Understanding investment property returns

Do you want steady cash flow or long-term growth? The key to successful property investment is understanding how it could earn you money. This guide can help you decide whether to focus on rental income or capital gains and find a property that matches your goals.

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Why having a returns strategy is important

Your returns strategy is how you plan to make money from your investment – also known as generating a return. This can come from rent paid by tenants, the property increasing in value, or both. 

Having a returns strategy is important because it may determine what area and type of property you invest in.




Rental income vs capital gains

Here’s a quick breakdown of the two ways an investment property could generate returns.


Rental income

Rental income (or ‘yield’) is all about earning steady cashflow from rent. Yield is the annual rental income expressed as a percentage of the property's value. 

To calculate the yield, you divide the annual rental income by the property's value and then multiply by 100.

Annual rental income ÷ property’s value × 100 = yield %

For example: 

  • If a house is valued at $700,000 and it generates a weekly rent of $500
  • The annual rental income would be $26,000 ($500 x 52 weeks)
  • The yield is approximately 3.7%.

Investors who focus on yield look for properties with high rental returns compared to the price they paid. The goal is strong, consistent income, so that the property covers its costs and ideally makes a profit. 


Capital gains

Capital gains happen when your property’s value increases over time. It’s simply the profit you make from selling the property for more than you paid for it over a period. For example, if you purchased a property in 2010 for $500,000, and sold it in 2025 for $700,000, the capital gain would be $200,000 ($700,000 - $500,000). 

Investors who focus on capital gains buy in areas that have the potential to increase in value, or they might look for a ‘do-up’ to renovate and sell. 

Investors focused on capital gains might be less concerned about rental income covering all costs, as their main profit comes when they sell for a higher price. 

Capital gains often take years to materialise. But historically, New Zealand’s property market has seen strong growth over time. So, this could potentially be a smart strategy if you’re planning to hold onto your property for the long term. 

It’s also important to know that there may be tax implications when it comes to capital gains, read on to find out more about tax considerations and the bright-line test.

Choosing the right returns strategy

Start by thinking about what you want from your investment. Are you building a nest egg for your retirement? Or do you want an extra stream of income to give you more day-to-day flexibility? Some investors aim for both – they want a decent rental yield now, while waiting for capital gains later. Others focus entirely on one strategy. 

By defining your investment goals, you can decide which type of returns to prioritise. Then, it’s about finding the right property to match. 

Certain property types might align better with different strategies. For instance, terraced units, apartments, or properties in high-demand rental areas might be more suitable if the focus is on generating rental income. On the other hand, for those interested in capital gains, standalone houses or properties in desirable neighbourhoods with high potential for appreciation could be worth considering.

Choosing the right property

With your strategy and goals in place, it’s time for the exciting part – finding an investment property. When looking at areas to invest in, it’s important to do your research. 

Factors like market trends, new developments, and economic outlook all have an impact on property values and rental demand. Here are three tips to help you find a property that suits your goals.


1. Explore the area

A good place to start is to check how similar properties in the area have performed. Look into:

  • What types of property are in demand 
  • Vacancy rates
  • Average rental yield
  • Property value history.

Other key factors to consider include employment rates, crime levels, local schools, and access to public transport. 

Future council projects and new developments could also hint at an area’s potential for growth. For example, a planned shopping centre in an up-and-coming suburb could boost demand and see property values increase. 


2. Research the market 

Market and economic trends, government policies, demographics, and changing interest rates all shape property values and rental demand. Staying updated can help you understand how these factors could affect the housing market and the area you plan to invest in.

The ANZ Property Focus could be a great place to start, giving you a regular overview of the state of the property market in New Zealand, analysing trends, market outlook and potential strategies for borrowers.



3. Do your due diligence

When you attend open homes, take a close look at their condition. Well-maintained properties attract tenants and could command higher rents. A property in poor condition might bring in lower rent, but with some renovations, you could boost both its value and rental income.

Planning for shortfalls

Even if capital gain is your main focus, rental yield still matters. It’s often used to cover the costs of the property, however, rent alone might not be enough to cover these and this isn’t unusual. After paying the mortgage, insurance, and rates, there might be nothing left for repairs. You might even need to top up the mortgage yourself if the rent isn’t enough. 

Whatever your strategy, consider how you’ll cover unexpected costs or vacancies. For example, if major renovations are required, you’ll still need to manage your repayments while the work is carried out. Your property may even have to sit empty for an extended period. 

Being able to comfortably manage gaps or extra costs can help you make the most of your potential returns – so it’s worth taking the time to plan how you could cover any shortfalls.

How tax can impact returns

Knowing how taxes impact your investment can help you maximise your returns and avoid surprises. Here are some key tax rules to consider. 


Paying income tax

Rent is treated as part of your overall income, which means you must pay tax on it – just like you do for your job. If your plan is to focus on yield, make sure you subtract tax from your expected rental income to get an accurate picture of your returns.


Deducting interest

Interest deductibility is a tax advantage for investors. If you own a rental property with a home loan, from 1 April 2025 you can deduct 100% of the interest paid on the loan from your rental income. This effectively lowers your taxable income, which can help optimise your returns. 

You can find more information on rental property tax deductions on the Inland Revenue website.



Bright-line test

How long do you plan to own your investment property? If you sell within two years of buying it, you may have to pay income tax if you make a capital gain on the sale. This is called the bright-line test, and it can have a significant impact on your returns.



It’s a good idea to get independent advice from your tax advisor or accountant so you’re fully aware of how tax rules can affect your returns. You’ll also find information on the Inland Revenue website.


Match your strategy to your goals

Whether you’re after reliable cashflow from rental income or the long-term growth potential of capital gains, your returns strategy should align with your goals and guide where and what you invest in. 

Before you sign on the dotted line, do your research and seek expert advice. A well-planned approach can help ensure your investment works hard for you.

How we can help

Whether you’re buying your first investment property, looking to expand your portfolio, or wanting to manage your existing property loans, we can help you achieve your property investment goals.


Important information

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