Is a rental property still a good investment option?

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#2197919 14-Mar-2019 12:16

irongarment: It's an easy calculation to make. Take your capital cost of the house, take your income from rent for the year and deduct your expenses for the year. This lets you calculate a percentage return where the value of the house is the principal, and the net income from rent is the 'interest'. Now compare that to a term deposit with that amount of capital for a year...

That's one (simplistic) calculation you can make....

However 100% equity in one house may enable you to borrow on up to 5x more so factoring in deductions on interest, maintenance etc and attributing losses as I mentioned above it becomes a whole different (and attractive) equation if you want to get into the game properly.

The ability to access finance on property (leverage) is part of what makes it so attractive - in addition to the tax treatment (negative gearing).

networkn:

...

Which on current recommendations is about to become 33% less attractive.

Only if you sell it - however there are plenty of ways to realise capital value from your investment without disposing of it (borrowing against it, inheritance to your family, holding it in trust etc).

networkn

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#2197920 14-Mar-2019 12:18

tdgeek:

A) You will find that will decrease, going by words around the traps

B) If you want taxfree buy a painting, or search for another means to earn tax free

That's not the point I am making.

You'd be stupid to make investmements based on the best case scenario. The worst case scenario is that Labour will introduce that at the recommended rate and if it ends up less, you get a nice bonus. If you assume it will be less and base your affordability and projected return on that, then you are likely in for an unpleasant result.

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#2197921 14-Mar-2019 12:19

solutionz:

irongarment: It's an easy calculation to make. Take your capital cost of the house, take your income from rent for the year and deduct your expenses for the year. This lets you calculate a percentage return where the value of the house is the principal, and the net income from rent is the 'interest'. Now compare that to a term deposit with that amount of capital for a year...

That's one (simplistic) calculation you can make....

However 100% equity in one house may enable you to borrow on up to 5x more so factoring in deductions on interest, maintenance etc and attributing losses as I mentioned above it becomes a whole different (and attractive) equation if you want to get into the game properly.

The ability to access finance on property (leverage) is part of what makes it so attractive - in addition to the tax treatment.

networkn:

...

Which on current recommendations is about to become 33% less attractive.

Only if you sell it - however there are plenty of ways to realise capital value from your investment without disposing of it (borrowing against it, inheritance to your family, holding it in trust etc).

Exactly right on both counts. Leverage is where it's at. It works for property it works for running a business.

irongarment

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#2197923 14-Mar-2019 12:21

solutionz:
irongarment: It's an easy calculation to make. Take your capital cost of the house, take your income from rent for the year and deduct your expenses for the year. This lets you calculate a percentage return where the value of the house is the principal, and the net income from rent is the 'interest'. Now compare that to a term deposit with that amount of capital for a year...

That's one (simplistic) calculation you can make....

However 100% equity in one house may enable you to borrow on up to 5x more so factoring in deductions on interest, maintenance etc and attributing losses as I mentioned above it becomes a whole different (and attractive) equation if you want to get into the game properly.

The ability to access finance on property (leverage) is part of what makes it so attractive - in addition to the tax treatment.

networkn:

...

Which on current recommendations is about to become 33% less attractive.

Only if you sell it - however there are plenty of ways to realise capital value from your investment without disposing of it (borrowing against it, inheritance to your family, holding it in trust etc).

It only works if the value of the property goes up. If it goes down then you're left servicing a large loan on something that is worth less.

tdgeek

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#2197928 14-Mar-2019 12:25

networkn:

tdgeek:

A) You will find that will decrease, going by words around the traps

B) If you want taxfree buy a painting, or search for another means to earn tax free

That's not the point I am making.

You'd be stupid to make investmements based on the best case scenario. The worst case scenario is that Labour will introduce that at the recommended rate and if it ends up less, you get a nice bonus. If you assume it will be less and base your affordability and projected return on that, then you are likely in for an unpleasant result.

Who said I based it on the best case scenario? We pay tax on income, no one knows what will happen in April or 2025 or 2030. It it makes a return, whether that be wages, interest, shares or any other money generating activity, then we pay tax on that. If you leverage, you will already be paying tax on that as many property investors already do, thats their core business. It it works for them.... And if the OP wants to play in this game and uses equity to buy others, and becomes a trader, then CGT isn't relevant. Or the house/houses are never sold so no tax is ever paid

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#2197930 14-Mar-2019 12:28

irongarment:

It only works if the value of the property goes up. If it goes down then you're left servicing a large loan on something that is worth less.

They do go down. But not over time. The OP is looking at 25 years minimum.Sell or keep as a rental

Inflation, supply and demand, interest rates will all have an effect. He may well chose when its suits to bail and invest elsewhere

solutionz

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#2197948 14-Mar-2019 12:55

irongarment: It only works if the value of the property goes up. If it goes down then you're left servicing a large loan on something that is worth less.

It's true there is risk as with any leveraged investment; so you want to be sure about what you are doing and have proper controls & contingencies in place (I do recommend GRA for this sort of professional advice).

However generally as an investor you only really care about the interest (which is deductable) - so as long as you have given yourself enough margin that any interest rate rises can still be off-set against your other income the effect is negligible - or at worst case you may have to flick off a property.

But as tdgeek points out over the long term property tends to go up.

