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More Realistic New Investor 3 Rentals in 3 Years

18 April 2018

 

More Realistic New Investor 3 Rentals in 3 Years

 

Following my post yesterday about what was required for a new property investor to buy 3 rentals in 3 years, here is a more realistic approach of how it could work.

To start with, I discussed with Adam Thompson from www.mymortgage.co.nz, and he identified an obvious opportunity and also an under used one.

  • 80% lending on new builds.  So, to get ahead doing a new build could be easier, as long as you can still add considerable value. 
  • Non bank lenders.  These generally only charge 0.5% more than the main banks, and can lend up to 80%.  Half a percentage is actually a small cost if it helps you get a good deal done!

 

Your personal house has some equity, you earn good money, and now you want to buy 3 rentals in 3 years so that you and your family can get ahead financially.  What do you need to do?

Our case study has started with:

  • $750,000 personal house with $299,000 debt.
  • NO capital gains – I prefer not to gamble on capital gains and also expect very small gains in the next 5 years outside of Auckland.
  • $120,000 family income.

 

Summary to make this work;

  • Purchase sub-dividable property $600,000, Gross Yield only 3.9%.
  • Add Duplex (two rentals that are joined together).  Total cost $710,000.
  • Gross Yield on all 3 properties is 5.76% based on 52 weeks and cost of development.
  • The rent pays all expenses (incl. fair repairs, accounting, as well as standard costs), and gives a small cash surplus at 100% borrowing and 4.5% interest rate.
  • The family income would need to increase to $130,000 to make this work.

I have based these figures on a current subdivision, but have been a little conservative with the figures, so the actual figures when completed could be better.

Big risk is interest rates. If interest rates increased to 5.5%, then negative cashflow by $10,200 per year.  This isn’t allowing for any tax refund, as Ring Fencing is likely to come in.

 

MORE DETAIL:

Start

Buy a sub-dividable rental for $600,000, $450 per week rent = 3.9% Gross Yield. 

$390,000 debt (65%) on the rental property, and $210,000 debt borrowed on personal home.

 

Next Step

Subdivide so that can build a Duplex on the back.  Cost estimated at $110,000.

Value likely to increase by at least $250,000.

 

End of Year 1

Personal house worth $750,000, with $299,000 debt.

Rental worth $850,000 with $500,000 debt, plus $210,000 debt on the personal house, so $710,000 total rental debt or 84% LVR (using some personal house equity to allow this!).

Rental income $450 per week, or $23,400 per year, plus $120,000 of personal income.

 

Year 2 – Build Duplex

Cost estimated at $300,000 each or $600,000 total.

As a new build, the bank will lend 80% or $480,000.

$91,000 from personal home security, and $29,000 from existing rental house.

Rent expected at $500 per week for each Duplex.

 

End of Year 2

Personal house worth $750,000, with $299,000 debt.

Two new rental properties worth $550,000 each, plus existing rental house $450,000 = $1,550,000 total rental value, and debt $1,310,000 (84.5%).

Rental income $500 per week for 2 new properties, and $450 for the existing =  $75,400 per year rental income, plus $130,000 of personal income (personal income would need to increase to $130,000 to make this work).

 

Year 3 – relax

Perhaps could renovate existing rental to gain more rental income too!

 

 Kind regards

Ross Barnett

What Is Needed For A New Investor to Buy 3 Rentals In 3 Years?

17 April 2018

 

What Is Needed For A New Investor to Buy 3 Rentals In 3 Years?

 

Your personal house has some equity, you earn good money, and now you want to buy three rentals in three years so that you and your family can get ahead financially.  What do you need to do?

Our case study is starting with:

  • $750,000 personal house with $299,000 debt.
  • NO capital gains – I prefer not to gamble on capital gains, and also expect very small gains in the next 5 years outside of Auckland.
  • Buying existing properties, so 65% debt.
  • $120,000 family income.

 

Summary to make this work

  • 2 rentals purchased for $500,000 each, added value of $280,000 each, but renovations only cost $100,000 each.  Rent $950 on each once renovated or 8.23% Gross Yield.
  • Renovate personal house, add $200,000 value at cost of $100,000.
  • This enables third rental to be purchased in third year based on equity for $500,000, rent $700 per week or 7.28% Gross Yield.
  • BUT – After discussing with mortgage broker, this would still not work, and household income would need to have gone up to $140,000 to have enough income for the standard banks to finance.

So, for a new property investor to buy three existing rentals in three years will be extremely hard.  Would need fantastic rent, as well as fantastic value added, to enable the third purchase!

Overall, this example would be extremely hard to actually make happen.  Make sure you like our Facebook page, as tomorrow I will post a similar example on how this could work!

 

MORE DETAIL:

Start

Buy a rental for $500,000, $700 per week rent = 7.28% Gross Yield.  (I needed to use a high rental, otherwise in year 2 and 3, there is not enough income, so this is an important part to note).

$325,000 debt (65%) on the rental property, and $175,000 debt borrowed on personal home.

Next Step

Need to add $280,000 of value to the property but only at a cost of $100,000. (With 65% lending, this huge added value is needed later to buy the 3rd rental – This would be extremely difficult!).

After renovation, $950 rent per week or 8.23% Gross Yield on cost of house and renovations.

Next Step

Renovate personal house, add $200,000 of value but only spend $100,000. (As above, this will be difficult).

End of Year 1

Personal house worth $950,000, with $399,000 debt.

Rental worth $780,000 with $425,000 debt, plus $175,000 debt on the personal house, so $600,000 total rental debt or 77% LVR (Using some personal house equity to allow this!).

Rental income $950 per week, or $49,400 per year, plus $120,000 of personal income.

 

Year 2 – Repeat, buying similar rental, same value, same debt and same renovations

Buy a second rental for $500,000, $700 per week rent = 7.28% Gross Yield.   (I needed to use a high rental, otherwise in year 2 and 3, there is not enough income, so this is an important part to note).

$325,000 debt (65%) on the rental property, and $175,000 debt borrowed on personal home.

Next Step

Need to add $280,000 of value to the property but only at a cost of $100,000.  (With 65% lending, this huge added value is needed later to buy the 3rd rental – This would be extremely difficult!).

After renovation, $950 rent per week or 8.23% Gross Yield on cost of house and renovations.

End of Year 2

Personal house worth $950,000, with $399,000 debt.

2 Rentals worth $780,000 each = $1,560,000 total rental value, and debt $1,200,000.

Rental income $950 per week for 2 properties = $98,800 per year rental income, plus $120,000 of personal income.

 

Year 3 – Repeat, buying similar rental, same value, same debt, no renovations at this stage

Buy a third rental for $500,000, $700 per week rent = 7.28% Gross Yield.  (I needed to use a high rental, otherwise in year 2 and 3, there is not enough income, so this is an important part to note).

$325,000 debt (65%) on the rental property.

$11,000 borrowed on personal home and this then maxes out personal debt at 80% of personal house value.

$82,000 extra borrowed on 1st and 2nd rental, so now both rentals have $507,000 debt or maxed out at 65% of rental property values.

End of Year 3

Personal house worth $950,000, with $399,000 debt.

2 Rentals worth $780,000 each, and one at $500,000 = $2,060,000 total rental value, and debt $1,700,000.

Rental income $950 per week for 2 properties, plus $700 for one =  $135,200 per year rental income, plus $140,000 of personal income.  (Family income would need to be $140,000 to allow a standard bank to lend for the 3rd rental!).

Kind regards

Ross Barnett

 

This Person Was Unaware of their $50,000 Tax Liability

13 April 2018

 

THIS PERSON WAS UNAWARE OF THEIR $50,000 TAX LIABILITY


Tax of overseas investments is an awkward area and there are a lot of ways you can get caught out on tax.

Sam was born in London.  He moved to New Zealand when 25 years old, approximately 15 years ago.

He is a New Zealand tax resident.

Sam's parents still live in London and have a wealthy Trust that is generating $150,000 of profit that is retained in the Trust.  As the parents are getting older, the famly agrees that Sam should be a Trustee of the Trust.

As the Trust is overseas, Sam does nothing in New Zealand.

Five years later, Sam is audited by IRD.

  • Sam should have completed a Foreign Trust disclosure.
  • As the disclosure has not been completed, any foreign sourced income is taxable in New Zealand.  So approximately $50,000 tax bill in New Zealand for each year, plus penalties and interest!



How could this be avoided?

New laws came in on 21 February 2017 that Foreign Trusts must register in order to have an exemption on foreign-sourced income by 30/06/17.  Or, there is a 4 year grace period for natural people, not in the business of trustee services.

So, if Sam had registered with IRD, then the foreign income from the Trust would not be taxable in New Zealand.

A Foreign Trust, in broad terms, is a Trust settled by a person that is not a tax resident of New Zealand at the time of settlement.



Some other potential overseas Trust issues

1.  An overseas person has an overseas Trust.  They move to New Zealand.  They have 12 months to elect the Trust to become a complying Trust, which can give large tax benefits going forward.  Or a non-complying trust can be taxed at 45%!

2.  If you receive a distribution from an offshore trust:  -  Most likely some of this distribution is taxable and there are ordering rules that must be applied to work out what the distribution is made up of.  First is current year Trustee income, second is trustee income that is not beneficiary income of an earlier income year, both of which are a taxable component in New Zealand.  Any capital gains and corpus will not be taxable, but these come after the taxable parts which must be accounted for first.

3.  In some cases, the New Zealand resident beneficiary needs to account for the income or losses on the underlying assets from the day of death of the parents.

 

Common Reporting Standards (CRS) - NEW!!

First reporting period 30/06/18.

If you have a Trust that meets both of these requirements:

  • 50% or more of assets in financial assets (i.e. investment in Craigs Investments)
  • And the financial assets are managed (i.e. Craigs Investments manages the portfolio for you)

then the Trust will need to go through the self-certification process  - Need to ask the account holder whether they are a relevant foreign tax resident.  The Trust will need to keep a record of the self-certification and the process they used to obtain it. You can find more information on forms IR1052 and IR1053 on the IRD website:  www.ird.govt.nz.


Kind regards
Ross Barnett 

Ring Fencing of Rental Losses and 5 Year Brightline

4 April 2018

 

Ring Fencing of Rental Losses and 5 Year Brightline

 

In late March, there were two major changes to residential property investment in New Zealand.

1)  The 5 year Brightline Test has come in from 29/3/18

-  Existing rentals are not affected, but obviously you can still be taxed under other sections of the Income Tax Act (check out this Video on how property sales can be taxed).
-  If a sale and purchase agreement is signed before 29 March 2018, then only subject to the 2 year rule.


2)  Ring Fencing of Rental Losses - Why don't we make it fair?

This is only for discusson at the moment, but the paper gives a good indicaton of IRD's intention!

The IRD officials' issues paper released yesterday applies to residential rental properties, but not:

  • Business
  • Commercial Property
  • Personal home (i.e. flatmates or Airbnb, etc)
  • Holiday home
  • Farming
  • Forestry
  • Shares (i.e. can still borrow to buy shares and offset this loss against other income).

I would much prefer to see an approach where losses are only allowed for say four years for everything!  So, if you buy a residential rental, you have four years to access the losses and turn the rental into a profitable rental.  The same with a business, a farm, a holiday home, a commercial business, a forestry investment , a personal home getting rental income or investing in shares.  Everything should be treated equally.
 

At this stage, it is only an officials’ issues paper, but it gives a fair idea of how IRD expect to apply this. So it is looking like:

  • 1/4/19 start
  • Might be phased in over 2-3 years
  • Also apply to overseas rentals
  • Will apply to sole traders, companies, Trusts, partnerships, and LTC's.  So will apply to all entities.
  • They are trying to make it hard to work around, but there are some obvious holes that can be exploited, especially for business owners.
  • If you trade properties, a loss from rentals will be able to offset this profit.

In the long term, this rule should not create any extra tax, as the losses are still there, they just carry forward to future years.
 

OVERALL – Commercial property could become more attractive to invest in.  Otherwise, as we have been saying for a while, if you have a rental portfolio that is cashflow negative, it is important to have a plan to turn this positive over the next few years!
 

What effect do you think this will have on house prices?  And on rents?

If you are worried about your rental portfolio, a great starting point is a free 5-10 phone chat with me, to work out the best way forward.  Due to all the recent changes to tax, we are also offering existing clients a discounted meeting with your annual financial statements.  But obviously if you urgently need some advice, we can have the meeting before your financial statements are done, if that suits you better!  Just This email address is being protected from spambots. You need JavaScript enabled to view it..


Kind regards
Ross Barnett 

Desperate to Buy Your First Rental?

9 April 2018

 

Desperate to Buy Your First Rental?

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John and Lisa are desperate to buy their first rental and jump up the property ladder.  They purchased an average first home in 2011 for $340,000 (around the NZ median at the time).  They started with around a $270,000 mortgage, which they have managed to get down slightly to $240,000.  John earns $90,000 per annum, and Lisa earns $30,000.

They are good with money, have no HP’s, and no outstanding credit card debt.  John and Lisa want to get ahead and have just changed their loan so that it will be paid off over 10 years.

At the start of 2017, their property has jumped in value and is now worth $490,000 (around the NZ median at the time).  They can now borrow 80% ($392,000), or an extra $152,000 towards an investment property.

They initially look at buying a normal rental, but with only 60% lending at the time through banks, it seems too hard and their price range seems too low.  They could only buy something for $380,000.

They talk to an investment property company, who convinces them to buy new, as the banks will now lend them 80%!  John and Lisa buy an investment property for $599,000 with a furniture package, and rented for $570 per week.

The rental would have a cash deficit of around $5,100, but after large chattels depreciation on a new property, the tax refund should be around $3,600 if structured in the best way.  So’ overall’ a cash loss of $1,500 per year.

They earn $120,000 per year combined;

Less Tax $24,890

Less Personal House mortgage $29,568

Less rental shortfall $1,500

$64,042 remaining for everything else.

 

One year later – 2018

The tenant has moved out.  The market has changed slightly and there are no longer tenants for fully furnished.  So, John and Lisa rent for $490 per week without the furniture.  They are lucky that they have a shed they can store the furniture in.

The rental cash deficit has increased to $8,700, and after-tax refund of $4,500, the cash shortfall is $4,200 approximately.

The property market has been reasonably flat, and John and Lisa purchased quite high through the property investment company, so their rental is still only worth $599,000, if they are lucky.

 

Another year later – 2019

Labour and IRD have ring fenced property losses (expectation at 8/4/18).  The rental is now a cash deficit of $8,700, but no tax refund.  So it is costing them $167 per week to top up the rental.

The property market has been reasonably flat, and John and Lisa purchased quite high through the property investment company, so their rental is still only worth $599,000, if they are lucky.

 

They still earn $120,000 per year combined;

Less Tax $24,890

Less Personal House mortgage $29,568

Less rental shortfall $8,700

$56,842 remaining for everything else.

 

HOW DOES THIS STORY END?

There are multiple possible endings, and you can choose your own ending!

1)  Property prices jump in value. John and Lisa’s personal house has jumped to $790,000 value.  Their rental has jumped to $700,000 value.  John and Lisa are extremely happy and looking to buy more rentals.

 

2)  Interest rates go up 1%:

a.  John and Lisa’s personal house payment goes up $1,404 for the year

b.  The rental cost goes up to $14,700 per year or $282 per week.

c. Their remaining cash for other costs is down to $49,438 per year.

 

3)  Property prices remain flat for 5 years:

a.  John and Lisa have put $32,000 approximately of their own funds (after tax refunds) in the rental to top it up.

b.  The rental is still worth $599,000 on a good day and the mortgage is $599,000. So, no equity.

 

4)  Property Prices have fallen over 5 years:

a.  $32,000 top up

b.  The rental is worth $549,000, and the mortgage is $599,000, so negative $50,000 equity.

 

5)  John gets cancer and can’t work …

 

The one good thing that is happening in all options, is that John and Lisa are quickly paying off their personal house.  So, if they can get through 10 years, and have paid off their personal house, then they will have surplus cash that could pay off the rental.  They also have a reasonable household surplus, so can perhaps afford to tighten their belts a little and push through harder times.

I don’t have the perfect answer how this will end either.  In my opinion, this isn’t a great situation to be in.  John and Lisa are stuck and really reliant on capital gains.  They will struggle to buy more rentals until their current properties have jumped in value.  Ideally, I think they should be saving a little harder and paying principal on the rental to create a buffer in case something goes wrong.  And obviously point 5) highlights that they should discuss their affairs with a risk broker and maybe have some income protection insurance, trauma or life insurance.

I hope this has got you thinking a little bit?  What is your goal, and if you are buying a rental, will the rental actually help to achieve your goals?

I think the simple goals for most people are a debt free personal home and passive income!

Kind regards

Ross

These items can often save a lot at Year End!

23 March 2018

 

THESE ITEMS CAN OFTEN SAVE A LOT AT YEAR END!

 

 

 

 

 

 

 

 

 

Purchased a new rental Is it worth getting a chattels valuation done?  www.valuit.co.nz has some great information, along with my past article  "You're Missing Out if You Haven't Had a Chattels Valuation Done!"  Click here to read the article or email This email address is being protected from spambots. You need JavaScript enabled to view it. to organise a free 5 minute chat with me to check whether you should get one or not. 

