Property Investment Loans
Property investment has been a kiwi investment favorite for a long time, and there is good reason:
- There is a wealth of ready information on risk, capital growth, purchase price, geographic variation. You can decide, to a degree, how much cash, if any, will be required for your initial purchase.
- If you are in a position to purchase investment property, then you’re probably also in a position to choose your loan structure.
- There are options to manage the property. Either you can do this yourself or you can engage a property management company.
- You have control on adding value by making property improvements, or you can choose to maintain the property.
- You have control over the tenant, the rent, the location and when to divest.
Just considering the list above, it’s evident that property management is not a passive investment, although you can make it more passive by buying into a property investment scheme. If you choose not to, then you’re going to have to take an active interest in property and property management. That’s not to say that you have to do everything yourself but, regardless of whether you engage agencies to do the day to day work, you still want to keep the finger on the pulse.
Even though the best returns are likely realized over time, property investment should not be considered as a passive investment.
The security of a physical asset.
Bricks-and-mortar investment give the comfort of owning a physical asset. While that may not be a lesser the risk compared with unit trusts or shares, many investors are more comfortable with the tangibility of a bricks-and-mortar investment. Also, despite the high entry value of investment property, it offers an easier entry, since property can be purchased by using other property assets as security and the rent, or a portion thereof, to service the loan.
Even though the tax rules around investment property have recently changed, there are still a number of tax benefits. Any expenses that are incurred to generate rental income may be tax deductible. It pays to work with an accountant who understands how to work with rental income and “negative gearing”. More on this later.
There are never any guarantees, but you can view capital gains on your investment property as a form of income.
To mitigate the risk, it is prudent to do the required research before you purchase. Purchasing below market value and in an area where property values will increase over time is important. Capital gains are usually achieved over a longer time, often with some fluctuations during the timespan, and while the rental income may initially be swallowed up to service the loan, over time the combination of rental income and capital gain created a passive, or near passive, form of income.
Negative gearing – and loss ring fencing
If the losses, while the costs of maintaining the property and the interest of your loan, are more than the rental income, you are in “negative gearing”, and you may be eligible for a tax deduction on those losses on your investment. You can claim those losses while your property is available for rent on future profits of the property. Since “loss ring fencing” was introduced in 2019, the losses can no longer be offset against “other” income.
You may have to pay tax when you sell your rental property
This is little understood, especially by those who claim that owning a rental property is a never-ending tax haven.
You may have received a tax benefit on “depreciation” i.e. the supposed loss a property makes because of value reduction over time. Compared to a car for instance, where the loss of value over time is more likely, a property usually increases in value, and so the tax losses on depreciation are seldom real. When you sell a property at higher price than the purchase price, the tax losses claimed on depreciation will have to be paid back. Since the 2012 tax year, depreciation could be applied to building structure. This is now no longer the case, but if you already owned the property before the 2012 tax year, then you should look into this ad expect to pay some tax when you sell.
“Leveraging” on other property
If you own property and you have already paid back a portion of that mortgage, you can borrow against the difference between the value of the property and what is owing on the mortgage. That is called “leverage”. This borrowing against existing property allows you to accelerate your investment portfolio by acquiring additional properties without using your own money and “leveraging” against your existing properties instead.
Common questions about buying property
Q: What kind of property should I invest in?
A: Knowing your investment goals in advance will ensure the right outcome for you. Your financial circumstances usually determine the most suitable focus for your property investment portfolio. We analyse the benefits to you of different strategies.
Q: We are concerned about the Agreement for Sale and Purchase – what conditions should we have in place before signing a contract to buy a property?
A: A “due diligence” clause is very helpful. If having that clause proves to be a hindrance to the deal then it is essential to at least have these time period conditions in your contract:
- Finance – a minimum of 10 working days
- Building report – 10 working days
- LIM – 15 working days
- Solicitor’s approval – 3 working days.
Property investment can be rewarding and most risks can be foreseen. With good advice and a good accountant, you have a chance of growing a successful portfolio.
Contact us for an initial discussion.