Where are the cheapest rates for property investors?

Council rates are your largest operating expense as a property investor.

Yes, your mortgage is still your largest cost overall ... but that’s not an operating expense.

Local property taxes cost several thousand dollars a year. They are often more than property management, maintenance and insurance.

But rates vary for each council area. Some areas have very high rates; others don’t charge as much.

This means how much you spend on local council taxes can vary widely based on where you invest.

In this article, you’ll learn where the most affordable rates are in NZ (for property investors).

Rates vs rents – How much of a difference does this really make?

Before getting into where the most expensive rates are in the country ... we first need to talk about rates vs rents.

Why? Well, how expensive rates are within an area isn’t actually about the dollar value itself.

This is because different properties around New Zealand earn different amounts of rent.

Let’s say you had two properties in different towns. Let’s say that both properties have rates of $2,500 per year.

• Property 1 earns $250 per week in rent.
• Property 2 earns $500.

In this situation, the rates are more expensive for the first property. That’s because it takes more weeks of rental income to pay the rates.

And if you run this analysis over the country, you start to see significant differences.

Let’s compare the areas.

Waitomo District vs Upper Hutt City

Rates in the Waitomo District make up an average of 19% of rent received per year.

That’s because the average property rents for $390 per week and the rates are $2,914.

Investment properties in Waitomo are cheap and earn fair rent, but the average rates are expensive.

It would take 7.5 weeks of rent to pay them.

Compare that with Upper Hutt City. The average annual rates are $2,177; that’s $737 less than Waitomo.

But properties in Upper Hutt are worth more and earn $625 per week on average.

That means Upper Hutt rates make up only 6.7% of the rent received, so would only take 3.48 weeks of rent to pay.

If you invested in Lower Hutt, that’s an extra 4 weeks rent hitting your bank account, on average.

Put another way, the local council rates are cheaper in Lower Hutt than in Waitomo.

Where are the most expensive rates in the country for property investors?

The top 3 most expensive districts all have a population under 10,250. They are:

1. Kaikoura (population – 4,160)
2. Carterton (population – 10,250)
3. Westland (population – 8,820)

Here’s the full map where you can explore the most and least expensive rates in the country:

Where are the cheapest rates in the country for property investors?

On the other hand, the country’s cheaper rates tend to be in larger districts, but not in the big cities.

A council’s primary purpose is to provide infrastructure for its residents.

That’s easier and cheaper if residents live close together as they do in bigger cities. That’s usually in areas with populations between 50,000 and 100,000 people.

Often areas in those geographic areas have lower rates.

This is why Upper Hutt City has the country’s cheapest rates. Rates there take up only 3.5 weeks of rent. Upper Hutt has taken the top spot for the last two years.

This is followed by Whangarei and Napier City.

More from Opes Partners:

• How should I increase the rent of my investment property? (Article)
• How do I pay less tax on my investment properties? (Article)
• What taxes do property investors need to pay? (Article)

Why are rates more expensive in smaller towns and districts?

Some investors will say: “Hold on, small towns have higher gross yields. This makes them the better investment”.

Yes, small towns do tend to have higher gross yield, but sometimes higher rates and other costs counteract this.

Every council needs a mayor, a chief executive, councillors and certain staff.

This is true whether you have a population of 4,690 (Mackenzie district) or 1,695,900 (Auckland).

But those fixed costs are spread over a smaller number of people.

Last year, the top 3 most expensive places for rates in the country had populations under 13,000.

This year, it’s the same (except the populations are all under 10,000).

Kaikoura district, where rates are the most expensive, has a population of 4,160.

How strong is this trend and are there exceptions?

While smaller towns tend to have more expensive rates … that is not always the case.

It’s fair to say that cities tend to have cheaper rates, but it’s not fair to claim that all cities have low rates.

Cities like Hamilton, Tauranga and the Hutts have high populations and cheap rates, but Auckland doesn’t.

It has the highest population, but its rates are middle of the pack. It’s ranked 30th out of 61 councils.

Similarly, while smaller districts generally have more expensive rates ... not all sparsely populated areas have high rates.

Exceptions to the rule exist, like Mackenzie and Kawerau.

For instance, Kawerau has a population of 7,760. The trend would suggest that council’s rates should be higher. But, like Auckland, it comes in the middle of the pack.

What are the rates on my investment properties?

Use the search function in the table below to check how expensive the rates are in your area.

So where should I invest?

After reading this article, you may be thinking: “So where should I invest? Is it in Upper Hutt City, since that’s where rates are cheapest?”

Not necessarily.

Rates are one of the 7 essential costs you’ll pay as an investor. Each of these costs will differ based on the property.

That’s why, if you're evaluating a property, you need to run a cashflow with all costs included.

This allows you to see the bottom line … and know how much a property will earn or cost you per week.

Some investors will argue in favour of investing in smaller districts. This is because they have higher gross yields, but they also have higher costs in some cases.

When running the numbers on an investment property, don’t make the gross yield the first thing you look at.

Instead, figure out how much money is left once all the costs are paid (net yield).

After all, gross yields are vanity; net yields are sanity.