 
House Building business We need to calculate any income in advance at 31/3/18.  So we need a list of any houses that are in progress at 31 March, plus details of the total sales, total costs, and costs to date.
 

Businesses – We need to know your Work in Progress (WIP) and Stock on hand, as at 31/3/18.  Both at cost and excluding GST.
 

2018 Annual Questionnaires – Instructions on how to complete your 2018 Annual Questionnaires will be emailed to Coombe Smith clients next week.  2018 Questionnaires will be available for completion on our website after 4 April 2018.



 
Great Accounting Records Tips 

 We have set up some standard folders and information to help you put together your 2018 financial records   This lets you know what information we need from you and will hopefully save you time.  These can be easily downloaded from Dropbox to your computer - Just follow the PDF instructions given ("How to Download Accounting Folders for Coombe Smith from Dropbox").  We also recommend that you read the "Great Accounting Records for Coombe Smith Clients pdf.  Click here to access.

Also, if you put the information in the correct accounting records folders, we will discount your fee by $50 + GST!      (Note:  This discount does not apply to monthly fixed fee clients).
 

  • To reduce your time putting together information, this year we are NOT going to ask for copies of tax invoices.   So that means less time for you scanning them through to us.  Should we require extra information, we will contact you for details about specific expenses or ask for a specific invoice.  Generally, it is a lot quicker for you to find an invoice in your system, rather than us searching for it.
  • ​Within the Accounting Records folder, there is a Current Year Expenses folder which contains spreadsheets you can use for a Cash Book and Expenses Paid Privately, and in the Travel folder, there is a mileage log book.  
  • The Invoice Folder is for you to keep all your invoices in one place, but we DO NOT need a copy of this.
  • The Long Term document folders are for your own record keeping only.  You DO NOT need to send these into us.



   
SAME PRICE, NO INCREASE 

We are keeping our prices the same this year.  So, as long as you haven’t had any changes (eg. sale or purchase of properties, etc), then our price to complete your 2018 financial statements and tax returns will be the same as 2017.  We are including a new section in our annual questionnaires where you can confirm you have had no changes and are happy with the price remaining the same as 2017.  Then we won’t need to bother you by sending a quote to be signed. 
 

Thinking about property trading – We have free property trading notes and a spreadsheet  that we can email through to Coombe Smith clients at any time.
 

Thinking about buying a rental We have a free rental property spreadsheet that we can email through to Coombe Smith clients at any time.  This looks at current cashflow, as well as the expected revenue, expenses and tax over the next 10 years!
  


If you are not a Coombe Smith client

 
Haven’t done your 2017 tax returns – you are officially late!  But we can often still help.  Best starting point is to email This email address is being protected from spambots. You need JavaScript enabled to view it. to organise a quick 5-10 minute telephone chat with me to see how we can help.  

 
Would you like us to do your 2018 financial statements and tax returns?  Obviously we then ensure you claim key expenses like chattels depreciation, but also by doing your financial statements, it gives me a great picture of your affairs.  I can then suggest improvements, such as a better structure, or how to move debt from your personal house to rentals (more tax deductions = less tax!) or a change of shareholding for an LTC to be more tax effective.
 

Or you might need someone to review your rentals and help you move forward.  Is one rental dragging you down?  Or are you worried about your risk or overall strategy.  I love reviewing property investors' portfolios and helping them get ahead long term.  The nature of property investing is that there is often a mistake or property holding an investor back, so identifying this, and ways to improve the situation, can greatly help a property investor reach their goals.  Click here to organise a free 5-10 minute telephone chat with me.


Kind regards
Ross Barnett 

Is Success Actually Failure?

16 March 2018

 

Is Success Actually Failure?

 

  

 

 

 

 


What is success?  Here is a common story of perceived success, with a reality check.
 
Tim and Jess are both 28, and buy a house for $350,000 in 2003, with a $250,000 loan.  Times are tough, so they only pay interest only, and cash flow is tight to start with.  Tim and Jess slowly earn more, but they also spend more.  They split the loan into $200,000 fixed interest only and $50,000 revolving credit that they can pay off quickly with their extra earnings.
 
Times get tough again, and the bank allows Tim and Jess a little mortgage holiday for six months, to help them get back on track.
 
Over time, the property slowly goes up in value.  The property market booms and suddenly it is worth $600,000 in 2007.  Tim and Jess find that their revolving credit is at $49,500 and hasn’t really moved over the four years.  They now owe $260,000 on their house (as the mortgage holiday got added on).  But their cars are getting older, the house needs some repairs, they would love a big TV and they haven’t had a holiday in years!  Suddenly, with the extra equity, the bank will allow Tim and Jess to borrow $50,000 more.  The mortgage is only $310,000 or 52% LVR.
 
Tim and Jess have it great - a holiday, new car, the big TV, but still struggle with cash flow over the years, so manage on interest only lending.  But now they want a bigger and better house.  In 2012, the Auckland house market has moved up a little more, so their house is now worth $750,000 (41% LVR!).  They borrow $30,000 to make the house look better and do the repairs they should have done back in 2007.  They buy a new house for $1,000,000.  After commission, they get $720,000 sale of their old house, and after paying off the mortgage of $340,000, have $380,000 cash left.  So, over time, their $100,000 deposit has turned into $380,000.  Awesome?
 
The new house really needs some new furniture, so Tim and Jess borrow an extra $50,000 for some new furniture and a spa.  They have a $1,000,000 house in Auckland now with a $670,000 (67% LVR).  They are earning more money than ever.
 
The cycle starts again, they are earning more but also spending more.  They need a new car, some house repairs, a swimming pool and they haven’t had a holiday in ages.  Plus, they have some HP’s, a personal loan and their credit cards are maxed out.  The property market has jumped further and the house is now worth $1,400,000 in 2014.  Wow!  With only a $670,000 mortgage or a 48% LVR.  The bank allows Tim and Jess to borrow another $150,000, leaving them with a $820,000 mortgage or 59% LVR.
 
Tim and Jess are now (2014) both 39 and have $580,000 equity in their home.  Would you say Tim and Jess are successful?
 
In my opinion – NO
 
To pay off their original loan over 30 years would be monthly payments of $1,342.  So paid off in 2033.
 
Now, to pay off their new loan over say 20 years, the monthly payments would be $5,412 or $65,000 per year, just in the loan payments!  And this would have a loan repaid in 2034.
 

My long term goals for all property investors are:

  • Have a debt free personal house
  • Plus passive income.


Tim and Jess are going to struggle to pay off their personal house.  They could try to downsize slightly, but if they wish to stay in Auckland, it is still likely to cost them over $1 million to buy another house, still leaving them with around a $500,000 loan.  Tim and Jess are a long way off a debt free personal house, and have no passive income.  Currently, at retirement, they are looking like they would still be in debt and relying on the Government pension.  Or forced to move to Taumaranui!


What does this highlight?

1.  ​A lot of so-called successful people are not good with money!  I would say that over 95% of people are not good with money!

2.  An increased personal house value doesn't make you successful.  Having a fancy car, pool, etc., also doesn't make you successful.

3.  Make principal repayments on your personal house.  Try to pay off your personal house as quick as possible.  Talk to firms like NZ Home Loans who focus on trying to pay off your personal house loan quicker.

4.  Don't borrow extra for new cars, furniture, etc.  -   You should be saving for these items and paying for them from surpluses of your income over expenses, not from capital gains on your house.

5.  Establish a plan to gain passive income long term.

 

I hope this has given you a different perspective to think about.


Kind regards
Ross Barnett 

Ring Fencing updates, support Property Investors Association, Special Tax Codes, and how can Capital Gains be taxable?

8 March 2018

 

Ring Fencing updates, support Property Investors Association, Special Tax Codes, and how can Capital Gains be taxable?

 

Ring Fencing

 

Rumour has it that Ring Fencing will also be included in the legislation currently making its way through Parliament, that includes the change to 5 year brightline rules. This is the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) bill that is expected to be passed before 31/3/18.

At this stage we still do not know the detail and this is just a rumour from a tax specialist firm, but my past article might help to give you an idea of the likely changes.  Click here to read the article.


Support Property Investors Association


If you join Waikato Property Investors Association before 14/3/18, then you can attend this event FREE!!  Membership is from $260 per year, which includes a monthly property investor magazine and lots of other great benefits!
Click here to find out more.  
  

  
 

 

 Nigel Latta - From Caves to Investment Properties:  The Psychology of Building Empires
  

 

 
 
How can capital gains on a rental be taxable? 

 

Make sure you understand how a property can be taxed by watching the first half of this video (3 1/2  mins approx), with the second half being a refresher on the 5 year Brightline change.   Click here to view the video.  

 
 

Special Tax Code

 If you want to get a Special Tax Code in place for the 2019 tax year, you need to get in contact with us now!  Email This email address is being protected from spambots. You need JavaScript enabled to view it.

But first click here to watch this video, as often I recommend not having a Special Tax Code!    

 

Kind regards
Ross Barnett 

Simple Meth Testing Information to keep your rental safe - Don't Panic!

23 February 2018

 

Simple Meth Testing Information to Keep Your Rental Safe - Don't Panic!


There is a lot of talk out there about meth contamination and possible issues for landlords and property investors.  Personally,  I really don't believe that Meth has to be that big an issue.  Here are a few key points:

 

1.  Get a Meth screening test done for under $200.  
 

2.  Make sure you review your insurance to ensure you have adequate Meth insurance and are fully covered, including Loss of Income, before you get any meth tests done.

 

  • This is just a Yes/No test.  It detects if Meth is present or not.
  • The reading is meaningless.  For example, 0.3 could still be a problem, as one room could be 2 and the other rooms nothing, resulting in a combined screen test of 0.3

      

3.  As many of you know, I own a small meth testing company (www.GetaMethTest.co.nz) that operates in Hamilton (which only does meth testing for landlords for property management purposes and not for new property purchases).  Over the 12 month period to 31/5/17, we have had 94.54% of rental properties tested show no meth on screening tests.  So only 5.46% of rentals tested required the full test to show the exact meth levels in each room!  This was based on the old guidelines, so the new standards are likely to see even less full tests required! 

 

4.  If your screening test is positive, talk to your insurance company:  They should cover the main test, less the excess.

 

 5.  The majority of main test results are coming back under the threshold of recommended guidelines.  So, again, there will be nothing else required to be done.

 

 6.  If, however, further action is required, and you have made sure you have the right insurance cover (see point 1), then your insurance company should fully cover you and any fix up costs and/or loss of rental income will be paid by them.


So, if you follow these simple steps, there should be no problems!


Kind regards
Ross Barnett 

BIG NEWS - Expected Date for Change to 5 Year Brightline Test

16 February 2018

 

BIG NEWS - Expected date for change to 5 year Brightline Test



It's typical, I'm relaxing on holiday and enjoying the snow, when Labour releases some big information.


 

 

 

 

 

 

 

 

 

Legislation is currently making its way through Parliament that will change the Brightline Test to 5 years.  This legislation is expected to gain royal assent in March, meaning any rental property purchased after this date will be taxable if sold within 5 years.

So how does this affect you?

1.  Current Rentals 

Not affected and will still be subject to 2 year Brightline Test. 

 

2. Restructures  -  BIG ISSUE

If you are looking at restructuring (for example, selling a rental from personal name to an LTC), this change to legislation could have a big effect.  The first part, selling to an LTC will be under the old rules.  So, as long as held for more than 2 years, should be OK.  But here are two scenarios to highlight the possible future implications:

a)  Restructure in February before changes.  The new entity has purchased the rental in February, so will still be subject to 2 year rule.  If the rental is sold say three years later, then as long as not caught by another taxing provision, the capital gain would be tax free.

b)  Restructure in April after changes.  The property would be subject to 5 year rule.  So, if the rental is sold say three years later, then any gains would be taxable!


We had hoped that restructures would be excluded from the Brightline rules, but, to date, I haven't seen any changes around this.  It is very important to get expert advice around restructures as there can be other catches and implications.


IMPORTANT   If you are considering a restructure, please email me as it is worth double checking the effect on you.  Often we are juggling the old 2 year period with a restructure, but it might be possible to put in place a sale and purchase agreement before the new rules take effect, and therefore the property going forward would only be subject to the 2 year rule.

 

3.  Buying a Property

The extended Brightline test does not apply to agreements to purchase before the date of enactment of the Bill.  So, ideally, if you are trying to buy a rental property, we want the agreement dated as soon as possible so that it is before the new rules.  Because we don't know the exact date yet, the sooner the better at this stage.  We are expecting the new rules to take effect some time in March 2018.

 

4.  Holiday Home

Main home exemption is only for one property.  So, if you buy a holiday home after the new rules take effect, then if this property is sold within five years, the gains will be taxable under these new rules! 

 

5.  Share Changes

Share changes can also be caught by the Brightline Test.  It is therefore important to consider any share change before the new rules come into effect.

IMPORTANT:    If you are considering a share change, please email me as it is worth double checking the effect on you.  We might be able to complete the share transfer before the new rules come into effect.  Share changes can have other consequences, so it is important to get expert advice on any share change.



Overall, I actually like the change to 5 years.  It helps to separate property investors from property speculators.  For a true property investor, who is buying properties for long term hold, the new rules should have little or no effect.


Kind regards
Ross Barnett 

 

Holiday Homes and GST Risk

6 February 2018

 

HOLIDAY HOMES AND GST RISK 

   

 

 

 

From the 1/04/11 the definition of a dwelling changed for GST purposes.  In the past a holiday home would be exempt for GST, but this change of definition most likely makes them liable for GST.  If purchased before 1/4/11, there is an amendment that excludes holiday homes, but any holiday home purchased after 1/4/11 DOES NOT have the exemption!

So, in theory, you could claim GST on the purchase of a holiday home (as long as not purchased from a GST registered vendor as then zero rating, or purchased from an associated entity as a limitation can apply), and the portion used, for the rental business.

You would then need to pay GST on rent, but could claim GST on other expenses.


Issues with claiming GST

  • Property goes up in value, so when you sell you have to pay a lot more GST than you claim.
  • Watch out for any GST registered vendors when purchasing, as compulsory zero rating (get specific advice!)
  • Often private component, which creates hassles and deemed supply rules.

So, often we recommend that a holiday home is kept out of the GST net and NO GST is claimed.


Risks         

1)  Over GST threshold of $60,000 
For example, an investor buys a multi-million dollar holiday home on Waiheke Island and it is rented for more than $60,000 for the year.  Non GST registered entity:

  • Have to GST register as over threshold, so pay GST on income.
  • Deemed supply (see point 7 below).             


2)  GST register entity later
For example, an investor has a holiday home in a Trust and it is rented out, but for under the $60,000 threshhold.  The Trust buys a commercial property, so GST registers.  The Trust will now have to pay GST on the holiday home rent and be liable for GST on the eventual sale.
 

3)  A Trust is GST registered with commercial property and holiday home

  • If holiday home is not rented and just used privately, then no issue.
  • But if there is a change of circumstances and the holiday home is rented, then falls into GST net.  So might just rent for 2 weeks over Xmas to get the high rent!

  General rule is not to put holiday homes in a GST registered entity.
 

4)  Leftfield result
Entity owns a commercial property, is GST registered and also owns long term residential rental properties.  In theory, there should be no issues as the residential rental properties are exempt for GST.  But:

  • rental property at Papamoa, was long term residential rental, but becomes vacant , so is rented out as a holiday home over summer.  Now falls into GST net.
  • rental property in Christchurch is rented out as long term residential rental property.  But tenant is using it as an office, so no longer fits dwelling definition, so would fall into GST net.


  5)  Farms - Watch what the dwellings are used for.

  • used as family home, will be exempt.
  • rented as long term home to farm worker, will be exempt.
  • used as short term accommodation and rented to shearers, then not exempt.

 
6)  Commercial and Residential

  • If buying from a developer, then not used as dwelling, so whole land and building is zero rated.
  • Bad from purchaser's perspective as effectively paying more!

 
7)  Deemed supply

  • Have to pay GST on deemed value of private use and could push you over $60,000 threshold.      For example, have a holiday home and received $30,000 of rent.  Holiday Home is also used for private use, and market value would be $40,000.  The rent combined with the private use market value is over $60,000, so have to GST register and fall into GST net.
  • Have to pay GST on rent and on deemed private use.
  • Would also have to pay GST on sale!


Clause 13.3

"The vendor warrants that any dwelling and curtilage or part thereof supplied on sale of the property are not a supply to which 5(16) of the GST Act applies".

If you are GST registered, be careful if this clause is changed, as it probably means the dwelling is either not a dwelling for GST purposes, or that GST has been claimed on this by the vendor, so would be zero rated.  Overall result if you're not careful is that the purchaser can pay too much.

Often it pays to check what the dwellings are used for to make sure they are exempt for GST when purchased . This especially applies to farms as per point 5 above.

Kind regards
Ross Barnett

Holiday Homes and Mixed Use Rules

29 January 2017

 

HOLIDAY HOMES AND MIXED USE RULES



Are you looking at renting a holiday home?



