Capital gains are the profit you make when the value of your investment goes up.  For example, if you purchase a property for $300,000 and its market value later increases to $350,000, you have made a capital gain of $50,000 (although don’t forget it is only a capital gain on paper until you actually sell the property and get the money).

Unlike some other countries, New Zealand does not currently have a capital gains tax if you’re not a speculator (i.e. not buying and selling property regularly as a business), so property may offer the opportunity to achieve an attractive tax free capital appreciation.  

Strategies for achieving capital gains

Buying well
Property investors who focus on capital gain often say they make money when they buy, not when they sell.  Buying the right property is very important for this strategy.  Examples of ‘buying well’ could include:

• Buying ‘against the cycle’ – i.e. when demand is low and vendors may be willing to accept a lower price for a quick, uncomplicated sale.
• Spotting social, economic and other trends which may influence property values – for example, identifying up-and-coming areas where demand for housing is rising.
• Staying abreast of property values in particular areas, so you can spot potential bargains or at least well-priced opportunities.

Property improvements
Some investors look for properties where they can make improvements which increase the value.  This could include:

• Modernising or tidying up a property that needs renovation, to make it more desirable. Generally you get the best return on investment by updating bathrooms and kitchens.
• Increasing the usage intensity – for example, by adding bedrooms or dividing up existing rooms to turn a three-bedroom house into a four- or five-bedroom house, which could increase both the property’s value and the rent you could charge if it is done well.
• Development – for example, if planning rules allow, subdividing a large section and adding another dwelling onto the site (which gives you another property without having to buy another section), or dividing a single dwelling into two flats, which could increase your rental income.

Holding property long-term
While property values do fluctuate in New Zealand, over the long term property values have generally performed well ahead of inflation.  While buying the right property is always important, it is less so for investors who look to buy and hold long-term as they depend on the overall property market continuing to rise.  By holding property for the long-term, they are also less concerned about the short-term fluctuations that can occur where property prices in some areas can remain static or decline for a period.

This material is for information purposes only. You should seek professional advice related to your individual circumstances. While The National Bank has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, The National Bank does not accept any responsibility or liability arising from your use of this information. Our lending criteria, terms, conditions and fees apply.