrates to how highly regarded that well chosen and well located real estate is as a secure and solid asset class.


2. A Real Asset - Everybody Needs Somewhere to live

Unlike "paper assets" such as stocks or derivative market instruments (CFD etc), real estate is something real and tangible. It physically exists! Even more importantly everyone needs space and a place to live.

As long as there are people in a given area, there will be demand for real estate.


3. Limited Supply

Unlike most other investments, real estate is finite. While it is possible to build taller buildings with more apartments in them on the same size block of land, there is only so much land, and only so much "well located" land near to public amenities, employment, and transportation. ie because they aren't making any more of it, it has scarcity value!


4. Price Growth

As noted earlier, your "leverage", or ability to borrow 80%, 90% or 100% of the purchase price of a piece of real estate, is only powerful IF your property appreciates in value. If it depreciates... you could find yourself owing more than you originally borrowed. Fortunately it is pretty easy to avoid and comes down to the correct "Real Estate Selection".

Real estate price inflation occurs for a variety of reasons:


a) Because of underlying inflation in the economy

For years, as a function of Country growth, most  economies around the world have been subject to economic inflation. This is the progressive increase in prices for most consumer items, and the corresponding decrease in the value of the nation's currency.

It is not unheard-of for Countries to experience very high inflation. During periods in the 1970's, 1980's and early "90's, many western economies were suffering double-digit inflation, which can also bring with it double digit interest rates.

This century, most western economies have enjoyed very low interest rates and correspondingly low single digit inflation. This may or may not continue. We could be in for higher interest rates and inflation in the future, or possibly a return to deflationary times which we have not seen since the 1930's. We need to be prepared for any and all possibilities. Fortunately, we are not dependant solely upon "economic inflation" for our real estate to appreciate. This is just one factor.


b) State of the Economy and Economic Health of the Nation

Real estate values also appreciate in line with the overall health of a nation's economy, and the wealth of its citizens. If a country is economically successful, has a low unemployment rate, and its citizens enjoy an increasing standard of living, then real estate prices for "in demand" locations will appreciate. This type of market is not only dependent on owner-occupiers for price value appreciation, but will also be helped along by investors seeking to build their nest eggs with their surplus equity and funds. The level of real estate investment in an economy is directly linked to the investor's confidence in their nation's present economic outlook. As with other investments, fear and greed are significant driving forces for investors.


c) Increasing Population

As already noted, one very valuable aspect to real estate, particularly the land component of it, is that we aren't able to make any more of it. If a particular areas population is on the rise, so too will the real estate values, due to the laws of supply and demand which influence the market values for almost every commodity.

Similarly... If there are plans for a new motorway, or a motorway extension, to link an outer suburb to the city centre, then investing in property in that outer suburb BEFORE the motorway is built can be very profitable. In many cases, the land values will increase several years before the completion of the planned works, so the earlier you purchase the better. Such works need not be limited to motorways or transport infrastructure. A new shopping centre, or any other commercial project or work that is likely to enhance the desirability of the area, can be a cause of future capital gain for that area.


d) Limited Supply in an "in demand" area

As already noted, increasing demand for a limited supply of real estate occurs for reasons other than population increase.

Whilst a particular suburb may have been industrial or manufacturing oriented, the factories may have closed down eg that industry may no longer be viable. If the suburb is in a desirable location, perhaps close to the beach or not far from the city centre, with good schools, shops and public transport, a process of gentrification may occur and the suburb may start to revitalise as a "café strip" lifestyle area. This will result in the area becoming more desirable to live in, and will attract more financially well-heeled property owners and tenants! The net result... property value appreciation.


As can been seen from above, the reasons for real estate value appreciation are varied, but the important part is to make use of this appreciation as a powerful wealth creation vehicle.

Primarily it is about leverage.

If you purchase a $350K house and land package and get 90% finance, you are effectively only investing $35K to purchase that asset.

It's historically proven that average growth rates for real estate located in the metropolitan areas is 10 % per year, ie  to double in value every 10 years. This is a compound rate of increase.