 

 



If you use a holiday home for private use, as well as renting out, then the Mixed Use Rules apply.



Mixed Use Rules
 
1)  Only apply if private and rental use.  So, if you solely rent out and don’t use privately, then these rules don’t apply.  Or, if you solely use privately, they don’t apply.
 
2)  If income earned is less than 2% of the market value, then can’t claim a loss.  For example, if property worth $500,000, would need to earn at least $10,000 income per year to be entitled to claim a loss (if one exists).
 
3)  If income under $4,000 per year, can opt out and not return income or claim expenses.
 
4)  Example: Say rented 50 days, used privately for 30 days and available to rent 285 days.
  

a)  Old rules up to 31/3/13.  Can claim 335 (50+285) days out of 365.  So 92% of all expenses.

b)  New rules from 1/4/13.   Can claim 50 out of 80 (50 +30) days.  So 63% of all expenses.

 
5)  Need to keep a very good record of days used privately and by family.
 
6)  Family use is included as private days.  So from example above, if also used 10 days by family (whether they pay full market rate or not), then can claim 50/90 (50+30+10) = 56%.
 
7)  If used for over 303 days per year, then mixed use rules don’t apply, i.e. if basically full time rental.


Next week I will cover holiday homes and GST Risk.


Kind regards
Ross Barnett 

Looking to buy a rental property in 2018? 8 Key Tips

24 January 2018

 

Looking to buy a rental property in 2018? 8 Key Tips.


 

 

 

 

 

Is your next rental property purchase just a gamble on capital gains?  Here are some tips to help you get ahead with rental properties!


1.  Buy a property where you can add value. 

Too many investors just buy a standard property, in a standard area, at fair value, with no opportunity to add value in the future.

  • The easiest opportunity is where the property is under-rented.  For commercial properties, the higher the rent, the higher the value.  So, if you can find property that is partially empty or rented below market value, then it can be quite easy to increase your equity and cash flow.  For residential, higher rent doesn't necessarily mean higher value, but it will improve cash flow.
  • Simple renovations and improvements are my second favourite - Use a good property manager and discuss options with them:

-  If you add a heat pump, how much extra rent will you get?

-  If you add new carpet, how much extra rent will you get?

-  What else could you do to make the property better for tenants?  How much extra rent will you get for these improvements?​

      It is normally pretty easy to get a 10% return on your investment for simple renovations.  But, realistically, if you are smart and work in with your property manager, you can probably get 20%.

  • Rent by room or rent fully furnished?  Be careful with these options, but it can be a way for you to add value and improve cash flow.
  • Add a bedroom - For residential, more bedrooms equals more rent and more value.
  • Add a minor dwelling.
  • Subdivide - For commercial, you might not be able to subdivide, but you might be able to split one bigger tenancy that is hard to rent into smaller tenancies that are easier to rent, and rent for a higher value overall.  For residential, a subdivision can often easily add $100,000 in equity, plus give you the opportunity to have a new rental, with good tenants and low maintenance.
  • Buy at a true discount.  This generally means buying privately!



2.  Work out the cash flow! 

Ideally you want a residential property where the rent pays for all the expenses.  Even more ideal would be if the rent can pay for all the expenses and some principal, so that you pay the rental off over 20-30 years.  
 

NOTE:  This means all expenses, so allow for fair repairs, rates, insurance, travel, accounting fees, etc. 
 

If you are a Coombe Smith client, make sure you have our simple Rental Spreadsheet that helps you see the cash flow now, and over the next 10 years.
 

For commercial - watch the principal requirements.  For example, your commercial property might be making $10,000 taxable profit.  But your bank might require $15,000 principal repayments, plus $3,300 of tax = overall negative cash flow of $8,300.




3. Check the area.

  • I google the population as a starting point for any area I am thinking of buying in.  If the population is decreasing, I would be very careful buying.  More people means more possible buyers and more possible tenants.  Good population growth is likely to lead to rent increases, which is essential for cash flow!
  • This is a great article on property values versus household income.  If household incomes are too low compared to house values, you might struggle to get higher rent in future: https://www.interest.co.nz/property/house-price-income-multiples
  • Look for recent articles and information, such as "100 jobs to go" - http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11980396.
  • If you are not from the area or buying without seeing, be careful that there is nothing in the area that affects your purchase.  A property investor once purchased a rental in a different island, sight unseen.  Unfortunately, it was right next to the sewerage works!



4.  High Gross Yield doesn't necessarily equal positive cash flow

You might find a property in a small town.  $120,000 cost and $275 rent per week.  Based on 52 weeks (I probably wouldn't use 52 weeks in my real calculation), this is an 11.9% Gross Yield.  But rates are $4,500, insurance might still be $1,200, interest might be at 4.5%, so $5,400.  Property Management is often a higher percentage (might be 9.5% plus GST).  Repairs can be the killer, as it often costs the same to repair in a small town as it does in a city.  Suddenly, with low interest rates, this property is still making a cash loss of $1,298 using those figures, some accounting and bank fees and travel.



5.  Don't believe developers.

Property is advertised as $600 per week rent – don’t believe it and get an independent rental appraisal.


Property is worth $700,000 – don’t believe it and either do your own research or get an independent valuation.

Property will give a 10% Gross Yield – is it too good to be true?  What is the catch?  Make sure you do your own research and if rent by room, or fully furnished, check with an independent property manager to make sure sustainable.  You don’t want to rely on $600 per week, when realistically it might have to drop to $500 as no demand for rent by room (for example).
 



6.  Have a plan and a goal -  If the property you are looking to buy doesn't help you to achieve your goal, then why are you buying it?




7.  Plan for change

  • Interest rates may go up.  I like to have some long term loan terms to protect against interest rate rises.
  • Tax refunds might disappear.
  • Better heating and conditions might become a requirement.  Take this as a positive and think of Item 1 above, as you are likely to get a good return on these items, especially if the Government helps pay for them.
  • Regular rent reviews.




8.  Balanced Portfolio

An old saying was to have five cash flow positive properties to support your one capital gain property.  This kind of portfolio should give you stable cash flow and stop you being so reliant on capital gains.  Also, try not to have too many of the same thing.  For example, if you have 20 rentals at Auckland university, what happens if the university suddenly closes down, or its student numbers drop by half?  Having some newer properties also helps to balance the portfolio, as these will have less maintenance in the future.

a.  If you already have two rentals, each running $5,000 negative cash flow per year.  Then, if you purchase another, I would want it to be positive.

b.  If you have five older rentals in Tokoroa, which have great cash flow, but you think no capital gain potential.  Then you might buy the next one in Hamilton to have a more stable tenant base, maybe less repairs and less         hassle, but higher chance of increase in rent and value.
 


I hope you enjoyed reading this. 


If you're not already a client of Coombe Smith, but want some help, we have 3 free telephone chat spots available this week for 5-10 minutes.  These are no-obligation free telephone chats with me.  Please This email address is being protected from spambots. You need JavaScript enabled to view it. RIGHT NOW to book yours in, as mentioned, this is OBLIGATION FREE.


Kind regards
Ross Barnett 

Low Hanging Fruit - 6 Easy Opportunities to make more from Property

12 January 2018

 

Low Hanging Fruit - 6 Easy Opportunities to make more from property

 

A great way to get ahead with property is to concentrate on some easy ideas that you can get done immediately.  I posted this live video on our Facebook page yesterday and it has had a really good response, so I thought you might be interested to watch it too.

Click here to view the video.


Feel free to share the video link with friends and family.

 

What is happening in 2018?
 

  • Simple property seminars in Hamilton, starting late February.  Over the next few months we will be covering:

 

Property Basics

Cashflow

Structures

Trading.

 

  • Simple property webinars on the same topics, most likely starting in March.
  • Video copies of the webinar available to Coombe Smith clients.
  • We are investigating monthly fees, so watch this space if you would prefer to pay monthly.
  • We will be offering discounted meetings with 2018 financial statements and tax returns, to help you plan for the future, focus on cashflow, and make sure you are in the best position once Labour’s changes come through.

 
If you have a topic that you feel would be good for a newsletter/blog, please email me at This email address is being protected from spambots. You need JavaScript enabled to view it. and I might be able to do a future newsletter/blog on that topic.

Kind regards
Ross Barnett 

Common Restructure to Become More Tax Effective (Personal Home becoming a Rental)

9 January 2018

 

Common Restructure to Become More Tax Effective (Personal Home becoming a Rental)

 

 

 

 

 

Are you trying to get ahead on the property ladder by converting your current personal home into a rental, and then buying a new personal house?

This is an example of poor advice that I have recently seen, followed by a common restructure that makes the overall situation more tax effective.


Poor advice and current situation
 
Jack and Jill own a personal house (House A), worth $500,000 with $50,000 of debt in their personal names. 
 
Jack and Jill have been advised to keep House A in their personal names.
 
They have purchased a new personal house (House B) for $600,000 with a $600,000 mortgage.
 
Outcome – Unfortunately with this structure, none of the interest on the $600,000 loan is deductible.  Only the interest on the $50,000 loan on House A will be deductible.  At say 5% interest, this would be a $2,500 deduction, reducing tax by $825 (if at 33% tax rate).
 


Restructure
 
A common restructure is to sell House A to a Look Through Company (LTC) at fair market value.  The LTC would then borrow 100% (can do with one or two banks!) being $500,000.  The interest on the $500,000 is deductible as it is being used to buy a rental property.  At say 5% interest, this would be a $25,000 deduction, reducing tax by $8,250 (if at 33% tax rate).
 
Jack and Jill would then receive the $500,000, pay off the $50,000 current debt, and use the $450,000 cash towards House B purchase.  This way there would only be $150,000 personal debt left, where the interest is not deductible.
 
This creates a tax advantage of $7,425 per year!
 
For any restructure, it is important to look at the cost versus the benefit.  There can be catches such as depreciation recovery, tainting and the Brightline test to consider.  Also, whether there is a commercial reason for the transaction.  So it is important to get expert advice.  QB 12/11 from the IRD gives some great information on this type of transaction as well, and confirms that this type of restructure is not tax avoidance, but it does depend on the exact circumstances!
 


The information below is from my 14/07/17 blog.  It is important reading if you are thinking of converting your current personal house to a rental:

 Convert Your Current Personal House to a Rental?

When trying to get ahead on the property ladder, a lot of people move to a new personal home and convert their existing house to a rental.  Unfortunately, this is often done for emotional reasons!

If you are thinking about doing this:

1)  Is your existing house a good rental?
Is there high tenant demand in the area?  Look at population figures for the area and talk to a local property manager.
Will you be able to attract a good tenant?
Is the property easy care and low maintenance?
Is there an opportunity to add value in the future?  For example, subdivide or add a minor dwelling.

2)  What is the cash flow?
As a starting point, I would work out the Gross Yield.  This is 50 weeks rent divided by the property value *100.  For example, $400 per week * 50 = $20,000 divided by value of $400,000 would give 5% Gross Yield.

The Gross Yield gives an indication of the cash flow:
5% or under is going to be quite negative cash flow based on 100% mortgage.
7% or better should break even or be positive cash flow.
Between 5% and 7% is still likely to be negative cash flow, but a smaller, more manageable amount.

Review the income less the full expenses.  The example below shows a $8,784 loss expected each year before tax.  After tax refunds, this drops to $4,914 per year or $94.50 per week.


 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3)  What happens if interest rates go up?
At 6.5% interest, the loss after tax refunds increases to $9,950 per year or $191 per week.

4)  Can you afford the cash flow losses?

5)  Do you want to gamble that the property will go up more than the cash loss?

6)  Or do you have a plan to change the cash flow?

  • Minor dwelling to increase rent
  • Subdivide long term and sell section, or build second rental on section
  • Inheritance coming that can reduce the rental debt.  NOTE:  you are likely to pay off any personal debt first.


Often I find that personal homes are not great rentals and that it is better to sell the existing personal house and buy a specific rental, with better cash flow or better long term options.

I hope you have found this topic of interest.


Kind regards
Ross Barnett 

 

Do you want to buy and sell properties for profit?

21 December 2017

 

Do you want to buy and sell properties for profit?


GST and Zero Rating

If you trade residential properties, then you will have to register for GST once you have a continuous taxable activity.  This means that you can claim GST on purchase costs that have GST but you also have to pay GST on the sale. 

If you do a one-off trade, then this is not a continuous taxable activity.  Therefore you would not be required to register for GST.  But there can be a fine line, and it is often difficult to determine, if the trade will be a one-off or if you are likely to do numerous property trades, thus becoming continuous.  I suggest seeking professional advice from a property accountant on this subject and the best approach is to be honest.  If you intend on buying numerous properties to do up and sell for the profit, then you should GST register at the start.

For long term residential property investors, there is no GST, so the above comments are just for property traders.


Zero rating – Over the last year we have heard about a lot of mistakes around the Compulsory Zero Rating (CZR).  Real Estate agents commonly get this wrong and a few recent forum posts on www.propertytalk.com even show lawyers and non property accountants getting this wrong.  If both the vendor and purchaser are GST registered, then the sale will be zero rated for GST.  Therefore if you are a GST registered purchaser and the vendor is GST registered, you should be making any offer for the GST exclusive amount, plus GST (if any).

So for example, you are GST registered and purchasing a section from a developer.  The developer is advertising the section for $240,000.  You want to offer $230,000.  You would therefore work out the GST exclusive value $200,000 ($230,000 / 1.15) and offer on the contract $200,000 plus GST (if any).  As the developer will be GST registered, the sale is then Zero Rated, so you would pay $200,000 but can’t claim back the GST, and the vendor would receive $200,000 but have no GST to pay to IRD.

Following the example above, some recent mistakes I have heard of are the contract being written at $230,000 inclusive of GST.  This sale would still be Zero Rated, and Zero Rated at the $230,000.  So the purchaser would effectively be paying $230,000 + GST, or $264,500.  This would be a $30,000 mistake and this can often be the difference between a good , profitable trade and a bad one.

Therefore it is very important to ensure you know whether a vendor is GST registered or not when you are buying trading properties.  I recommend that you talk to your lawyer about inserting a clause in the sale and purchase agreement to ensure that the vendor is unable to change their GST status once the contract is signed.  Many traders and educators use a standard clause that your lawyer should be able to provide you.


Second hand goods claim – If you are buying from a vendor who is not GST registered (this will often be the case, as they are just personal house owners), then as a GST registered trader you will be able to make a second hand goods claim.  You can only do this on the payments basis for GST (i.e. claim the GST once you pay for it).  The property trader would then claim the GST back in the next GST period and get the GST back as a refund.  This is the purchase price divided by 23 * 3, so for example if a trader purchased a property for $230,000, they would get $30,000 GST back.  IRD will generally audit large GST refunds, so we often get clients to just claim the land/building purchase in that GST period, to keep the GST return very simple for the IRD audit. 
 


GST on rental income if trading properties

We have taken on a client in the past whose old accountant has returned GST on rental income for the last 6 years.  The client owes or has paid around $12,000 in GST per year, totaling $70,000 approximately over the 6 years.

If you are trading properties and registered for GST, you should not be returning GST on rental income!  For properties purchased before 1/04/11 it is best practice to use Lundy adjustments.  For the client above, using the Lundy adjustments reduced the GST adjustment down to approximately $2,000 per year or $12,000 for the 6 years.  Overall we hope to save at least $50,000 and are in the process of reassessing the old GST returns with IRD.  Again, if you are involved in property transactions, it is essential that you use a specialist property accountant who is fully aware of property tips and tricks.

If the property was purchased after 1/04/11, new rules have come in that generally require more GST to be paid back to IRD.  But the first adjustment required is not until 31 March of the year after.  For example, if you purchased a section, built a house in May 2013 and tried to sell it, then couldn’t, so rented it out, the first adjustment period would be for May 2013 to 31/03/15, with the GST adjustment due in the 31/03/15 period.



Profit on Trading Property

There are a lot of people looking at going full time into property trading to make a living and gain wealth.
My first comment is be very careful about quitting your day job.

- This job brings you day to day cash flow, which enables you and your family to live.

- Banks love a steady, solid income.   So without one, you might find lending difficult.

Secondly, do the figures really stack up?   In today’s market it is easy to buy, easy to renovate but the problem lies with selling.   This can result in additional holding costs and also with a lower than expected selling price.

Here is an example of a Property Trade that I have heard an investor talk about.


Example

Purchased for $275,000
Renovations cost $5,000
Could sell for $300,000
From a quick glance, a lot of people think “that’s not too bad” and it’s $20,000 profit.   But, unfortunately, that is not the case.   Below are the likely expenses and I have included commission because in today’s market, many sellers are needing to use an agent to get a good price. 

