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Improve Your Savings Potential

Debbie Roberts on how your property portfolio can give you more options in retirement.

By: Debbie Roberts

1 March 2021

There are approximately 546,000 residential rental properties in NZ1, and approximately 270,000 landlords2. This means that property investors in NZ own an average of two properties each. With average rents at the moment of around $520 per week, you had better hope that you have a mortgage free home and at least two mortgage free rental properties by the time you retire. Or after tax and expenses (rates, insurance, repairs and maintenance, vacancy, property management, etc) you might not have enough cash left over to enable you to do much other than survive.

The problem is, that unless you have an exceptionally high income, it’s not that easy to purchase a home and two or more rental properties any more. Nowadays you have to be strategic.

Lending rules have changed significantly over the past 20 years, and more change will come. Property investing is more about your ability to balance both cashflow and capital gains, than about the actual property now. In other words, these days it’s a game of finance, so you’d better learn the rules.

For example, since you can potentially borrow 80% of the purchase price on a new build, then you might think that this would be a better option than borrowing 60% of the purchase price to buy an existing property. On face value that could make sense, as that ability to leverage would enable you to purchase a higher value of property.

I mean, if you had $150,000 in available cash or equity, with 80% lending you could purchase a property up to the value of $750,000 (if your provable income is high enough), compared to only $375,000 purchase price with 60% lending.

‘The higher the total value of your property portfolio, the more your net worth increases with capital growth’

However, rental returns tend to be higher with existing property rather than new builds. And you also have the added benefit of being able to add value to an existing property (ie through renovation), so an existing property might actually suit your starting financial position better than a new build. What if the new build purchase means that you reach your limit for borrowing capacity? What if the yield from an existing property is high enough to enable you to grow a rental property portfolio (by recycling your deposit and purchasing another property) to a higher total value than that of the new build? Now things start getting interesting, right?

It’s been estimated that approximately 80% of investors own one or two rental properties, so that means that there are some investors who clearly beat the average and grow a rental portfolio that gives them more choices in retirement. How do they do it? It’s not about simply being wealthy to begin with. We’ve helped thousands of

Kiwis to grow their wealth through property investing, regardless of whether they start from a very modest financial position or whether their starting position is what some people’s dreams are made of.

The higher the total value of your property portfolio, the more your net worth increases with capital growth. For example, 10% capital gain on a $750,000 property is $75,000 whereas 10% capital gain on a portfolio of property worth $1,000,000 is $100,000.

So, you can either open your wallet for a savvy salesperson who will be more than happy to sell you the “deal of the century”, or you can take a carefully measured approach to property investing. Balancing both capital growth potential with rental returns so that you can maximise your borrowing capacity to reach your full financial potential.

If you try playing the wrong game for your starting financial position you risk hitting the wall with your lending ability before you achieve your retirement goals.

Don’t sell yourself short by taking the “easy option”, or you might regret it 10 years from now.


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