When changes were announced in March last year there were anguished predictions that landlords would not be able to keep their rentals and that the rental market would be turned upside down.
However, a 28% (nationwide average) rise in rents and rocketing house prices meaning huge capital gains have meant investors have benefited and in many cases been able to pay down mortgages faster.
For those that bought investment property more recently the phasing out over 4 years of the ability to offset interest payments against rental income might make it more difficult to keep a property cashflow positive.
Deloitte Private partner Dan Hellyer has a few tips for landlords. “If an investment property is considered as an income generating asset, then not much has changed., Although being able to claim funding costs is being phased out investors can still claim ordinary operating expenses. These are costs incurred in generating rental income”.
NZPIF executive officer Sharon Cullwick says sometimes people don’t bother claiming for small expenses like vehicle costs wen they visit their property. “But it adds up so claim everything that you can”.
Expenses you can claim include;
- Repairs and maintenance (but not renovations that substantially improve the value of the property)
- Professional services fees such as accountants, lawyers, property managers, rates and insurance
- Mortgage repayment insurance
- Vehicle and travel expenses when travelling to inspect your property or to do repairs
- Depreciation on capital expenses like whiteware, appliances, heat pumps
- Legal fees involved in buying an investment property – as long as that expense is lower than $10,000
Hellyer says “New Zealand needs rental housing stock. Rental properties still make sense as an investment to many people. From a diversified portfolio point of view, it is still a great step for people to consider and will remain a feature of investment portfolios for middle New Zealand. Be clear about the costs associated with each property and make sure you are meeting compliance requirements for each of them. Get professional advice”.
Cullwick advises “Think about what costs may be over the next few years. Don’t just concentrate on what they are now”.
Things to consider;
- A property’s ability to generate income
- How much your costs will rise when interest deductibility is phased out
- What your current interest rate is and how long they are fixed for
- Are maintenance and repairs up to date
- If the property meets healthy homes standards.
Operating on ‘chasing capital gains’ has worked over recent years but may not be a sound strategy for the future. Focus more on yield. Make sure the property can pay for itself. Don’t have it so you need to dip into your own pocket to pay $50- $100 a week for the next 20 years.