     

Incl GST

 

Excl GST

INCOME

         
           

Sale of Property

 

300,000

   

Less GST - Divide by 23 * 3

39,130

   
         

260,870

           

EXPENSES

       

Purchase

   

275,000

   

Commission on sale

 

10,350

   

Legal - $1,000 to buy and $1,000 to sell

2,000

   

Accounting

 

500

   

Advertising - Agent or other

1,500

   

Insurance for 3 months

200

   

Rates - 3 Months

 

500

   

Renovations

 

5,000

   

Telephone

   

25

   

Travel - 86 cents per km * 300

260

   
           

Subtotal Expenses

 

295,335

   

Less GST

   

38,522

   
           

Subtotal Excluding GST

   

256,813

           

Less Loan Fee - NO GST

   

1,000

Less Interest 3 months @ 6%

   

3,750

           

TAXABLE PROFIT

     

-693


   
So based on the expenses included, the Trade would make a loss of $693.   If commission is excluded the profit would be $8,307 before tax, or around $6,000 after tax at average tax rates. 

This example shows how quickly a perceived profit can disappear.   If the property was held for longer, then it is likely to make more of a loss.

There are a number of property investors getting tutored about property trading and my understanding is that there are around 90 such students targeting areas in South Auckland.

In my opinion this is too many traders concentrating in the one area. I would suggest being very careful about trying to trade in this area as it is likely there are too many other traders competing to sell their properties.

$50,000 rule

I always think that you need a $50,000 gap between the purchase and sale, with limited renovation expenses.   So for example, buy at $250,000, spend $5,000 on renovations and sell for $300,000.   Based on the same kind of expenses including commission, the profit before tax would be approximately $20,000. 

This level of profit gives the trader some room to move with either the selling price, or to hold the property for longer and to still make some kind of profit.
 
Overall

Property Trading is not easy and you need to ensure you have a market in which to sell your finished product.   With Trading you need to keep your properties moving, so the idea is to do them as quickly as possible and then move onto the next one.   Historically where I have seen Traders come undone is where they take too long or where they get too big too quick (i.e. have 2-3 or more on the go at once).


If you are thinking about trading properties, I suggest you organise a meeting with me to discuss the structures used and the implications of tainting.  Ring Mareese on 839 2801 to organise a meeting or email This email address is being protected from spambots. You need JavaScript enabled to view it..  Please note: there will be a charge for this meeting, depending on the work and information required.

Kind regards
Ross Barnett

Are you thinking of selling after a two year period? Here is a timely reminder about the Bright-Line rules!

19 December 2017

 

Are you thinking of selling after a two year period?  Here is a timely reminder about the Bright-Line rules!

 

 

 

 

 

 

 

 

 

Here are some important points around the Bright-Line Test that you need to be aware of:

Currently 2 year period.  So, in general, if you buy a rental, sell within 2 years, any gains will be taxable.



Measuring the Bright-line Time Period:

  • Effective from 1 October 2015.  So, if Sale and Purchase Agreement dated before that, then Bright-Line doesn't apply.
  • Date of Acquisition = Normally Settlement.
  • Date of Disposal = Sale & Purchase Agreement date.


Must be residential land: There is some criteria around this:

  • Includes overseas residential land!  But should also get foreign tax credit if gain taxed overseas already.
  • Includes B&B's and AirBNB properties.


Off The Plan Sales:

  • Purchase = date of Sale & Purchase Ageement.
  • Sale =  date of Sale & Purchase Agreement.


Subdivided Land:

  • Date of Acquisition = registration of undivided land, i.e. when the whole property is purchased.
  • Date of Disposal = Sale & Purchase Agreement for sale of section.
  • NOTE:  Likely to be taxable under other tax provisions.

 

Leasehold to Freehold:

  • Date of Acquisition = date lease granted Gift.
  • Date of Disposal = date of registration


Compulsory Acquisition:

  • Date of Disposal = date of compulsory acquisition


Mortgagee Sale:

  • Date of Disposal = date of disposal by mortgagee.


Nominations: 

  • Originally IRD viewed nominations as a disposal, and therefore any gains could be taxed under the Bright-Line rules.
  • In early 2017, IRD retracted and have confirmed no sale or disposal on a nomination - which is good news.


Main Home Exclusion:

  • Can be Trust
  • Must be predominately main home, so more than 50% of time used as main home.  If vacant and renovated for more time than used as a personal house, then not main home.
  • Main Home Exclusion can only be used twice in 2 year period.
  • Doesn't apply if there is a pattern of buying and selling personal home.
  • Holiday ok if short term.  Longer time, depends on exact circumstances and as long as you don't set up another home, it should be ok.
  • Subdivide main house.  Generally section sale would also have main home exclusion but would suggest getting full advice on this to double check.


Main home looking at buying and selling for a profit:

  • If intention is to renovate and sell for profit, then taxable under other income tax sections.
  • Main home exclusion would not apply.
  • So be very careful with what your intention is and how this is documented!

Main Home intended to renovate and sell:

  • Gain is taxable.

Main Home, intended to live in and renovate.  But then later decide to sell:

  • Gain not taxable and exclusion for main home should apply (as long as no pattern of buying and selling, and still meet home exclusion provisions).


Relationship Property Transfers:

  • Generally excluded and transfers deemed to be at cost.

 

Inherited Property:

  • Generally excluded.

 

Change of Trustee:

  • If only a change of Trustee, then stays with original registration date.

 

Residential Land Withholding Tax (RLWT):

  • Applies from 1 July 2016.
  • Only for Offshore RLWT person who disposes of land subject to Bright-line rule.
  • Only relates to New Zealand land.
  • Obligation on conveyancer at settlement and to account to IRD.
  • If taxed under other tax provisions, but within 2 years, there will still be RLWT if vendor is an "Offshore RLWT" person.
  • There are three RLWT methods.


I hope this summary of the main points is helpful.

Kind regards
Ross Barnett 

It's amazing how often there is confusion over these simple GST scenarios

15 December 2017

 

IT'S AMAZING HOW OFTEN THERE IS CONFUSION OVER THESE SIMPLE GST SCENARIOS

 

 

 

 

 

SCENARIO 1:   You are looking to buy another investment property (PropertyA) that you will use for short term accommodation (e.g. Air BNB, holiday rental).  Income will be over $60,000, so you have to be GST registered.  You are looking at a particular property that is being advertised at $600,000 plus GST, by a GST registered developer.

If both parties are GST registered, the sale would be zero rated for GST.

From your research, comparable properties are worth and being sold for $600,000, with normal GST inclusive contracts.


What should you offer?
In this case you could buy a comparable property from a non-GST registered party for $600,000, then claim back the GST, so be left with a real cost of $521,739 exclusive GST ($600,000 / 1.15).  Therefore, if the properties were the same and you were happy with the value, then you would only offer $521,739 plus GST for Property A.  If accepted, the transaction would be zero rated.  You would pay $521,739 and you would not claim back any GST.  This would be the same as the real cost for the comparable properties.



SCENARIO 2:  You are a GST registered trader or builder wanting to do a spec house.  A section is being marketing by a GST registered developer for $230,000.  This is the normal price that a personal home buyer would pay for the section, so this would be $230,000 inclusive of GST.

What should you offer?
$200,000 plus GST.  As both parties are GST registered, then the sale is zero rated.  Effectively, this is $230,000 less the GST = $200,000 GST exclusive.

  • Vendor:  Would normally get $230,000, then have to pay IRD $30,000 and be left with $200,000 real sale value.
  • Buyer:    Would normally buy for $230,000, then get the GST back from IRD $30,000 and be left with $200,000 real cost.
  • So the Zero Rating avoids the steps of paying the GST and receiving back the GST, and just settles at $200,000 where both parties would end up at anyway.



SCENARIO 3:  You are looking to buy a long term hold residential property that will be leased to a long term residential tenant.  As such you are not GST registered.  For some reason the vendor is GST registered and asking for $300,000 plus GST.   They say there is only GST on half the property.

What should you offer?
Obviously if depends on what you think the overall property is worth.  But you should be looking at a GST inclusive offer.  So the vendor is really asking for $300,000 plus 50% of the GST = $322,500 ((150,000 * 1.15)+150000).  If you were happy with this amount, you would offer $322,500 GST inclusive.  The GST is then the vendor’s problem, and you have a set purchase price that cannot be affected by GST.  Otherwise if you offer $300,000 plus GST and it turns out the GST is $30,000, then you would have to pay $330,000.



SCENARIO 4:  You want to buy a lifestyle block.  Really just your personal home, with a couple of sheep, a dog, two ducks, three cats and a horse.  Obviously this isn’t a real business, so you shouldn’t be allowed to claim the GST back.  The lifestyle block is for sale for $2 million plus GST.  The GST is only on the extra land, so is 50% of the property in this example.  So the GST inclusive value would be $2,150,000.
 
You are struggling to come up with the funds, so your creative real estate agent and mortgage broker come up with a plan that you should be GST registered.  Then the sale would zero rate, and you would just have to pay $2 million.

Is this a good idea?  NO

  1. Technically you cannot be GST registered as there is no continuous taxable activity.  So what you are doing is illegal.
  2. Is it really in your best interests?  You might save interest on the $150,000 extra, at say 5% for 5 years, being approximately $37,500.  But, you might sell the property in 5 years time for $4 million.  The new purchaser is likely to not be GST registered.  So you would have to pay GST on the sale.  This could be $2.5 million for the GST part, so $326,087 GST to pay.  You only saved $150,000 at the start, but are now paying $326,087.  So taking the interest into account, the GST has cost you an extra $138,587!


I hope this has cleared up any confusion you may have had.


Kind regards
Ross Barnett 

Our Turn to be the Bad Guy - If you renovate, then sell, probably non-deductible!

30 November 2017

 

Our Turn to be the Bad Guy - If you renovate, then sell, probably non deductible!


 

 

 

 



 Scenario 1
 
You have owned a rental for 10 years.
The tenants give their notice to move out.  You decide this would be a great opportunity to sell.
To maximise the sale value, you paint the house outside, you renovate the bathroom and do some other repairs for $20,000.
The property is sold.
 
Unfortunately the $20,000 of costs are not deductible as repairs.  They are a cost of selling and non deductible.
 
The rules do not look at who caused the damage, or why the repairs were needed. 


Scenario 2
 
You have owned a rental for 5 years.
The tenants give their notice and move out.  You decide this would be a great opportunity to renovate and then re-tenant.
You spend $15,000 on painting and other repairs [See point (a)]
Then, as part of your re-tenanting process, your property manager suggests you get a meth test, just in case.  You have already appointed the new property manager and already started to advertise the property.
Meth test = positive.  All attempts to rent stop.
$9,000 is spent to decontaminate [See point (b)]
You decide you have had enough and sell the rental. 

(a)  Is the $15,000 deductible?  Obviously it would need to meet standard repair vs asset tests, but as the property was being renovated to rent out, and there is clear evidence that the property would be re-tenanted, then the $15,000 would be deductible. 

(b)  Is the $9,000 deductible?  Unfortunately not.  The $9,000 is a cost of selling and not associated with receiving rent.


Scenario 3
 
You have owned a rental for 6 months.
The tenants give their notice and move out.  You decide to renovate and then re-tenant.
You spend $17,000 on painting and other repairs.
You then rent the property out for another 2  months, before changing your mind and selling.
 
Is the $17,000 deductible? 
Yes, as long as standard repair versus assets tests are met, this is associated to the rental income, and the property was rented before and after the renovations.
Note – Any gains would be subject to the 2 year Bright-line test!


I hope you have found these examples useful.

I'm running the Keppler 60km run on Saturday, so I'm still working on the commercial property blog.  If you want to learn more about commercial property, make sure you click here to subscribe to our newsletter to ensure you get this great information.

Kind regards
Ross Barnett 

It's time to think about interest rates again

24 November 2017

 

It's time to think about interest rates again

Interest rate risk

 

 

 

There is some talk that interest rates could jump up suddenly.  At this stage it is just talk, but how good is your mortgage strategy?  Have you reviewed it recently?  And what would happen to you if interest rates jumped up suddenly?

 
I last looked at interest rates in November 2016, and, at that time, ASB and BNZ had just raised their 3 to 5 year rates.  I was therefore expecting interest rates to slowly move up over the last year and be maybe 5% by now.  Obviously this was completely wrong with the short term rates.  The 1 to 2 year Interest rates are still extremely low and haven’t really moved.  From www.interest.co.nz the best rates are:

1 Year 4.19%
2 Year 4.29%
3 Year 4.79%
5 Year 5.59%
 
While the 1 and 2 year rates are still extremely low, the longer term rates have moved up slightly.



Four Key Points to Consider:
  

1. Negotiate – If you ask for a better rate, you can often get a discount off the standard rates.  Or use a mortgage broker so that they do the running around for you and can negotiate on your behalf.  You can definitely get a good discount off floating rates!

A great line can be:  "My accountant told me that I should be getting 4.55 for 3 years."  Or "my accountant told me that his other clients are getting at least a 0.2% discount."  Worst case, the bank still won't give you a better rate, but it can be an wasy way to ask for a better rate and you are blaming it all on someone else (me!).

2. Don’t have too much floating – the idea with a floating loan is that you can pay it off before your next fixed loan comes up.  So if you think you can only pay off $20,000, then your debt in your floating loan should be around $20,000.  The best floating rate on www.interest.co.nz is 5.65%, or 1.46% higher than the 1 year rate!  So if you had a high floating loan of $300,000, you would be paying $4,380 extra interest per year!

3.Rental debt vs Private debt – When we complete your financial statements, we will identify in our letter if there is an opportunity to borrow more in the rentals that is tax deductible and therefore reduce your personal home debt where there is no tax deduction.  This can often be a simple change at a very small cost.  For example, if your rental Company owes you a $200,000 shareholder current account and you have a personal house debt over this, then the Company could borrow $200,000 and repay you,. Therefore the interest on the $200,000 would be deductible and could save $3,000 in tax per year!

It’s essential to do this right and to get expert advice.  So if you think this could work for you, then contact us and we can help you through this process. 

4. Spreading loans – If you have all your loans fixed for 1 year, then you are gambling that interest rates will go down.  If you are right, great.  If you are wrong, then it could cost you a lot in extra interest!  Obviously no one has a crystal ball, so everyone is guessing what will happen.

 
I like the approach of ‘don’t put all your eggs in one basket’.  Therefore, if I had a $920,000 mortgage, I might split it into:

  • $20,000 floating
  • $300,000 at 1 year
  • $300,000 at 3 years
  • $300,000 at 5 years.

 
The average interest rate is still only 4.9%.  If you negotiate, you will be able to get this lower too!
 
Under a spreading approach, if interest rates go down or stay the same you still do OK as you have some loan fixed for 1 year.  If interest rates go up, you still do OK as you have some loans fixed for 3 and 5 years.  You might not get the best interest rate, but then you are not gambling on one outcome either.
  
Overall it’s not about panicking and rushing a decision.  Instead, it’s about thinking about your long term approach and your preferred risk level.
 
Kind regards
Ross Barnett 

 

What are the implications if you have an LTC, now that Labour is aiming to change tax rules for rentals?

10 November 2017

 

WHAT ARE THE IMPLICATIONS IF YOU HAVE AN LTC, NOW THAT LABOUR IS AIMING TO CHANGE TAX RULES FOR RENTALS?

There are three parts to this:

Part 1:    If you have a negative rental, how will the possible changes affect you?
 
So at the moment you have an LTC, making a loss of $10,000 per year, and the loss is offsetting your personal income and you are saving $3,300 in tax each year.
 
The likely changes that Labour are suggesting will take some time to put into place, and then Labour is looking at phasing the change in over five years. 
 

  • Year ended 31/3/18 = likely no change and still $3,300 refund
  • Year ended 31/3/19 = likely no change and still $3,300 refund
  • Year ended 31/3/20 = Likely only 80% of loss can offset personal income, refund reduced to $2,640
  • Year ended 31/3/21 = Likely only 60% of loss can offset personal income, refund reduced to $1,980
  • Year ended 31/3/22 = Likely only 40% of loss can offset personal income, refund reduced to $1,320
  • Year ended 31/3/23 = Likely only 20% of loss can offset personal income, refund reduced to $660
  • Year ended 31/3/24 = Likely no loss can offset personal income, refund reduced to $0.


 
Part 2:    The losses will still be there and would be carried forward to future years where there was rental profit. 

So as your rentals change from negative to positive as you pay down debt, rent rises and depreciation deductions reduce over time, then you would not have to pay tax on the profits for the first few years!
 
In my opinion, investors should be concentrating on getting passive income from property long term.  Therefore, long term, property investors should be paying tax on profits, rather than being worried about whether they will get tax refunds from losses.  It kind of gives around five years for a property investor to get their ‘house in order’.
 
 

Part 3:    An LTC is probably still the right structure anyway. 

If the suggested rules come in, and are set up correctly by Government, then all structures will be affected.   So if you currently have an LTC, then it is likely to still be a good structure for you.   It’s important to always review your structure, but one of the best advantages of an LTC is its flexibility.   You can change shareholding long term as your situation changes.   Fox example,  initially you might have the shares owned by the highest earner to offset their high tax, but long term you might change to a Trust owning the shares to give asset protection and lowest tax on the income.   An LTC is also an easy entity to access capital gains!
 
If the government doesn’t set the rules up correctly (I’d guess a better than 50% chance), then keep an eye on my newsletters and facebook posts, as there is likely to be some clever ways to structure in the future!
 
