The Principles of Property Investing
The basic principle is that property values and rents increase over the years, while your debt stays the same (or, ideally, reduces). So you are building up an asset base that is worth considerably more than you originally paid.
If you are borrowing a large amount to buy a rental property, chances are that, in the early years, the rental income will not totally cover the outgoings, such as your mortgage payment, house insurance, council rates and maintenance costs. Therefore you will need to fund the shortfall from your personal cashflow.
However, the good news is that any losses plus the expenses incurred in managing the property may be able to be offset against your tax. So, in effect, you have the tenant and the tax department helping to pay off your capital-appreciating asset. And that, in a nutshell, is why property investment is so popular in New Zealand.
If the value of your own home goes up and the mortgage on it stays constant (or reduces), your equity, – or ‘net worth’ – increases. The bank allows you to borrow against that equity to fund 100% of the purchase price of a rental property.
Then, if the value of your own home and the rental property goes up and the mortgages on them stay constant (or reduce), your equity has increased again, and you can use that equity to buy a second rental property…. and so on.