Investment property – tips for maximising returns after the tax changes

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:

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:

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.”

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.”