 
So, overall at the moment, don’t panic.  If you are currently using an LTC, then it is likely to still be fine.   As the new rules become clear, then it would be worth having a free initial telephone chat with me for 5-10 minutes to check if you need to do anything further.  


Kind regards
Ross Barnett 

Commercial Property I don't think you should buy!

30 October 2017

Commercial Property I don't think you should buy!

Click here to watch my live video on Facebook.

 

Kind regards

Ross Barnett

I'm nervous.... No I'm Scared

27 October 2017

 

I’m Nervous…. No I’m Scared

The property market has already turned, or is showing signs of turning. LVR rules have had a huge impact, and I was getting set for a consolidation phase. My prediction was that the market would go flat, and that in 2-3 years there would be some desperate vendors, therefore some opportunities to pick up some bargains. I love this video showing what a new investor does at the peak of the market:  https://www.facebook.com/thepropertyaccountant/vide...

Now the game has changed a little bit more;

- 5 year brightline test. This personally doesn’t worry me, but the majority of property investors are after a quick buck. They want to buy a property now, it to jump up in value $100,000, and then to sell so that they can reduce their personal house loan, or buy a fancy car, boat , holiday etc. Paying tax on a property gain scares these investors.

- Tenant friendly. Everything seems to be going the tenants way at the moment, no letting fee, only annual rent rises, 42 day notice becomes 90 day. There is also a lot of tenancy tribunal cases going against landlord, and some landlords are having to pay some serious money back to tenants.

- Extra costs and compliance – insulation, smoke alarms and especially Health and Safety. Health and Safety is frustrating some landlords and also pushing up ‘Tradie’ costs.

I would guess that 65% of property investors have negative cashflow, that means the rent doesn’t cover all the costs. These investors then love and rely on their tax refund. I just did a quick cashflow of a standard rental that an average/normal investor would buy now. $550,000 and getting maybe $475 per week in rent, so just over a 4% gross yield. If the property is 100% mortgaged (this is pretty normal), it costs $10,600 before tax refunds!

That’s right – an average rental, that an average property investor buys now, is costing them $10,600 per year, before tax refunds.

And that is at 4.5% interest rates. What happens if this goes up to 6.5%? The loss moves up to $21,500!

Currently this average investor would be getting back around $5,000 in tax presuming highest tax bracket and some chattels to depreciate. So this brings the overall cost down to around $100 per week. Which is manageable to most investors.

How is this new or average investor going to cope with no tax refund – down $5,000 or another $100 per week?
Plus the extra compliance costs and hassle?
Plus if there is no capital gain for 2-5 years?

Then the biggie – WHAT IF INTEREST RATES GO UP? 1% would be another $100 per week.

Can the average investor survive an extra cost of $200 per week?

My thoughts from this;

- If you are conservative - Wait, watch and hope the market collapses. Then buy some bargains in ½ to 3 years, that have opportunity to add value, maybe through subdividing.

- If you are a little more aggressive - Same as above, but maybe some joint ventures, so that you are still doing things, but with lower risk. Also ensure the new purchases whether trades or holds, can cover themselves easily and don’t put you under pressure

- Aggressive – I just don’t think it is worth going there at the moment

- Buy in the bigger regions, such as Auckland, Hamilton, Tauranga and Wellington, where there is always buyers and tenants. Keep away from dying regions and little regions, especially if they rely on one industry. I always laugh to myself as each property cycle comes around and talk slowly moves to "lets buy in Tokoroa or Whanganui!"

My best advice at the moment, is take your time and don’t be afraid to get some advice and ask for help. Your local property investor association is a great starting place, and we also have some great information, checklists, webinars, seminars, video’s and blogs coming out over the next few weeks on strategy and how to get through the hard times if they come. Make sure you like our page or sign up for our newsletter to ensure you get the info!

If you have negative properties, think hard on how you can turn these into positive – a great starting place is a free 10-15 minute chat with me, where I can often point you in the right direction. Just email my PA, Mareese at This email address is being protected from spambots. You need JavaScript enabled to view it.. It’s completely free and no obligation!

What do you think?

Ross Barnett


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Claim your $1,000 back right here!

30 October 2017

 

Claim your $1000 back right here....

If you earn over $52,000 per year, then you are likely to have just lost $1,000 in tax cuts that National planned to bring in from 1/4/18.

How can a property investor get that back again?


1) Increase your rent. In simple terms it would sound like you need to increase rent $20 per week to gain $1,000, but after taking tax into account you actually need to earn around $29 extra rent per week!

2) Restructure – Over the last 10 years, we have found that the average restructure saves around $2,500 in tax per year, after taking into account any costs!

a. So can you borrow in your rental company to repay a shareholder current account?
b. Can you restructure a rental into an LTC, to make more interest on borrowing deductible?

Both of these need to be done correctly, for the restructure to work!

3) Rent by the room or fully furnished – Both of these will result in more rent, but they only work in certain places and it is important to make sure you can manage these kinds of properties and understand the tenants demand in the area.

4) Chattels depreciation

5) Make sure you are claiming all those small things. By themselves, each of these items is likely to be quite small, but added together they might save you $1,000 per year

· Mileage - For rental property associated travel you can claim 73 cents per km using the IRD rate or you can also use the AA rates which are generally higher. Make sure you have a simple system
· Donations - You can claim back 33% of any donations, as a rebate!
· A good system to account for all repairs, and all the little purchases


6) Insulation subsidies – If you haven’t insulated yet, talk to your property manager about insulation grants or subsidies. These can often reduce your insulation costs by $1,000

7) Kiwisaver – If you are an employee, then joining a super scheme or Kiwisaver makes sense. The government pays $521 into your Kiwisaver each year. Plus your employer matches your 3% contribution (3% of your income), less tax = approx. 2% extra contribution. So on a $50,000 income, you could be gaining $1,521 per year from the government and your employer

8) Renovation – An example from a property manager in Hamilton, was the landlord spent $25,000, and increased the rent $80 per week. A 16% return on investment!


Do you own a business, and also investing in property? Watch out for my next blog on “Maximising the benefits of having a business and property”

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Kind regards
Ross Barnett

How to get passive income from property?

6 November 2017

 

Check out my article for Waikato Property Investors Association - Have you joined yet?

 

How to get passive income from property! A must read on 5 different strategies. Have you joined your local Property Investor Association yet? With so many changes to property it is worth checking out the benefits at the bottom of the article! 

What is happening in the Auckland market?

6 November 2017

 

What is happening in the Auckland market?

The Median sales information shows that Auckland has been very flat over the last 6 months, but is still slightly above last year. At this stage it definitely hasn’t crashed!

What’s your prediction for the next 12 months?

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7 Mistakes Business Owners Make with Property

7 November 2017

 

7 Mistakes Business Owners Make With Property

 

Here is the list of seven items.  After this list, I have focussed on Points 1, 2 and 4 and included more detail and some diagrams to help explain the concepts further.
 

1.  Structure:  Often as property investors, we are looking at tax refunds versus asset protection.  Business owners can do so much better!

2.  Inter Entity Transactions: If your business goes bust, you don't want to lose your property investments too.

3.  I'll do it myself!  If you are a business owner, especially in the Trades (plumber, builder, electrician, etc), it seems easiest to mow the lawns yourself, or fix that fence yourself, or do the painting yourself.  You're saving money by not paying a contractor, right?
  

Often this is wrong, because as a business owner, you are often time poor.  So you already don't have spare time.

  • Often your hourly rate is higher.  If you are going to do work, then you are better to do it for a client.  Maybe earn $80 per hour for your trade versus only paying the handyman $50 to fix a few things.
  • What is your family life worth?  What is some time to yourself for fishing, hunting, or relaxing worth?  Yes, you could mow the rental property lawns, but it is also important to get a work/life balance.

4.  One Bank

5.  Not treating it as a business.  Property is not a hobby!

6.  Not understanding the numbers in business.  A business should:

  • Have monthly financial statements so that you know the monthly profit.  Xero or a similar program can help.
  • Have a Budget and a comparison each month between actual and budget.
  • Review its Balance Sheet at least quarterly and understand its current assets vs current liabilities.
  • Have a marketing plan.  This can be very simple and set out the major advertising over the year to avoid spur of the moment decisions.
  • Regular dividends to move profits through to the business owners.

 

7.   Make a fair profit for your work and then a business profit.  So for a small business, that might be a fair market salary or similar profit distribution of say $100,000 (you should be earning more than your staff!), and then maybe a $60,000 business profit.  Otherwise why are you doing it?  If you are earning less than your staff, there is a major problem!

More profit means there is more to invest in property to obtain more long-term passive income.

Click here to view some great videos that might help you, especially if you are a Trade business (plumber, builder, electrician, etc).


So now I'm going to explain the concepts of Points 1, 2 and 4 above further.

1.  STRUCTURE

As a business and business owner, you have risks.  You could be liable for Health and Safety.  Your business could go bust and you could have personally guaranteed creditors.  These are just two examples, but there are many ways you could be at risk.

Therefore, asset protection is very important.  Ideally you want your family home protected and separate to your business and separate to you.

Two common structures:



Structure B is the Rolls Royce structure.  It means if Trust 1 has to guarantee the Company lending as shareholder, Trust 2 is still separate and, therefore, the Personal Home is separate.  BUT, often banks will require a guarantee over the personal house anyway, which kind of undoes some of the benefits.  It still provides an added layer between the business and the personal house.

 

 

 

 

 

 

So how does this link in with property?  Expanding on Structure A, a standard property structure would be:






We would often make both companies LTC's.  Therefore the profit of the business (Company 1) would flow to the Trust.  The loss (or profit) from the rentals (Company 2) would also flow to the Trust.  The Trust would then be the central point that combines the profit and loss, and then could distribute to beneficiaries.  For example,  $1,000 to each child under 16 which normally has no tax, and distributions to a non-working spouse to use lower tax rates.

LTC's are easy to get the capital gains out of too!  Where as it can be a real pain and expensive to get capital gains out of a normal company.

This structure gives both asset protection and still an offset from the rental loss!

 

If money has been introduced or loaned to the business or rental, then this structure can be improved slightly.  The Trust could formally loan this money to either company, with a General Security Agreement (GSA) in place.  This should give the Trust a higher priority and more chance of getting its funds back in a worst case scenario.  If you are advancing money to any company, seek advice from your lawyer and they will be able to help protect it better!



2.  INTER ENTITY TRANSACTIONS

You have a business operated through a company and some rentals in a separate company.  The business has excess cash, so you transfer it to the rental company to reduce some debt.

 

ISSUE:  Now company 2 (rental) owes Company 1 (business) money.  So in a worst case scenario, you have been doing this for five years and now the rental company owes the business $100,000.  The business goes bust!  The rental company would have to repay the $100,000!

 

 

 


How could this be done better?



 Business profits flow down to Trust through dividends.  Then Trust lends to Rental Company.  This loan could be done with security too.

 

 

 

 

 

 



4. ONE BANK

Often it seems easier to have one bank, say BNZ.

BNZ has the loan on your personal house.
BNZ has the loan on your rentals.
BNZ has the loan on your business.

You have one Bank Manager and life is good.  Right?

WRONG:  If something goes wrong, then BNZ owns you.

Ideally, you want to separate into a number of banks.  As you get more and more rentals, then you should have multiple banks for your rentals too.  For Example:

BNZ - personal house in Trust
Westpac - Rentals
ANZ - Business.

Try to have no cross securities between them.  This way, if the business goes bust, you have one major issue to deal with, but at least your personal house and rentals should be separate.


Great Free Information

I hope this has given you some great information.  Make sure you like our Facebook Page as we are putting up some great videos and information for property investors!


Kind regards
Ross Barnett

What effect will the new Government have on property investing in New Zealand?

20 October 2017

WHAT EFFECT WILL THE NEW GOVERNMENT HAVE ON PROPERTY INVESTING IN NEW ZEALAND?

I’ve just done an 11 minute video on Facebook about the likely changes coming up, and what you should be concentrating on as property investors.  You can view this here. 
 
Next week, I will put my thoughts into writing, just in case you prefer a written version.
 
The big thing is not to panic!  I see the property market as already being flat, and I expect the property market to stay flat in the short term.  It’s a time to focus on property basics.
 
 
FREE STUFF
 

  • We have some free seminars coming up in a few weeks to ensure you are doing the basics, plus to discuss your strategy further:  “How are you going to get passive income from property?”
  • Videos – We have 5 new videos on Youtube that you will find very interesting.  All short and sweet!   Here's the link to watch these.
  • Property investment spreadsheet – for clients.
  • Trading property notes and tips – for clients.

 
I hope you have a great long weekend, and hopefully we will all get some sunshine!

Kind regards
Ross Barnett 

 

Why you should be paying Principal on your Rentals!

6 October 2017

Why you should be paying Principal on your Rentals!

 


Long term, do you want Passive Income from your rentals?

What is the easiest way to achieve this?

Obviously that is easy - it's to have no mortgage.  One of the easiest strategies to achieve passive income from your rentals is to make Principal and Interest repayments, and long term pay off the mortgage.  Sacrificing a little bit now, saving a little harder, and budgeting a little more, can have huge benefits later on and can really help to set you up for your retirement.


How is paying Principal possible? 

It’s human nature to spend all that you have available.  So if you earn $800 in your hand each week, the $800 per week will generally disappear.  Often people don’t know where their income goes, but because it's there, they buy little extras they don’t really need.  But if the net pay was only $750, you would probably still survive.  You might have a few less drinks, lunches and luxuries, but this would force you to manage your money better and adapt to having slightly less.  So, working on this principle, if you were to set up an AP for the $50 per week to go towards your rental to pay down some principal, then you probably wouldn't even notice the difference of a little bit less in your spending account each week. 
 
Over 10 plus years, the small principal repayments will add up to a lot.  You start saving interest on the loan your have repaid, so slowly the interest gets less and less.  Then you have more cash free, so can repay more in principal.  So its all about getting into this winning cycle.


Your available cash Increases

If you just allow the pay rise, finished loan repayments, or tax cut money to sit in your spending account, it’s going to disappear.  On paper you are earning more and have more cash, but you will naturally adjust for this and it will disappear on unnecessary extras.  So instead:

  • If you get a pay rise:  Work out the extra pay and increase the AP to your rentals or home loan to pay off the mortgage quicker.
  • If you finish paying off an HP or car loan:  Set up an AP for the same amount to your rentals or home loan to pay off the mortgage quicker.
  • On 1/4/18, if tax rates change:  Work out your extra net pay, set up an AP to your rentals or home loan to pay off the mortgage quicker.


But, but, but………… the “tax benefits”

I hear this comment all the time.  Yes, it is a slight benefit to pay off your personal home loan quicker.  But most of the time the money just gets wasted and doesn’t go to either the home loan or the rental.  Also the tax benefits are often tiny.  I looked at this in more detail in my 21/3/17 blog, and on a $500,000 rental loan the difference in tax was only $292 per year approximately over five years!
 
Hopefully this helps you to pay off your rentals and obtain passive income long term!


Coming into Coombe Smith offices to see us?  There is now 2 hours FREE parking available on both sides of the road outside our building.  Thank you to Hamilton City Council.  

 

 

 

 

 

 

 

 

 

 



Kind regards
Ross Barnett 

Choosing A Property Accountant

28 September 2017

 

Choosing a Property Accountant.

It doesn't really matter where your accountant is. These days, with emails and Skype, it's often easier not to have a local accountant! Here are the things you should look for:

 

1)  True property accountant.

The easiest way to tell this is to visit their website. If the website is all about property - great. But if it is about business and farming, etc, etc, then they don't specialise in property and might be missing some tricks!

 

2)  Don't go for a one person firm.

A tiny firm often doesn't have all the resources they need. Plus if they die, are sick, go on holiday, how do you get your information? Back ups systems can be hopeless, and how does a single accountant review their own work? (Good firms generally have a double review process!).

 

3)  I personally don't like large firms either, as you often deal with the junior.

 

4)  A Chartered Accountant is generally better as they have compulsory training each year and many years of university and practical experience.

 

Good Luck with your choice.

Ross Barnett

The Property Investor You Don't Want To Be

26 September 2017

Last Friday I released my latest video The Property Investor You Don't Want To Be.  Over 2,000 people have already viewed this video on our Facebook page over the weekend.  If you are thinking about buying a rental, you need to watch this video first!  Only 14 minutes of your time and it might save you from making a big mistake.  Click here to view this video.

Feel free to share the video link with friends and family who are thinking about getting into property investment as it will be very useful for them.

Following on from the election here are my thoughts:  Why not National and Labour?

Rather than political games, why don't the two main parties work together for a better NZ? If you take the best of both parties, the end result could be quite good. They could focus on:

1). Reducing Government overspending

- Start with lower MP salaries
- Reduce the number of MP's by 25%
- Reduce the number of MP's advisors by 25%
- Reduce MP's perks, travel, superannuation and other costs by 25%.

2). Bring in Labour's 5 year Brightline test, to make property speculation harder. With this, the number of personal home exceptions could also be reviewed, as currently this gives a loop hole to be exploited.

3). Currently there is an incentive for people on a benefit to have more children. Maybe try a new strategy, as the current one isn't working.  Perhaps an incentive for people on a benefit not to have children?

