Recent tax changes will impact many of our KTS Clients who are residential property investors.
Here are some ideas and tips on how to make the most of your investment properties.
Tips for Landlords
Claim for everything you’re eligible for
Dan Hellyer, Partner, Deloitte Private, says if you look at an investment property as an income-generating asset not much has changed. “Although being able to claim the funding costs is being phased out, you can still claim ordinary operating expenses. These are the costs that are incurred in generating rental income.”
Sharon Cullwick, executive officer, New Zealand Property Investors’ Federation, says sometimes people don’t bother claiming for small expenses, like vehicle costs when they travel to their rental property. “But it all adds up, so claim for everything you’re able to.”
Expenses you can claim for include:
- repairs and maintenance (but not renovations that substantially improve the value of the property)
- professional services fees, like accountants, lawyers or property managers
- rates and insurance
- mortgage repayment insurance
- vehicle and travel expenses when you travel to inspect your property or do repairs
- depreciation on capital expenses, like whiteware, appliances or heat pumps
- legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
Take a close look at your portfolio
He says now is a good time to take a good look at your portfolio, so you’re really clear about the costs associated with each property you own and to make sure you’re meeting compliance requirements for each of them. Get professional advice to see what would makes the most sense for your circumstances.
Cullwick says it’s important to consider what costs could be in the next few years rather than just concentrate on what they are now. “If you bought your property before 27 March this year, the ability to claim your interest as an expense may be phased out over the next few years. So your costs may rise over that time. Interest rates are also at historic lows and could rise in the next few years.”
Things to consider include:
- a property’s ability to generate an income
- how much your costs will rise as interest deductibility is phased out
- what your current interest rates are and how long you’ve fixed them for
- if maintenance and repairs are up to date
- if your properties meet healthy homes requirements
Buy for yield rather than capital gains
She says this can be a risky strategy as property prices won’t keep rising forever and suggests investors should focus on getting a good yield on their property. You can assess yield by calculating how much income the property generates (after paying the mortgage and other expenses) and dividing this number by the value of the property. This figure – usually around 5% – will help you understand the value of the investment, compared with other rental properties or investment opportunities.
“Make sure your property can pay for itself,” says Cullwick. “Don’t have a property that you need to dip into your own pocket for and pay $50 or $100 a week for the next 25 years.”
Consider new builds
Again, Cullwick says it’s important to consider yield when buying a new build. “The numbers have to make sense and the property has to pay for itself.”
Consultation is ongoing about the exact definition of what a new build is. “You might buy an old house, demolish it and build a new one in its place,” says Hellyer. “While you and your bank would probably consider that a new build, Inland Revenue is still consulting to determine how the new legislation will deal with such a situation.”
Further tips for Landlords
If you’ve taken out a loan for a business purpose, eg to buy a new business asset, and the loan is secured against a residential rental property, you’ll still be able to claim the interest as an expense.
- If your tenants are having trouble paying rent, let them know they may be eligible to apply for a one-off rent arrears payment from Work and Income. FIND OUT MORE
If you need any other advice or support, please contact us at KTS