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Paul1977

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#2197961 14-Mar-2019 13:22

Thanks for the input, lots to consider.

chevrolux

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#2197971 14-Mar-2019 13:41

networkn:

tdgeek:

OP has this house freehold, he either sells it or keeps it to rent. Yield will be ok, that will increase over time, seems to be nearly compliant, and at retirement there will be capital gain. Capital gain is the ONLY reason you become a landlord

Yes its worth it

Which on current recommendations is about to become 33% less attractive.

But you still make a capital gain!!

It blows my mind how such a large percentage of NZ is allergic to paying a fair amount of tax. And don't even start with "people who have the coin to invest in property are already paying more tax anyway", or "i worked hard for my money" rubbish.

OP - Regardless of what the national-voting dooms-dayers say about CGT, there is no doubt property is still a fantastic investment. Far FAR easier, and less volatile, than shares.

Fred99

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#2198060 14-Mar-2019 15:20

gbwelly:

tdgeek:

Its long term so flat house prices isnt relevant

If rents rise as rentals turn to sales, thats a benefit. Its also a very slow process to date if you are referring to Kiwibuild

Well it is relevant, would you invest $600,000 into a savings account with 0% interest for 10 years? No?

First home buyers benefit from the conversion from rental to owner occupied, but not for everyone who rents. Are you saying that is worth it?

It's also relevant because no (sane) financial advisor would normally recommend:

a) Putting all your eggs in one basket and furthermore...

b) Putting all your eggs in one basket at one fixed point in time - thus exposing yourself to the "vagaries of the market". (A small correction of say 10% in share markets won't bother you long term if you're investing surplus cash/savings incrementally - such as you'd likely do with Kiwisaver or whatever, as most of that asset value you paid for at lower prices than they're worth after the correction. A 10% correction in the market on a fully leveraged $600k investment property could cost you $60k in asset value overnight - plus the significant cost of liquidating that asset *in one hit* if and when you need - RE/legal fees/bank fees etc). If it does turn to crap, and you'd used all your equity in your home and leveraged 100% to buy an investment property, you could lose the investment property as well as ending up with a larger mortgage on your first property - IOW go seriously backwards. This scenario isn't hypothetical - it happens - exacerbated by the fact that the job market is usually impacted seriously by the same factors that caused a house price recession. There's nothing quite like being forced to sell because you lost a (high paying) job in a downturn. Banks won't lend any more against the depreciating asset, so you can't withdraw cash from the investment, and you won't have any viable "plan B".

Being a landlord should probably be the preserve of the relatively rich as part of a diversified portfolio, despite recent history where obviously many people (mainly a generation older than the OP) have done better out of it as an investment than others, and it's a high risk investment if leveraged.

Yet here we are, with mom and pop landlords seduced by a prospect of "free money" being pushed hard by an industry wanting commissions, being convinced by others that it's risk-free long-term. It isn't.

Aredwood

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#2198062 14-Mar-2019 15:22

As for the comment about Look Through Companies. Rental property losses will be ring fenced. By my understanding, starting from 1st April this year. So no more being able to claim tax deductions against your PAYE Income due to rental property losses.

Add in the CGT, and I'm not aware of any remaining tax rules that favor property investment over other forms of investment.

Fred99

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#2198063 14-Mar-2019 15:25

chevrolux:

Far FAR easier, and less volatile, than shares.

Except with shares etc, you don't normally have the risk multiplier of being (close to - for tax minimisation purposes) fully leveraged.

Property investment is more like trading futures.

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#2198072 14-Mar-2019 15:31

Aredwood: As for the comment about Look Through Companies. Rental property losses will be ring fenced. By my understanding, starting from 1st April this year. So no more being able to claim tax deductions against your PAYE Income due to rental property losses.

Add in the CGT, and I'm not aware of any remaining tax rules that favor property investment over other forms of investment.

I wonder what the mechanism will be. Look through companies are used overseas and are not a bad idea - everyone's favourite orange skinned reality star is structured via an LTC, although US tax law is quite... unique - but I wonder if there will a general amendment put through affecting treatment of the asset class - 'a flat' - or some other wordplay encompassing everything thats a rental (airbnb, multiple houses owned by a holding company etc)

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DaMuzzMan67

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#2198073 14-Mar-2019 15:35

Hi Paul

I know lots of people have contributed to the discussion already.

Getting back to an important question - what are your goals in life? You are not sure of your investment options, so you may need to have a sit-down with a Financial Advisor. A good one will get you to fill out a questionnaire that has what you would like to do, achieve, and when you want to retire etc. From there, a range of investment options may or may not be applicable.

Rentals are a good investment, but are only 1 form of investments and I would highly recommend you figuring out your goals in life (and your financial life) to see how it fits in with where you want to go. A Financial Advisor should be able to advise you how rentals can fit in with Shares, Cash Deposits, Funds, Business Investments etc.

I am not a financial advisor, so don't ask me where to invest your spare million dollars!

Quote:

I know nothing about investments so don't know where to start with other options.

Fred99

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#2198080 14-Mar-2019 15:41

Aredwood: As for the comment about Look Through Companies. Rental property losses will be ring fenced. By my understanding, starting from 1st April this year. So no more being able to claim tax deductions against your PAYE Income due to rental property losses.

Add in the CGT, and I'm not aware of any remaining tax rules that favor property investment over other forms of investment.

Exempt is residential property that is (to be) taxed on sale.

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