4). Still have the tax cuts that National proposed!   The higher income earners already pay a higher percentage of NZ tax, and with the country surplus increasing, it is fair for some of this to go back to those who pay the majority of tax. AND, many of the tax refund recipients will spend the extra $1,000 on luxuries which then creates more money for small business's, leading to more wages, that leads to more overall spending in the economy.

5). Establish a new rule for future elections to stop Political Parties buying votes with last minute election promises.

6). Review the major items discussed during the election such as clean waterways, lower immigration, and more support for those less fortunate, and work together to improve these.

I personally don't think any of the Political Parties is that great, but maybe with the two major parties working together, rather than playing games, the country could be in a better place in 2-3 years time. Also over 80% voted for either of these parties.

What do you think?

Kind regards
Ross Barnett 

What would you do if you won $30 million?

18 September 2017

Hopefully you are the lucky person sitting there, wondering what to do after winning the $30 million Lotto last weekend.  The ideas below also apply to anyone who has come into a reasonable amount of cash, whether through a Lotto win, inheritance, a lucky property transaction or some other means.

What would I do if I had won $30 million over the weekend?  In my mind, the first 3 steps are imporant:

Step 1 – Don’t tell anyone.  Not your friends, family or anyone.  Keep the information to yourself and give yourself a chance to comprehend the win and what you will do with it.

Otherwise suddenly you will have 500 more friends, and your close family will double or triple in size.  They will all be trying to give you ideas and tell you how much they need help.

Step 2 – Pay off all debt.  Pay your home loan off, credit card debt, and all other debt.  This is a safe use of the money.  If needed, you could always borrow again later against these assets, but with $30 million your main issue will be having too much money.

Step 3Create some breathing room and stop rash decisions.  Tie up your money for 3 months, so that you have time to think rationally.

With the money left after Step 2, portion off some ‘fun money’.  You have just won $30 million, so you are bound to want a few extra dinners out, stay in some fancy hotels and maybe have a holiday and buy some cool clothes.  Maybe $200,000?

Split the remainder between 4 or 5 major banks – chat to each bank, but with $5 million or more, you should be able to earn 3% or more per annum fixed for 3 months.  Get the interest paid out monthly to a separate account, or into your ‘fun money’ account.  And get the interest taxed at the top tax bracket of 33% to make things simple.

The whole idea is to slow you down!

  • Don't rush out and buy your dream car (boat or plane) tomorrow.  Chances are that with the $30 million win, your dream car would have changed.
  • Don't help anyone immediately.
  • Don't buy a property, whether a personal home or beach house or investment.  With $30 million, your ideal personal home or beach property will probably change!

At only 3% interest, you will still be earning $50,000 per month after tax is deducted.

 

Step 4 – Planning for your Future

The planning part can be done in the first three months, but I would delay actually committing to anything within the first 3 months.

A)  Set up a Trust with a good lawyer.  A Trust is designed to protect your assets, and now that you have $30 million, you have a lot to protect.

Make sure you go through the whole process with the lawyer, such as transferring any relevant property into the Trust, having an independent Trustee and completing full gifting.

 

B)  Set selfish goals.  Decide how much you personally need/want:

  1. What luxuries do you need, and how much cash do you need for these?  This might be the mansion in the country, the beach house, the cool boat, and the fancy car.
  2. How much income do you need a year?  How much do you want to earn a year, and how much cash do you want available?
  3. Decide how much extra buffer you want to have?  You are unlikely to win $30 million again, so you want to make sure you are set for life.

Pay for advisory meetings with two or three different financial advisors, and look at what investments you could make and the income they would give you.

Remember the golden rules of investment:

  • Don't put all your eggs in one basket.
  • The higher the return, the higher the risk.  With $30 million, you probably don't need to take any risks, so you could probably look at safer, more conservative investments.

 

C)  Helping others:

  1. Make a list of who else you want to help.
  2. Work out how to best help them.

There are different ways to help people.  The obvious is to just give your friends and family money.  If it was me, I would keep away from just giving capital (your $30 million winnings) and I would prefer:

  • Loaning money.  That way, if their relationship breaks up, you can get the loan repaid.
  • Invest the money under a separate Trust, and then distribute the income to those you want to help.  This way you maintain the capital and are just giving the income.
  • Set up Trusts for each person you want to seriously help, and control the Trust for them (or get advisors to help).  It could hold investments for them and help them get further ahead financially.

Hopefully you are the lucky person who has just won the $30 million, and this has given you some great ideas!

Kind regards

Ross Barnett

 

Labour Update - New Taxes and Lies?

14 September 2017

 

LABOUR UPDATE - NEW TAXES AND LIES?

I've been away at my best friend's wedding for two weeks and it is amazing what a change there has been.  I wrote my initial blog on Labour's policies in May 2017, with National polling 43% and Labour at 30%.  On Tuesday, when I started to review any new Labour information, Labour was 43% and National was behind on 39%.  Obviously this is just one poll and other polls will show different results, but overall the election is going to be a lot closer than it appeared in May!

Comment from Jacinda Arden on Tuesday - Completely wrong!

"The fact that someone who works a 40 hour week pays tax and someone who flicks four investment properties and doesn't in the same way - that's a question of fairness."

Facts:

  • People who trade properties (flip) have to pay tax on the profit.  The relatively new Brightline Rules make it almost impossible to not pay tax on trades.  But before the Brightline Rules, a trade was taxable under the 'intention rules' anyway.  So a person who trades four properties per year is taxable on this profit and always has been.
  • A trader who trades four properties per year would also have to pay GST.

I liked this comment from Mathew Gilligan on a property forum:  "Either she knows this is incorrect and is lying to the public (unlikely) or she is ignorant of how the tax system works, making her incompetent.  Which is it?  She is plain wrong."


Land Tax

This is something that Labour won't rule out, so is possible.

In my opinion, this could be very scary for property investors.  The worst part is the unknown.  Could it be $1,000 per year or $20,000 per year?  Most likely it would be a percentage of land value, but what %?

I feel that property investors need to focus more and more on cash flow, and the aim of most investors, at some point, is passive income.  Paying a land tax each year is going to hurt a lot of property investors and either force rents to rise or property investors to sell.  Long term investors who have worked hard and struggled into a good position of low debt on rentals, could suddenly find their passive income disappearing and their retirement plans ruined.

The Rich Should Pay More Tax

Currently anyone who earns over $90,000 is in the top 11% of income earners.  This 11% of earners pay 48% of the national tax!  If we round the figures a little, 10% of people are paying 50% of the tax.  Should higher income earners really be paying more tax?

If you earn over $40,000, you are in the top 42% of income earners, and this 42% of income earners pay 85% of the national tax!

Source:  http://www.treasury.govt.nz/budget/2017/at-a-glance/b17-at-a-glance.pdf



Making life better for renters

  • Extending Notice period from 42-90 days:  Current period is 90 days anyway, unless certain exemptions are met.  The two main exemptions are:
    • Selling
    • Owner or family member going to live in property.

So, it will make it harder to sell with "vacant possession" or harder to move back into the property for your own use.

  • Limit rent increases to once per year:  current law allows once every six months.  It would then become important to make sure rent increases are done regularly and that rent is kept up to market rates.  Otherwise, it could take a while to catch up.
  • Letting Fee:  Labour is planning on banning Letting Fees from being charged to tenants.  The cost of letting properties will still exist, so this cost will either be worn by property management companies, or be paid by landlords, or landlords will long term try to cover by increasing rents.


Capital Gains Tax

Labour plan to hold a working group to work out the best tax changes going forward.  From Jacinda's comments, changes are likely to occur within the first term.

Past Tax Working Groups have suggested Capital Gains Tax.  So there is a reasonable chance that, if Labour are elected, a Capital Gains Tax would be implemented.

As with any tax, 'the Devil is in the Detail'.  Until the details have been finalised, we cannot be certain how this would be implemented.  Based on tax policies in the past, such as the Brightline Rules, any new Capital Gains Tax would only apply to new purchases from a certain date.  It would also take the Working Group, Labour and IRD a while to finalise any Capital Gains Tax.

I would hope that any Capital Gains Tax wouldn't apply to existing properties.  Otherwise this could cause a large number of investors to try to sell some rentals before the policy came into effect, creating a large over-supply of properties for sale that could have a major impact on the sale prices.

Overall:  The main thing to remember with any Capital Gains Tax is that it is only payable if the property is sold, and at this point, you should have the cash available to pay any tax on the capital profit.


Inheritance Tax and using a Working Tax Group

Jacinda's comment says that "inheritance tax is off the table."

The two parameters for her Working Tax Group would be:

  • The family home is not allowed to be taxed.
  • Inheritance tax is off the table.

It's interesting that Labour is looking to use a Working Tax Group to establish the best tax changes, but then not giving them full freedom to look at all the options.  I'm not saying the family home should or shouldn't be taxed, or that inheritance should or shouldn't be taxed.  However, if you are going to review the tax system, surely the group reviewing it should have complete freedom to look at all the alternatives and recommend the best solutions for the country.

Currently, I'm very concerned about any Working Tax Group as the outcomes will largely depend on the criteria given to them (what else will be taken off the table?) and also who is on the Working Group.


Growing the Building Workforce but Cutting Immigration

"5,000 new jobs at its peak" for the construction industry.

New Zealand's current unemployment rate is 128,000 or 4.8%, which is the lowest since 2008!  Labour also plans to reduce immigration by 20,000 to 30,000 per year.  Fourteen to twenty thousand of this immigration is work related.

With unemployment already low, and with low immigration, I'm curious where all these extra people will come from?


Overall I have tried to show the possible policies and taxes that could affect property investors if Labour gets in.  I have not written about National as their policies are already in place, and in past blogs over the years, I have written about the changes they have made.

We welcome any comments on our Facebook page about this blog - Click here to go to our Facebook page.


Kind regards
Ross Barnett 

Negative Gearing - What is it and how does it work?

29 August 2017

NEGATIVE GEARING - WHAT IS IT AND HOW DOES IT WORK?


This blog was written by David Kneebone of Lodge City Rentals (www.lodge.co.nz/Property-Management).  David has kindly allowed me to share this with you. 




 

 

 

 

 

 

 

If you're new to the world of property investment, you will likely have come across the term 'negative gearing'.  It's often in the news, controversial and sounds quite fancy.  But what does it actually mean?  Here is our introductory guide to negative gearing.

What is negative gearing?

Negative gearing is the approach of borrowing money to lose money, usually in the short-term, with a view to making it elsewhere.

In the property investment sector, negative gearing relates to the expected income earned by a property not being enough to cover the costs of owning and managing it.  However, the investor intends for this loss and will make up for it elsewhere, for example with a reduction in tax.

In concrete terms, it's like buying a rental property and renting it out for $30,000 a year, but needing to pay $35,000 a year for interest, rates and other expenses.  The owner can then get a tax deduction on the loss, which is seen as an incentive to invest in housing.

A property may be negatively geared at the start of the ownership, but as rental income increases the property can go from being negatively geared to positively geared.

How does it work?

Let's say a person earns $100,000 a year in their job, and has a rental property making a loss of $5,000 a year.  When it comes to the end of the tax year, that person is taxed on $95,000 income overall.  The loss on the rental property reduces their income by $5,000, and thus reduces their overall tax bill by $1,560.  It's perfectly legal, but controversial because, in effect, other taxpayers end up subsidising their 'poor investment'.


What are the advantages of negative gearing?

  • Ability to borrow more:  See example above.  If you're disciplined with your investments, negative gearing is one way to offset cashflow losses in the short-term.  This enables lower or middle-income earners to invest in property, which they would not be able to afford otherwise.
  • Take advantage of capital growth:  Besides tax savings, arguably the biggest benefit of negative gearing is that it can allow an investor to afford to buy a property with the potential for high capital growth.  Capital growth potential is the most common goal of property investors.  Negative gearing allows you to more easily afford some properties that will increase in value in the future.
  • Better quality investments:  Negative gearing can open up the range of properties an investor can afford to purchase, including properties where the rent would not necessarily fully cover the mortgage and expenses.  This can potentially allow an investor to invest in safe, secure areas that are likely to provide regular rent, which is a sound investment strategy, or to invest in high capital growth areas.


What are the disadvantages of negative gearing?

  • Rules can change:  Your investment strategy is based on a set of rules which can be changed.  The revocation of building depreciation is a good example and this has lessened the benefits of negative gearing significantly.  The fact that you can't control this change means negative gearing is a real risk.
  • Risk:  Borrowing money to fund a property comes with the possibility of rising interest rates and depreciation in the value of your property, which can eat away at the potential capital gains.  Many people incorrectly assume negative gearing is a fool-proof strategy to "save money" on tax.  No investment strategy can be called "fool-proof" or "safe", and significant losses are possible if the investor underestimates the amount of loss they are making on their investment.  Most people embark on negative gearing to achieve capital gain, but there are no guarantees.  Capital gains are not steady or certain, and you may end up without appreciation in value with negative cashflow.
  • Higher debt levels:  Negative gearing can help more people afford more properties, which can drive up house prices.  There are also the unforeseen costs of property ownership which have the potential to make a slightly negative property very negative.


An example of capital growth from negative gearing

Imagine you bought a $440,000 property and took out a $400,000 loan at an interest rate of 7%.  The annual interest payable on the loan is $28,000.

Now imagine you are earning $430 per week in rent, which adds up to an annual rental income of $22,360.

Based on the above example, you are paying $28,000 in interest but only earning $22,360 in rent, which means a shortfall of $5,640 per year.  That's the bad news.

The good news is the property should be going up in value and will be worth more as time goes on.  If the property went up in value by 10% in a year, it has increased its value by $44,000.

At the end of one year, you have paid out $5,640 in interest but the property has increased in value by $44,000, which means you are $38,360 richer than you were 12 months ago.


A change to the depreciation rules

In 2010, changes were made to the rules around depreciation.  Where previously property owners could take three percent of building costs as a tax loss, the change has now meant it is no longer possible to depreciate buildings, thus making negative gearing harder to achieve.  It could be said that the golden days of negative gearing are over.

However, the approach to negative gearing does bring about the discussion of good debt vs bad debt.  While negative gearing may encourage people to borrow more, it can be argued that servicing an income-producing asset is good debt in the long run.

Negative gearing could be the determining factor as to whether an investment is good debt or bad debt.  Is your property making - or not making - a return?  And can you make a previously negatively geared property cash flow positive?  If so, it could be the answer to turning an investment into a winner.


The future of negative gearing


Labour have announced a plan to phase out negative gearing over the next five years in a bid to dampen property speculation and help first-home buyers go up against property investors.

The Property Investors Federation has opposed removing that incentive, saying it could result in a shortfall in rental housing stock.

At Lodge City Rentals, we'll be keeping a close eye on these changes.  In the meantime, if you have any questions about negative gearing and how it could affect you, get in touch with the team today.


(Source:  http://blog.lodge.co.nz/negative-gearing-what-is-it-and-how-does-it-work)


I hope you have found David's blog interesting and useful.


Kind regards
Ross Barnett 

 

So what is really happening in the Hamilton Market? Have we crashed?

22 August 2017

So what is really happening in the Hamilton Market?  Have we crashed?


There is so much talk in the market about property crashing!  When I was putting together the most recent Hamilton information, I was actually expecting the Hamilton Median Sale Price to be down slightly, and for there to be a downward trend.

Well, there isn't.

The graph below shows January 2017 to July 2017 as being very flat.  The peak last year was November 2016 at $527,000, and July 2017 is slightly above at $531,600.


Graph

 

 

 

 

 

 

 

 

 

 

 

 

It is very interesting to note that January 2016 was $388,000!  So in 18 months, there has been an increase of $143,600 or 37%!  Wow!

My pick for December 2017 is that it will be very similar to December 2016 and around $525,000.  Obviously I don't have a crystal ball either, and it is always very interesting to see how close I get.  The big factor that could change this for me is the LVR rules.  I think it would be crazy to remove these.  But if removed, that would likely cause a mini boom, so therefore, would throw my prediction out the window!

Do you have a strategy for a flat market?  What will you do if interest rates go up and there in no major capital gain in the next few years?  This email address is being protected from spambots. You need JavaScript enabled to view it.  or give Mareese a call on (07) 839 2801 to make a time for me to have a quick 10 minute free telephone chat.


Kind regards
Ross Barnett 

 

 

 

Do You Need a Trust?

4 August 2017

 

DO YOU NEED A TRUST?


What Do You Want a Trust For?

Relationship Property?  A Trust isn't bullet proof and you would need to get some expert legal advice around relationship property, and most likely have a relationship property agreement too.
 
To save tax?  For most property investors, a Trust will be less tax effective, as any losses stay within the Trust and cannot offset personal income (so no tax refunds).  For business and property owners that are making a real profit after a fair owner wage, a Trust is a great entity to spread income to other beneficiaries and minimise tax.

 
The main reason is asset protection.


