When the changes were announced in March last year there were anguished predictions landlords would not be able to keep their properties and rental market would be turned upside down.
However, a 28% rise in rents over the past five years and rocketing house prices meaning huge capital gains have meant investors have benefited and in many cases have been able to pay down mortgages faster.
For those who have recently bought investment property, the phasing out over four years of the ability to offset mortgage 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 not much has changed.
“Although being able to claim the funding costs is being phased out, investors can still claim ordinary operating expenses. These are the costs that are incurred in generating rental income.”
New Zealand Property Investors' Federation executive officer Sharon Cullwick 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 traveling 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.
- Hellyer says rental properties still make sense as an investment for many people.
“New Zealand needs rental housing stock as much as ever. From a diversified portfolio point of view, it’s still a great step for people to consider and will remain a feature of investment portfolios for middle New Zealand.”
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. Interest rates are also rising.
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 property/s meet healthy homes requirements.
In the past few years, some investors have been chasing capital gains, and have been willing to run their rentals at a loss in the expectation that house prices will rise, says Cullwick.
She says this can be a risky strategy as property prices have started dropping in some areas 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.”