Crunching the numbers on rentals in Taupō:
What ‘Return on Investment’ really looks like.
The economic climate has certainly been a difficult one to navigate for any sector and property investment is no different. Coming off a surge in property values post-covid; record low interest rates that have since surged upwards and remained that way for some time; continued regulatory changes for residential investment properties and; a geopolitical landscape that is really all over the show, there is a whole lot to consider at present.
It’s a common theme that rental rates don’t typically tend to keep up with the property price cycle, in that a 10% lift in property prices wont necessarily follow with a 10% increase in rent prices. That can make choosing an investment that gives an acceptable return quite tricky, particularly when we look at how the cost of borrowing for that investment plays a significant
The official cash rate has been held relatively high in recent years, as the Reserve Bank attempts to tackle the sticky high inflationary environment the country has been witnessing.
Some investors may have been caught in higher interest rates over the past couple of years, but it has been encouraging to see the major banks start to drop those rates in recent weeks. Those higher interest rates of late, would have had an impact on the return on investment that some residential investors would have experienced.
“A residential investment is likely to be a long-term strategy for kiwis, typically held as a nest egg for retirement years.”
However, a residential investment is likely to be a long-term strategy for kiwis, typically held as a nest egg for retirement years. With that in mind, it’s a worthwhile exercise to look at how interest rate fluctuations affect the return on investment (ROI), but also how the longer term strategy will likely realise a significant improvement on those returns when capital gains are taken into account.
How different price brackets can impact your return
It’s important to consider the price bracket when purchasing rental investment, as the returns definitely reduce as the price point increases, as we mentioned earlier, rents do not necessarily correlate with property prices. You may find a four bedroom, two bathroom home in a particular suburb in Taupō may realise a sales value of $950,000 and a rental of $850 per week as outlined in the table below, but you may equally find a property in another suburb of lesser quality that realises a sales price of $750,000 at a rental of not much less at $780 per week. The difference in returns will be 3.8% vs 5.4% before expenses – a significant difference.
Talk to the experts
Ben Westerman - Director
Westerman Property Solutions
All of this needs to be taken subjectively, as all properties are different. All properties have varying costs and improvements required over time, but it’s worthwhile being aware of how the current climate needs to be considered within the life of the investment and the capital improvement that’s occurred in the value. It’s also really important to understand the varying price
points in the current market and how rents are reflected in those varying price brackets.
At Westerman, we’re passionate about getting the best value for our owners’ investment, so
if you’re considering property investment, feel free to give one of our friendly team a call to guide you through the process of getting most bang for your buck.
When looking at those expenses, we start to see a picture of the indicative returns that are possible for an investment in the current market in Taupo. This is calculated by the following:
Return On Investment = (rental income – expenses – interest)/Property value x 100
= ($44,200-$8,145-$45,524)/$950,000 x 100
= -1%
Return in five years - Long term view
But if you take a longer term view and account for the improvements in property value over time it paints a very different picture. In our region we see an average uplift of 104% in the average sales price value, in this case $97,000 per annum (*Source: REINZ).
If we plug the longer term property value into the same ROI equation, we see an improvement in return to 9.2%.