To be conservative , assume a 5% per annum rate of appreciation. At the end of the first year, your $350K house and land package is now worth $367K. You only invested $35K of your own funds, therefore you have effectively realised a 48% cash-on-cash gain within the first 12mths. In the bank, that same $35k might have made a 5% return. The property return is  ten times better!
 
Next, Your property is now worth $367K, with another 5% appreciation in value: your asset is now worth $385k; year 3 $404k; year 4 $425k; year 5 $446k; year 6 $468k; year 7 $491k; year 8 $516k... you will note it's increasing in value by more than the original $17K per annum which we had after the first year because the value of your property is compounding! The increase in value, given the same 5% rate of appreciation, will become greater and greater each year.

This is the power of owning real estate.
In reality property values generally do not grow in a linear fashion. Several years may go by with very little or no capital growth, and then suddenly we may experience several years of 10% or 15% per annum or more in capital gains. This is the cyclical nature of the property market at work, but  it is not unreasonable to expect that well chosen property will double in value in every ten year period.

The hardest part about building wealth in real estate is making your first purchase. This is the purchase where you will have to find that 10% or 20% deposit to fund it. But once you are "On the Ladder" and own your own little piece of appreciating real estate, you can use the increase in value from your original purchase to make subsequent purchases without having to save up to fund the 10% or 20% deposit in cash for each future purchase. You can simply borrow against the increase in value of your original property to fund the deposit required to purchase your subsequent properties.

As time passes, you are creating a snowball effect, and your wealth will continue to multiply, given stable economic conditions and well selected property in the right location.

So how do you determine what is a "well selected property" and what is the "right location"?

Selecting The Right Investment Property
What is the best type of property to buy?

1. Limited Supply of Land

This is an important factor when deciding on the type of property to buy.
It is a good practice to invest in property where at least 30% of the value of the purchase price is made up of the land component.
If you buy a 2 bedroom apartment in a 15 storey building comprising 50 separate apartments built on a 1200 sq mtr block of land, how much of that land do you actually own? Only about 24 sq metres.

In the right location, the value of the land will continue to increase, but this comprises only a small percentage of the cost of your investment. The building itself will decrease in value as it gets older and approaches the end of it's lifespan.

Further, if you are buying in an area that has already been approved for high rise development by your local council, what is to stop a developer from buying up those ageing townhouses next door, knocking them down and putting up more 15 storey apartment buildings in it's place? This is a common occurrence, and the net result is that the developer will be diluting the supply of apartments, hence diminishing one of the key ingredients that you require for capital growth of your property: limited supply.

That does not mean that you should only focus on house and land packages. Our society is changing, more people are remaining single and less people are having children. There are more single households now in New Zealand than at any other time in recorded history. Hence, the demand for townhouses or smaller villa units in good locations for busy professionals, who don't have the time or inclination to weed the garden on the weekend, is on the increase.

To add to that, many baby boomers are, or will be, looking to downsize their present houses. Their children have left home  and the 4 bedroom home in the suburbs, on the large block of land, may not be what they wish to retire with. Many prefer to downsize to a smaller unit which requires less upkeep, and is within walking distance of shops, restaurants and amenities. They can therefore  sell their big suburban house, which provides them with a larger cash sum for their lifestyle in retirement.

So demographics should play a part in your selection criteria for the type of property that is likely to be most "in demand" in the future in your target investment area.

2. Select An Area of Stable or Increasing Population

It is important to ensure that the town or area that you are looking at investing in is not decreasing in population, or is not prone to a decrease in population.

Some smaller cities and towns can be very dependent on a particular industry. A significant employer in a town such as a large car manufacturing plant, can have a huge influence on the town and on employment provided by smaller companies that support it. If that car plant were to close down, that town's economic prospects would be severely damaged, and property values may drop. This is an example of an area that could be prone to a drop in population given the departure of a main employer in that town.


3. Select An Area With Good Schools, Shops, Transportation, and Close to Public Amenities

Real estate is about "Location, location, location".

