Thinking of buying an investment property in Dunedin?
Owning an investment property in Dunedin (and in New Zealand) is popular. Lots of New Zealanders own rental property. This article gives some background for people new to property investment and in particular new to investing in property in Dunedin.
Why invest in property
Investment property has two potential returns. One is in the form of rent paid by tenants and the other is from the property increasing in value – called capital gain. Property investment is not very liquid becuase in order to get our money out we need to sell the property or increase the mortgage. This is not always easy or ideal as there are extra sales costs such as a valuation and real estate agent fees and it may not be a good time to sell. Most people buy investment properties to make a long-term profit as price of property rises. Everyone has that family member who bought their home in 1976 for $15,000 and then sold it recently for $850,000. These types of returns are very attractive.
In the short term, however, there may be little or no profit from rent after expenses like mortgage, insurance, rates, maintenance, and property management fees are taken into account. Also, if we sell within two years of buying, we will also have to pay income tax on the sale.
Banks usually make it harder to borrow money for a rental property than for your own home. Some lenders may have lower lending limits (loan to value ratio - LVR) for investment properties but fortunately in recent times those restrictions have been largely lifted and with interest rates at an all time low it couldn’t be a better time to invest in property.
Why choose Dunedin as the spot for your investment?
One strategy for investment is looking for undervalued assets with growth potential. Dunedin is a location that has traditionally been underpriced compared to much of country so it offers affordable property investment opportunities and comparatively high yields. The yield of a property investment can be calculated by taking the ‘Annual rental income (i.e. weekly x 52) and divide it by the property value then multiplying it by 100. For example, a recent property we manage was purchased for $540,000 and then we rented it at $580 per week ($30,160 annually) and so the yield was 5.6%.
In the 1800s, Dunedin was the financial centre for New Zealand due to the gold rush in central Otago. It has some of the oldest establishments in the country including the University of Otago. This is a key driver of property investment opportunity has there is a large student population based in Dunedin. Student investment present a strong opportunity for capital gain coupled with high yield.
Renting to students is quite different from a conventional rentals. Student flats (the name for student rental properties) are traditionally rented on a per room basis, and signed up for a 12-month lease, from January 1 to December 31 each year. The majority of students form groups and begin looking in July and August for flats for the following year. The key to student flats is the location - generally students do not want to be more than a 10 to 15-minute walk from the university.
What is the current market doing?
During the COVID era the Dunedin property market has continued to boom reaching new levels each month. The numbers reported for Otago has been strong but that does not show the whole picture. Whilst Dunedin has been growing, COVID has negatively impacted the Queenstown Lakes area. If we pull out the Dunedin data it looks even more positive.
This has been driven by fundamental increase in demand for properties. Dunedin has had an influx of ex-pats returning home and Dunedin is seen as a spot that is a) affordable, b) offers job opportunities. Fortunately, the University has remained open (except during lockdown) for students and is expected to do so in 2021. In addition, Dunedin has a major hospital rebuild planned for 2022 and so there are expected shortages in trade requirements, homes, and more during that time.
How Can Dunedin Property Management Help?
Dunedin Property Management is an independent property management company and we don’t offer real estate sales. That means we offer unbias advice. This is important. If the property management company is linked to the sales company then it is in both of their interests to provide inflated rental information. This is good for the sales agent but not good for the buyer. If you’d like an independent rental appraisal then click the button below.