 

 

 

 

The first part to consider is what are you protecting your assets from?  What is your or your partner’s risk of being sued?  I look at:

  • Director risk:  If you are a director in a company (such as a finance company, for example), then you have director responsibilities and risk.  In a worst case scenario, you could be sued as a director.
  • Trustee risk:  Are you a Trustee in another person's Trust.  If so, you could be liable as Trustee.
  • Have you given personal guarantees?
  • What is your potential risk to Health and Safety?  If you are in the construction industry, this could be quite high!  And it's not just owners who can be liable.  Any employee could be held to be liable.

 
You need to consider these items and any others that might affect your risk or your chance of being liable.


 

 

 

 

If you have high risk, then a Trust would help to separate your assets from your risk.  Generally, this would mean putting your personal home in a Trust to start with.  For investment properties and businesses, you need to consider the structure carefully and there can be lots of catches or costs to restructure. 
 
Setting up a Trust is only part of the process and you need to be aware of the ongoing administration and compliance requirements:

  • New Trust laws (due to come in late 2017 or early 2018) setting higher obligations on Trustees.
  • Normally you would have an independent Trustee.  We charge $75 + GST per year for this service. 
  • For signing of documents as Trustee (e.g. Finance documents), we charge $75 + GST.
  • If we are a Trustee, we require a compulsory annual meeting, normally done by phone.  We charge $100 + GST for this phone meeting.
  • Gifting.  We charge $255 + GST.
  • Annual Financial Statements, Minutes and tax returns for the Trust.  This can vary widely depending on the work required, but is likely to cost at least $500 + GST per year.
  • Trust Minutes and discussion for major transactions.
  • Separate Trust bank account and keep Trust affairs separate to personal.

 
Setting up a Trust is done through a lawyer and normally costs $2,500 to $5,000 depending on what is included and what property needs to be transferred into the Trust. 
 
In my opinion, when should you be looking seriously at a Trust?

  • High risk as above
  • Profitable business making $50,000 or more after fair owner wages
  • Profitable rentals
  • As your overall equity builds up to $1million plus, it is worth considering Trusts as you have more to lose.

 
I haven't put these items here as a 'sales pitch', but I hope they give you a realistic idea of the ongoing costs for a Trust and that all the little things can add up! 


FREE STUFF

If you are a paying client of Coombe Smith, we have some information which we can give you for FREE:

  • A list of Five Stategies for property investing
  • A list of expenses you can claim
  • Simple Spreadsheet for rental cash flow
  • Simple Spreadsheet for trading properties
  • Trading property notes, including information on GST and zero rating
  • Rental Property Basics Seminar Video
  • Advanced Property Investors Tricks and Tips Video.

This email address is being protected from spambots. You need JavaScript enabled to view it. if you would like to request any of these.


Kind regards
Ross Barnett

Do You Have Spare Land?

27 July 2017

 

Do You Have Spare Land?

If you have an older house on a large section, or are looking to buy a new section, it is worth considering Duplexes.

I think they look a little ugly, but from a financial perspective, Duplexes should allow you to get more income from the land, thereby maximising your return.

With a shared wall, the building costs should also be less.

Click here to read a recent article from Stuff that you might be interested in.

 


Do you have another accountant and wonder if you are getting the best accounting advice?

  • Are you getting the best accounting advice?
  • Are you claiming illegal expenses?
  • Are you missing major deductions?
  • Do you need to look at restructuring?


If you have another accountant who does your rental property financial statements and tax returns, we have the perfect offer for you:

We will review your financial statements and tax returns for one entity (this can be your 2016 accounts) for $100 GST inclusive.

If we can’t find a major error, or major area to improve, then it’s FREE!

(If you have multiple entities, we would first need to see what is involved, but most likely the cost would be$100-$200).

I’ll personally be looking at your financial statements, tax returns, and overall financial position.  In lots of cases I can see opportunities to legitimately save thousands in tax.  At the end of the review you will get a letter outlining any major errors or issues that I can find, or opportunities that most likely need exploring further

Please note: This is just a Review.  Therefore it does not provide solutions on how to fix the errors or issues identified and that would have to be explored or expanded on later. 

Our aim is to show you how great we are, so that you then want us looking after your accounting and tax needs.   But there is no requirement to change to us.

Want to go ahead?  Email your last year's Financial Statements and Tax Returns to This email address is being protected from spambots. You need JavaScript enabled to view it..  We will come back with:

  • An exact price if you have more than one entity
  • The extra information we require.


Kind regards
Ross Barnett

Overseas Case Studies and Examples

21 July 2017



 

 

 

 

 

OVERSEAS CASE STUDIES AND EXAMPLES

 

Joe is from the UK and has moved to New Zealand in April 2012.   

CASE STUDY ONE:

Joe has a rental in the UK.  Does he need to return the income in New Zealand?
 
The general answer is yes.  Once Joe becomes a tax resident in NZ, then he needs to return his world wide income in NZ, and pay tax on this in NZ.  If Joe is paying tax in UK on the rental profit, he will get a credit for this in his NZ tax return.  But if Joe is paying a higher tax rate in UK, then he will still only get a credit for the NZ tax due, i.e. if paying 40% tax in UK, but only 33% in NZ, then will only get a credit for 33% in NZ.
 
4 year exemption - There are some restrictions such as no Working for Families, but in general, if you have just moved to NZ for the first time, then there is a 4 year exemption on foreign income:

  • so for the first 4 years, Joe doesn't have to return the UK rental income in NZ.
  • After the 4 years, Joe will have to return the UK rental income in NZ.

 

CASE STUDY TWO:

Joe contracts back to his old employer in the UK.  They pay him his normal salary, to his UK bank account with UK withholding tax deducted.
 
It is 2013, so still within the 4 year exemption.  Does Joe need to return this income in NZ?
 
Yes, this is still taxable in NZ.  The 4 year exemption does not cover income earned for personal services.
 
Most likely in this case, there should be no tax deducted in UK, and NZ would have the sole taxing rights.  So if you have a situation like this, it is important to get the tax right at the start, otherwise you could be double taxed!
 

CASE STUDY THREE:

If you are currently receiving a monthly pension from overseas, the pension is fully taxable in NZ (Presuming you are a NZ tax resident).
 
Say it is $10,000 that you receive each month.
 
Some tax payers have changed their monthly payments to an annual payment.  So following the example above, that would give an annual payment of  $120,000 for the year.  Then the tax payers are trying to say, its a lump sum and then taxable under the schedule/ formula method, which results in less tax being payable.
 
Unfortunately, NO.  This is still a pension and not a lump sum.  So is fully taxable!

CASE STUDY FOUR:

Joe has 200,000 pounds in an offshore bank account.  There is no way NZ IRD will find out about that.  Right?
 
With relatively new information sharing between countries, it is likely that IRD will find out!  It is likely that the overseas bank will ask for a Taxpayer Identification Number (TIN), and therefore the information will be passed onto NZ IRD.
 
NZ IRD will look for:

  • Should the initial capital have been taxed?  For example, could be taxable distribution from a Non Complying Trust.
  • Should there be ongoing income that should be taxed in NZ?

CASE STUDY FIVE:

Joe has a Trust that he established in the UK while he lived there.  Is there anything that needs to be urgently done?
 
Yes - Joe has 12 months to elect for this Trust to become a complying Trust.  Otherwise it becomes a Non Complying Trust, which has a 45% tax rate on capital gains and past year income! 
 
NZ has a settlor based tax regime, so the Tax is generally based on where the Settlor is.


CASE STUDY SIX:

Joe has lived in NZ for 10 years, and it is now 2022.
 
His parents still live in the UK, and they both passed away.  Surely the overseas inheritance is tax free?
 
 There are tax implications to consider: 

  1. Joe’s parents' Estate will be considered and taxed as a Trust in NZ.  So need to consider tax obligations of Trust in NZ.  For example, has Joe become a settlor of this Trust, and therefore Case Study 5 applies?
  2. In some countries, there is no Probate and Joe would receive the assets, and therefore the income, straight away upon the death of his parents.

CASE STUDY SEVEN:

Joe has an Australian rental property.  In the 2014 year, it makes a loss of $12,000.  What could Joe do?

  • Could opt out of 4 year transitional period, so that the loss could be included in NZ tax return.  Obviously would have to carefully consider other overseas income and assets.
  • Be careful who the money is loaned from, as may have to deduct Non Resident Withholding Tax (NRWT).  Or it could be worth applying to pay Approved Issuer Levy (AIL) instead.
  • As there is capital gains tax in Australia, it is worthwhile (and a requirement) filing annual tax returns in Australia, so that the losses carry forward.  This could offset some of the capital gain when the rental is eventually sold.
  • The $12,000 loss would need to be converted to NZ dollars.  Also, some of the expenses claimed in Australia might not be deductible in New Zealand, and commonly the depreciation needs to be reviewed and updated for NZ tax laws.
  • There could be an exchange gain or loss that is taxable!  See my previous blog.


Overall I hope this blog highlights that there are a lot of tax implications related to having assets overseas, and people who move to New Zealand need to carefully consider all of these implications!

Kind regards
Ross Barnett

Is this a great way to save Tax on Overseas Pensions?

18 July 2017

 

Is this a great way to save tax on overseas pensions?

If you are currently receiving a monthly pension from overseas, the pension is fully taxable in New Zealand (presuming you are a NZ tax resident).

Say it is $10,000 that you receive each month.

Some tax payers have changed their monthly payments to an annual payment.  So, using the above example, that would mean a total of $120,000 received for the year.  The tax payers are trying to say it's a lump sum and thus taxable under the Schedule/Formula method, which would result in less tax being payable.

Unfortunately, NO.  This is still a pension and not a lump sum.  So it is fully taxable!

Kind regards

Ross Barnett

Looking to Buy a Rental? Or convert your current personal house to a rental?

14 July 2017

Are You Looking To Buy A Rental?

What do you want from rental properties?  My idea of the perfect scenario is a debt free personal house and passive income coming in from rental properties. 
 
It appears we are around the peak of the market and for most investors, it is important to focus on cash flow or long term opportunity.
 
If you buy a standard house, at standard values through a real estate agent, it is likely to cost $5,000 or more each year, after receiving tax refunds.  If Labour get in and take away the tax benefits, this cost would increase to $9,000 or $170 per week.   Is it worth gambling on a capital gain of more than $9,000 a year over the next 1-5 years?

The only times I would buy a rental that is giving a large cash loss is:

  • If there was a 'twist' available that would change the cash flow substantially.  The best example of this is a subdividable property.  To start with, the cash flow might be negative $5,000 per year or more.  But if you subdivide and sell a section (ensure you get tax advice!), this could substantially reduce the mortgage, even after paying tax.  Or, subdivide and add another rental on the back to give more rental income.
  • If you are expecting a large inheritance or cash windfall which means you can pay off any personal house debt, and also reduce the rental debt so that it is then break even or better.
  • If you have large income and can quickly pay off any personal house debt and then quickly reduce the rental debt.
  • If it is a trading property and you are buying at a signifcant discount.  NOTE:  trading is risky and you would want to ensure there is still a good profit even if things go wrong.

Otherwise, my approach is slow and steady.

  • Can you improve rent on existing rentals?  A simple renovation can often improve the rent by $40 or more per week and give a large return on investment.
  • Can you subdivide or add minor dwellings to existing rentals?
  • Only buy rentals if either:
    • The rent covers all expenses and can pay down principal over 25 years, or
    • It is subdividable and ideally with the option of building a Duplex.  You still need to buy well and do your numbers carefully!
  • Watch and wait,  and hope the market crashes a little and that there is great buying in two to three years.

So overall, when buying a rental, I'm looking at how does this rental help me achieve my personal aims and goals.  If I buy, I want a strategy of how this rental will give me passive income.  That generally means buying extremely well, subdividing or reducing a large amount of debt.  Otherwise you are left hoping or gambling on capital gain!

 

Convert Your Current Personal House to a Rental?

When trying to get ahead on the property ladder, a lot of people move to a new personal home and convert their existing house to a rental.  Unfortunately, this is often done for emotional reasons!

If you are thinking about doing this:

1)  Is your existing house a good rental?
Is there high tenant demand in the area?  Look at population figures for the area and talk to a local property manager.
Will you be able to attract a good tenant?
Is the property easy care and low maintenance?
Is there an opportunity to add value in the future?  For example, subdivide or add a minor dwelling.

2)  What is the cash flow?
As a starting point, I would work out the Gross Yield.  This is 50 weeks rent divided by the property value *100.  For example, $400 per week * 50 = $20,000 divided by value of $400,000 would give 5% Gross Yield.

The Gross Yield gives an indication of the cash flow:
5% or under is going to be quite negative cash flow based on 100% mortgage.
7% or better should break even or be positive cash flow.
Between 5% and 7% is still likely to be negative cash flow, but a smaller, more manageable amount.

Review the income less the full expenses.  The example below shows a $8,784 loss expected each year before tax.  After tax refunds, this drops to $4,914 per year or $94.50 per week.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3)  What happens if interest rates go up?
At 6.5% interest, the loss after tax refunds increases to $9,950 per year or $191 per week.

4)  Can you afford the cash flow losses?

5)  Do you want to gamble that the property will go up more than the cash loss?

6)  Or do you have a plan to change the cash flow?

  • Minor dwelling to increase rent
  • Subdivide long term and sell section, or build second rental on section
  • Inheritance coming that can reduce the rental debt.  NOTE:  you are likely to pay off any personal debt first.


Often I find that personal homes are not great rentals and that it is better to sell the existing personal house and buy a specific rental, with better cash flow or better long term options.

I hope you have found these two topics interesting!

Kind regards
Ross Barnett 

Hamilton Population Growth vs Building Consents Updated

13 July 2017

 

Hamilton population growth vs building consents updated

I just came across the 30/6/16 population estimate for Hamilton, Waikato and Waipa. 

 

Hamilton

The report from Stats NZ shows 4,400 population growth in Hamilton for the year ended 30/6/16.

Stats NZ shows the number of building consents in Hamilton for the same period as 1,213.

If there are 2.65 people per house (previous average), then the number of new builds should house 3,214 people.

So this means for the year ended 30/6/16, the new houses consented would be short by 448 houses (1186 / 2.65).

The year ended 30/6/15 was population growth of 3,300 vs 909 houses.  Or short by 336 houses.

The number of building consents for the year ending 30/6/17 is likely to be higher than for 30/6/16 as up to May, the consent were already 1,138.

The population growth estimates are much higher than the previous projections!

 

Waikato

The report from Stats NZ shows 1,700 population growth in Waikato district for the year ended 30/6/16.

Stats NZ shows the number of building consents in Waikato District for the same period as 780.

If there are 2.65 people per house (previous average), then the number of new builds should house 2,067 people.

So this means for the year ended 30/6/16, the new houses consented would be 138 houses (367 / 2.65) more than required.

The year ended 30/6/15 was population growth of 1,100 vs 491 houses.  Over supply of 76 houses.

 

Waipa

The report from Stats NZ shows 1,200 population growth in Waipa district for the year ended 30/6/16.

Stats NZ shows the number of building consents in Waipa District for the same period as 546.

If there are 2.65 people per house (previous average), then the number of new builds should house 1,447 people.

So this means for the year ended 30/6/16, the new houses consented would be 93 houses (247 / 2.65) more than required.

The year ended 30/6/15 was population growth of 1,000 vs 382 houses.  Over supply of 5 houses.

 

Kind regards

Ross Barnett

New Meth Levels

3 July 2017

NEW METH LEVELS

Standards New Zealand has just released the NZ standard on Testing Meth.  The new level is 1.5 micrograms per 100cm2 compared to the old level of 0.5 micrograms.  Click here to view the new standards. 

As many of you know, I own a small Meth Testing company (www.GetaMethTest.co.nz) that operates in Hamilton.  Over the 12 month period to 31/5/17, we have had 94.54% of rental properties tested show no meth on screening tests.  So only 5.46% of rentals tested required the full test to show the exact Meth levels in each room!   This was based on the old guidelines, so the new standards are likely to see even less full tests required!

So this gives some really key information:

  • You shouldn’t be afraid to get your rental tested for Meth.  From our experience with hundreds of screening tests, over 94% of rental properties are fine and will come back clean.
  • Watch how your property is tested.  If the light switches are tested for example, these are quite likely to show Meth present!  But I do not believe light switches are a true indication of the whole rental property. They are similar to money. Because they are frequently touched, they are more likely to show traces of Meth.
  • Spending more on the initial screening test, so that the samples don’t need to be obtained again later, is wasting time and money in over 94% of cases

I hope you found this useful!

Ross Barnett

Why I Don't Like Standard Companies

26 June 2017

WHY I DON'T LIKE STANDARD COMPANIES.

When trying to set up the right structure, there are a few things that are looked at:

  • Asset protection and your level of risk
  • Flexibility - what is going to change over time
  • Tax minimisation - how do we save you the maximum amount of tax
  • Long term goals and strategy
  • MOST IMPORTANT - Can we keep it simple?

Unfortunately, a lot of advisors miss another key component:  What happens if you need or want to sell?

Issues with Standard Companies - Example

Tom and Jane have a personal house worth $1 million and debt of $500k.