Location is an important aspect of property selection criteria, but by no means the sole factor. A decent land component, as well as a stable or increasing population, are also necessary to ensure limited supply and maximise your potential for capital growth.

But location is important. So what makes for a good location?

Once you've chosen a town or city that is supported by a diverse economic and industrial base, you then need to pick a specific area within that town to purchase your property.

What do people need and what makes an area desirable?

The top four, in no particular order, are:

a) Shops and markets

b) Schools

c) Transportation: public transport close by, and a quick route to the city by car

d) Public facilities such as a post office, libraries and parkland

Followed by "lifestyle" attributes such as:

e) Restaurants

f) Café strips

g) Close to the beach or mountains

Investing in an area which includes all of the top 4, and some or all of the last three attributes, will increase the probability of the best capital growth prospects and demand for your property.


4. Affordability for the Renter

What is the median household income in the area? What are the average rents for the type of properties that you are considering?

A good rule of thumb to use is to ensure that the rent that you plan to charge for your property does not exceed 40% of the average monthly household income for that area. Thirty percent is a good benchmark.

In typical property cycles, a property price boom will often slow down, and prices may even fall, when the average monthly mortgage repayments on property in a given area exceed 40% of the average household income for that area (assuming an 80% loan to value ratio mortgage). Conversely, once households are back down to only spending 30% of their monthly income to service a standard mortgage, the market will tend to cycle up again.

Obviously this rule of thumb will vary depending on the country and the market, as different countries have different tax laws which affect the affordability of a home mortgage (i.e. in some countries the interest on an owner occupier mortgage is a tax deduction, in New Zealand and Australia it is only a deduction on investment property).

Purchasing a prestige or high end property in a middle class or high end suburb may not be the best investment. In boom times there may well be plenty of well-heeled prospective tenants for your property, but in a recession when many of these loose their jobs, and businesses are closing down under high interest rates, you may struggle for tenants or sales.

It is also not a good idea to target the very cheap or run down property below the standard of the neighbourhood. Whilst this may be a good way to pick up something at little more than land value, your cashflow may suffer with long vacancy periods in between renters and with a more significant maintenance and repair bill on the home.

Your best strategy is to target an average property in an average neighbourhood, that is affordable to the average resident in that area (the rent you plan to charge does not exceed 40% of the average income for the area, with 30% being the better target).


5. Affordability for YOU, the investor

This is not the purchase price of the property, but rather the amount of income it will bring in versus what it is going to cost you to hold it, in the form of your mortgage repayments, insurance, maintenance, management fees, council rates etc.

There are many different methodologies for creating wealth with real estate.

Some investors believe in a quick cash model where they use their negotiating skills to buy a property at a discount and resell quickly at a mark-up. Yet others will buy a run down property, renovate it to create capital appreciation, and then resell it at a profit. Then there are those that insist on positive cashflow,  whose focus is on the passive income that a portfolio of properties can generate, and these investors use creative techniques such as vendor financing wraps, or rent to own lease-options.
 
The methodology and focus of this article is about creating wealth from the capital gain and price appreciation of a property portfolio. Whilst the price appreciation is the focus, cashflow is also very important.

If you buy a property that is costing you $100 p/mth to hold, after your rental income has offset your holding expenses, you have a negative cashflow situation and this will limit the number of properties that you can buy on this basis. You're getting a tax deduction against your income on the negative gearing, but you're still losing money (cash- although you may be gaining on capital appreciation).

Sooner or later, whilst you will still build up enough equity to fund the purchase of further properties for your portfolio, you may not have the spare cashflow to sustain the holding cost. The other disadvantage to a negative cashflow property is that if you lose your employment or main source of income, your investments will then financially bleed you to death as opposed to feeding you.

Ideally, you want to select a property that meets the previously mentioned criteria of:

a) Good land content;

b) An area of increasing population;

c) Close to schools, shops, transportation and public amenities;

d) Affordable for the average resident in the area; and

e) Where your cashflow is either break-even or a little positive.

