As for mom & pop rentals it is tough and the experience i've seen is the risk is very high if you're going in the game with just only 1 or 2 houses. A wise landlord told me the key reason is econmies of scales ; when you have 1 house and it sits empty, you've essentilally lost 100% of your return on the investment. In his case, he owns a 25 dwelling apartment complex which is fully tenanted most of the time. But don't take my word, just look at the large pool of seminars going around NZ getting the small mom & pop investors into the real estate game. They pool the investors $ together to buy real estate all over NZ and work out the projected returns etc. and managing (again, on economies of scales).
As I mentioned before, there's good reason why one can leverage into buying real estate. It's because the banks like it. But when you ask them for a loan to buy equities they'll gladly show you the door. The risk levels are entirely different because banks want low risk loans. Go to a NZ broker and ask what their margin lending rates are and the fees they tack on for borrowing $.
Either 2 or 5 years, the brightline test does not worry me. Where I came from (Canada), any 2nd or 5th purchase of a house will always have CGT or straight income tax rates. The compelling issue in NZ is there's a huge inequity on investments between NZ real estate and foreign share holding equities because the former can be 100% tax free while the latter attracts FIF. So any person that looks to do index ETF investing needs to determine 1) do I pick NZ shares because they're exempt from FIF and have tax free capital gain like on a house? (of course book value rarely rises on NZ shares as they're mostly dividend paying focussed) or 2) buy real hard assets like houses because the bank knows that houses & land does not walk away and maintains their value unlike share holdings in a pooly managed company.