Whilst it is not too difficult to find properties that match criteria a) thru d), getting that to mesh in with a break even or positive cashflow property as specified in criteria e) can prove to be a challenge in present markets.

If you can only find negative cashflow properties in your chosen market, and if you are not prepared or unable to contemplate investing in other towns or areas, then don't let the negative cashflow stop you investing. You can still become very wealthy over time purchasing negative cashflow properties providing they increase in value over the years. It's just that your ability to hold any significant number of such properties in your investment portfolio will be limited by your disposable cashflow from your other sources of income.

You will also expose yourself to greater risk in the event that you lose your business, employment, or primary source of income, but many people have generated substantial wealth over time with negative geared properties, and providing you are diligent in your selection criteria, and our national economy doesn't suffer any major disaster, then building wealth with real estate is every bit as possible for you too!


6. Get Educated First

Ideally you should educate yourself about property investing, what to look for and evaluate, BEFORE taking the plunge. The difference between some knowledge and little or no knowledge could be in the $10's of thousands of dollars to you on your first purchase.

You also need to research your target area thoroughly so that you have a good idea of what a particular property should sell for just by looking at it from the outside. This will put you in a position to identify value once you see it, and will also insure you against paying above market price for a given property.

Summary - Building Wealth with Real Estate

To summarise creating wealth with real estate.

Real Estate is a great asset class for building wealth for 4 principle reasons:

1. It provides better leverage than other asset classes, with the  ability to typically borrow at least 80% of the purchase price on house and land packages. 110% lends are possible in some circumstances.

2. Real Estate is a real asset - it physically exists, and everybody needs somewhere to live. Wherever there are people, there will be demand for real estate.

3. There is a limited supply of land. There is no more land being created! If you select property with a land component in an area of increasing population and demand, the laws of supply and demand will work in your favour to increase the value of your investment.

4. Price Inflation. Given a healthy national economy, no deflation, an increasing population, or at least increasing demand for property in your chosen investment area, then your real estate investment is liable to increase in value over time. You may have no control over the state of the economy, but you can build the probabilities in your favour by selecting the right type of property in the right area.

Investment Property Selection

1. Solid Land Component
Aim for an investment where at least 30% of the purchase price is comprised of the land component. House and land, villa units, townhouses, and low rise apartment buildings can all fit the bill. Land is the only limited resource, and that means value for you. If you purchase a unit in a high rise, not only will the value of the building depreciate over time, but what is to stop developers erecting more high-rises and diluting the supply in your market?

2. Stable or Increasing Population
Invest in an area with an increasing, or at least stable, population base. Avoid towns which are dependent on a single industry for the bulk of their employment. If the industry collapses, so will the tenants.

3. Transport, Shops and Public Amenities
Invest in an area close to schools, shops, public transport and good public amenities such as a post office, library and parks. These are the basic factors that make an area desirable to live in, and will help to ensure continued demand for property in that area over the long term.

4. Average Property Affordable For The Average Worker
Select a median property in a median area, one which is affordable for the average couple. High end real estate is prone to vacancy and busts in recessionary times. Low end real estate is less desirable, can attract a lower quality of tenant, and cost you more in maintenance. Aim for a property that will rent for no more than 40% of the average household income for that area, preferably 30% of the household income.

5. Affordability for you, the investor
Try to invest in property that at least pays for itself, that is to say that the rental income will at least cover your mortgage repayments, insurance, maintenance, management fees, local rates and taxes. If this is not possible in your area, consider alternative areas. Otherwise you can still build wealth with negative geared property. It is just a little more risky and the size of the portfolio that you hold will be limited by your ability to service the negative cashflow with your other sources of income.

6. Education First
Educate yourself about property investing first, before making that first investment. Buy a few books. The difference between some knowledge and little or no knowledge could be in the $10's of thousands of dollars to you on your first purchase.

Also research and make yourself very familiar with the properties in your target area before making a purchase. This will help you to spot bargains and will insure you against paying above market value for a property.


Lastly, but most importantly, take action on what you have just read.

Time is Money when investing in real estate.