They have a standard company that has:

  • Block of flats worth $1.5 million and debt of $1 million (purchase price $1 million)
  • New townhouse worth $550k and debt $450k
  • New 4 bedroom house worth $750k and debt $650k (recently purchased 2016 for $650k)
  • Tom and Jane have $50k shareholders current account.

Tom and Jane decide to sell the block of flats, and net of cost receive the $1.5 million.  They pay off the $1 million debt and are left with $500,000 cash!

So what should Tom and Jane do?

They want to pay off their personal house and have it debt free.  This would be pretty normal and normally a good financial move.  So, without talking to their advisor, Tom and Jane take the money out of the company and pay off their personal house.

One year later they are getting their Financial Statements done:  Do you think there will be an issue?

Yes - there is a MAJOR issue.


Tom and Jane have taken $500,000 that they are not entitled to.  An easy argument is that $50,000 is repayment of the shareholders current account (would have been nice to have a Minute), so this leaves Tom and Jane with a $450,000 overdrawn current account.

The company has to charge interest on the overdrawn shareholders current account, say six months at 5.77% (presribed by IRD) being $13,000 approximately.  The company would then have to return this $13,000 as additional income in the year and pay $3,640 in additional tax at 28%.

Some people will be thinking that's easy, there is a $500k capital gain on the sale of the block of flats.  While the capital gain is correct, a standard company has no easy way to distribute these gains to the shareholders.  It can distribute capital gains tax free upon liquidation, but that would mean having to liquidate the company.  Liquidation would be expensive and messy as the other rentals would have to be sold, which would then mean the new 4 bedroom house would be caught by the 2 year Bright-line, and there would possibly be depreciation recovery or other costs.

There are ways to fix this issue in some circumstances, but that will incur additional costs to obtain expert advice and to make the changes.  Also, some of the fixes take time, and Tom and Jane could easily pay $30,000 or more in unnecessary tax!


I hope you have found this informative.  If you do have a standard company (not an LTC or QC) that owns rental properties, it would be worth having a free 5-10 minute chat with me, followed most likely by a one hour Initial Meeting ($329 inclusive GST) to sort out your issue and give you the best advice going forward.



Kind regards
Ross Barnett 

Nominations - Update to my News Article of 28/10/16

16 June 2016

Nominations – Update to my News Article of 28/10/16Stupid Tax Law – Be very careful with Nominations!

IRD have retracted their original approach and have confirmed no sale or disposal on a nomination.

Good news!!

Kind regards

Ross Barnett

No FBT on Work Utes?? Plus vehicle options, tips & tricks

14 June 2017

 

No FBT on work Utes?  (Applies more to trades people and businesses)

In the past, IRD generally allowed 'work related vehicles' to be fully deductible, with no FBT payable.  Having the vehicle signwritten helped as well.

IRD put out PUB00249 Exposure Draft earlier this year, which stated a 'work related vehicle' must:

  • Be signwritten, prominently and permanently
  • Not be a car
  • Not be available for employees' private use, except:
    • Travel to and from home that is necessary and a condition of their employment; or
    • Other travel that arises incidentally to the business use.

They also have a good example of 'also available for private use' on page 25.

CHANGE:  If you have a true work related vehicle, such as a ute, but it is available for private use, then FBT should still be due and payable.

The key part is it only needs to be available for private use!  It doesn't actually have to be used.

SUGGESTION:  Review if your vehicle or employees' vehicles are available for private use.  If so, look at paying full FBT, or another option is to pay FBT for the weekends.  As this is a relatively new exposure draft from IRD, we can expect IRD to focus on this a bit more over the next few years.

 

Vehicle Options

1)   FBT

If a normal company owns a vehicle that is available for private use, FBT should be payable.  This cannot be used for LTC's!

Advantage:  FBT is based on cost of vehicle.  So, for a cheap vehicle that is mainly private use, you can pay a small amount of FBT, but then legitimately be able to claim 100% of GST, fuel, oil, repairs, depreciation and any other vehicle costs.

Disadvantage:  If your vehicle is very expensive, FBT can be very expensive.  Also, if you already have very high business use, then FBT only gives a small benefit up to 100% business use.

Often we put FBT through as a journal entry with a GST adjustment.  This means that FBT is not paid separately, but your income tax is slightly higher.

If you operate a normal company, that is paying FBT, make sure you put all the vehicle expenses through the business, as they are fully claimable.

FBT rate - generally this is 49.25%.

Calculation and Example:  The benefit from a motor vehicle is deemed to be 20% of the GST inclusive value.  So, if you purchased a car in a normal company for $10,000 that is available for private use, the benefit is $2,000.  FBT at 49.25% is then $985 per year.  There is also a GST adjustment to this, and the cost of FBT is deductible as an expense for Income Tax.


2)  Public Service Mileage Rate or AA Rates

Commonly used for rental properties where a small amount of mileage is used.

Need to keep track of all kilometres and then claim the mileage rate.  Generally we use AA rates as they are higher.  Their rate for a  2.5L vehicle is  92 cents per kilometre.  The IRD Public Service Mileage rate is currently 73 cents for the 2017 income tax year.

Advantage:  Gives a high claim per kilometre.  Relatively simple and easy.

Disadvantage:  Generally can only claim maximum of 5,000 kilometres, and also need to log every trip!



3)  Claim a %

Commonly used by Trusts, Partnerships or Sole Traders.  A log book is completed for three months to establish the business use.  This % lasts for three years.

For a normal company, you can do this to a degree but can't have the vehicle owned by the company.  So you miss out on depreciation and the initial GST claim.  But still could get the % of operating costs.

The business % of the initial GST is claimed, the business % of fuel, oil, etc, is claimed for GST and income tax.  The business % is claimed off the depreciation.

Advantage:  Once three months log book is done, then no more log book for 2 years 9 months.

Disadvantage:  Not so great if business use is low, as can't use FBT.  Often have to do annual GST adjustments to correct GST claimed.

If the business owns the vehicle and it is used for business purposes, but doesn't have a log book, you can claim 25% as long as the actual percentage of use is reasonable.



Kind regards
Ross Barnett 

Labour's New Policy:Levelling the playing field for first home buyers

17 May 2017

Labour's New Policy "Levelling the playing field for first home buyers"

 

 

 

 

Labour's top priority is to "restore the dream of home ownership and ensuring housing for everyone."
http://www.labour.org.nz/levelling_the_playing_field_for_first_home_buyers

As property investors, we have to be very careful about how Labour's policies could impact on us.

The big questions is:  Will Labour get in?  The latest Colmar Brunton Poll has National at 46%, but National still requires some support from smaller parties to get a majority.  Labour is only at 30%.

If Labour do get in:

  • Wellington:  I would expect Wellington to boom as historically Labour goes spending.
     
  • "The biggest users of tax loopholes are large-scale speculators" - Labour's comments are a load of rubbish.  Large-scale speculators build a lot of houses for New Zealanders.  In the first year, often these projects will make a loss, which in the majority of cases would be carried forward to offset against the next year's profit.  This isn't abusing the rules.  It is standard business/accounting practice that the costs of business offset the revenue from business.  These large-scale speculators overall pay a lot of tax and GST to the Government!

It is possible to have a profit from a completed project and have this slightly offset by the early losses in the next project.  BUT, often these will be different entities that might not be able to offset, or the losses are likely to be quite small compared to the profits, and you can only offset for so long!  So, for example, Joe Bloggs Ltd develops five townhouses, sells them all and makes a $400,000 taxable profit in the year ending 31/3/17.  In the same year, Joe Bloggs Ltd buys empty land to do the next development.  The company buys new land for $500,000, incurring $25,000 of interest and $5,000 of rates as holding costs.  The new land for $500,000 isn't deductible and doesn't offset the $400,000 profit.  ONLY the holding costs are claimable.  So Joe Bloggs Ltd would pay tax on $400,000 less $25,000 less $5,000 = $370,000.  At 28%, tax would be $103,600.
 

  • "Losses from rental property investments will be ring-fenced."  There are quite a few parts to this:
    • How long would it take for Labour to make this happen?  Perhaps at the earliest, it could be for the year ending 31/3/19?  They will have to work through the tax law with IRD, consult, and then go through the process.  I very much doubt this would be by 31/3/18, especially with Christmas holidays.  So, if IRD really wanted to push this through, they could make it apply for the 31/3/19 year, but it is probably more likely to be for the 31/3/20 year.
    • Then phased in over five years.  So, if you had a rental making a loss of say $10,000:
      • 31/3/20 you would lose 20% of the loss, and at 33% have $660 less refund.
      • 31/3/21 you would lose 40% of the loss, and at 33% have $1,320 less refund
      • 31/3/22 you would lose 60% of the loss, and at 33% have $1,980 less refund
      • 31/3/23 you would lose 80% of the loss, and at 33% have $2,640 less refund
      • 31/3/24 you would lose 100% of the loss, and at 33% have $3,300 less refund.

SUGGESTION:  If you have a rental portfolio that is losing cash (not so worried if loss is just depreciation), then you should be having a five year plan to turn this loss into a profit or at least neutral.  Otherwise you really are just gambling on capital gains, which might or might not come.  There is no need to panic and sell in a rush!

    • Who will the ring-fencing hurt?  It will hurt the smaller investors who are making tax losses from rental investments and offsetting these against their personal income.  Most larger investors are making profits (especially if rental is their only income).   So will not be affected by ring-fencing.
    • Will ring-fencing make rents go up?  Property investors always threaten this, but my guess would be 'no'.  When building depreciation was taken away, rents didn't really go up as a result.  Rents are generally supply and demand driven - if there is a shortage of rentals, then rents go up.  So, indirectly ring-fencing may result in less property investors, therefore less rentals, which might result in rents going up.  Also, a lot of property investors are not negatively geared, so the changes won't affect them.
    • $150 million additional tax:  Ring-fencing of property losses long term is just a timing issue.  You can still claim the same losses, it just might take you a few more years to claim them.  That means for the first few years, Labour might get some additional tax.  However, as the properties start to turn positive or sell and sujbect to the Bright-line test, Labour will get less tax as the investors can use up their ring-fenced losses from earlier years.  In the ideal world, over say 20 years, Labour shouldn't get an extra cent in tax!

 

  • Labour plan to build 100,000 high quality, affordable homes over 10 years, with 50% in Auckland.
    • This would be 5,000 houses in Auckland each year.  From my  February 2017 blog, Auckland needs approximately 14,000 new houses a year but is only building 10,000.  So, if Labour could build the 5,000 extra., that would help the immediate problem and balance the books.  But what about the huge shortage that currently exists?  The 50,000 extra Auckland houses over 10 years wouldn't help with the current shortage, and in 10 years time, there is likely to still be a large shortage.  Therefore, even with the extra houses, I can't see Auckland house prices going down due to sheer demand.
    • In the last 12 months (April 2016 to March 2017), there were 30,000 new house consents.  If we take away Auckland, that would be 20,000.  If Labour is going to build 5,000 extra houses per year, that is a huge increase (20%).  This number of new houses could have a major impact on the demand by tenants (rents) and demand by buyers (house prices).
    • Outside of Auckland, this could be a real game changer!  Imagine 900 new houses in the Waikato in a year.  But it's not a one-off, it's every year for 10 years.  So 9,000 new houses.  At 2.65 people per house, that is 24,000 extra people that could be housed.  Between 2006 and 2013 Census (7 years), the Waikato population only grew by 22,815!
  • Ban foreign speculators from buying existing homes:  I'm not sure how they will differentiate between foreign speculators and foreign investors, but this is still likely to reduce the number of buyers, so could cause house prices to go down or not rise as much.
  • Bright-line test moved to five years:  I personally don't think this is a bad thing.  It just means you have to be very certain that it is a long term hold.  If the rental is sold within five years, you pay tax on the capital gain.  If you were an investor with multiple properties and you had to sell, then you would try to sell something you have had longer than five years.


The Labour Party policies are also likely to change over the next few months, and might be quite different if they are actually implemented!

Kind regards
Ross Barnett 

 

Little Loan Problem

5 May 2017

 LITTLE LOAN PROBLEM



 

 

 

 

 

At the moment we seem to be seeing more and more investors with loans in the wrong entity.  For example, the Company owns an investment property, but the loan is in the personal name.
 
In a worst case scenario, this could lead to the interest not being deductible.  In most cases, it leads to more work being required and creates a greater chance of an error or this issue being missed. 
 
With the example above, the individuals have borrowed money.  If this money is used to gain income, then the interest is deductible.  So we would normally claim the interest in the personal name, and then charge the Company the same interest.  Ideally the Company would pay the individual interest, and then the individual would pay the bank.  The Company would then be allowed the interest deduction if this money was used to buy the investment property.
 
Sound complicated?  I suggest taking this opportunity to just double check whether your loans are in the right entity.  And, if necessary, to discuss them with me and your mortgage broker to get them right.
 
Another common example can be that the borrowing is in a Trust, but the investment property is in a Company.  From my last newsletter (Can You Better Protect Yourself? - 1 May 2017),  this can also create an asset protection issue!
 
I’m excited to be doing the T42 off road marathon tomorrow, and hope you have a less painful weekend planned.

Kind regards
Ross Barnett 

Can You Better Protect Yourself?

1 May 2017

Can You Better Protect Yourself?

Case Study 1

Jo and Jack have a personal house in Mayfair St worth $1.5 million, no debt, and in JJ Trust.
 
They decide to get into property trading and development, operating through a Company.  Their banker suggests it is easiest to borrow funds in the Trust name secured over Mayfair St, so the Company buys Kent St for $400,000, plus has a $300,000 overdraft facility, all secured over Mayfair St and the Debt in the Trust.

A). The development goes horribly wrong.  The property market has crashed and there are leaky complications with the property and development.  The Company now owes $600k on a partially renovated property, plus $100k to subcontractors.  The Company decides to sell the property in a rush, to minimise potential loss.  Unfortunately it is only worth $500k.  Plus GST is owing on the sale of $65k.
 
I'm not a solvency or liquidation expert, but most likely the $65k GST debt would have first priority, so IRD would get paid first. Only $435k left now.  Then there are two unsecured creditors, the $600k the Trust has loaned, plus the $100k creditors.  But only $435k to pay $700k.  Most likely a liquidation would be forced, then liquidator fees would be taken that can easily amount to $50k.  The remaining $385k would most likely be paid out, with each unsecured creditor getting 55 cents in the dollar back.
 
So overall the Trust would get $330,000 of its $600,000 back, thus still owing the bank $270,000!
 

B). What if the Company takes out the loan, but it is secured solely over the personal, Mayfair St property?   This would most likely give the same outcome as A)
 

So what could be done to improve this?

  • If the bank took security of the trading property at Kent St.  From the sale, the bank would then get the $500,000 (presuming not mortgagee sale).  This means the Trust would only owe $100,000 to the bank, which is a $170,000 improvement on A)!
  • If the Trust had done a formal loan agreement and General Security Agreement (GSA) before the money was advanced to the Company, then the Trust would most likely have priority and get its loan back before GST or any other unsecured creditors. Again, this would mean the Trust would only owe $100,000 to the bank.

It is ESSENTIAL that you get legal advice before loaning between entities, and that you protect for the worst case.  Unfortunately, business and property development does go bad, so it is worth spending $500 to $1,000 to set it up correctly.  It is also ESSENTIAL that this is done before any money changes hands!  Sometimes the structures that banks suggest, and is easier from a finance perspective, are not in your best long term interests.


Case Study 2

Mike and Kelly have done well in life.  They have a personal home worth $1 million with $50,000 debt.  They have a rental portfolio in a company with $750,000 equity.
 
Their lawyer has recently suggested a family Trust be set up to protect their family home.  The Trust has been set up and the family home transferred into the Trust.
 
So everything is now safe and protected in the Trust?  Right?  
 
This is just a step in the process and you need to look further:

  • Should Mike and Kelly gift any amounts the Trust owe them?  In the past you could gift $27,000 per year each without paying Gift Duty.  Gift Duty has been abolished a number of years ago, so now you can gift the full amount in one go.  But, this can affect future rest home subsidies!  To have asset protection, the full amount really needs to be gifted.  If you choose not to gift the whole amount, lawyers can add some clever clauses into your loan documents to help give some protection.
     
  • Should the shares in the rental property be transferred to the Trust, and then this value gifted too?  This would provide further asset protection, but ensure you receive tax advice around any transfer of shares, as this can be complicated and there are many tax catches.
     
  • If Mike and Kelly have a current account with the Company (very likely), this could be assigned to the Trust, and then gifted.
     
  • If Mike and Kelly have life insurance policies, should these be owned by the Trust, so that any proceeds go directly to the Trust?

It is important to consider all major current and future assets.  Are there any other major assets that are worth protecting?


Case Study 3

Lisa and Jordan have a business operated through a company and a rental property business operated through a different company.  The business makes good profit.  The Rental Company breaks even, but they aim to pay down loans over the next two years.
 
Money is transferred from the Business Company to the Rental Company to pay down the loans - What is the major issue here?
 
Well, if the business goes bust, then the Rental Company would have to repay the advances. This can amount to hundreds of thousands over a long period.
 
How can it be improved?  
 
Generally it is better for the profits and therefore money, to flow down to the owner and then be advanced to the Rental Company.  These advances could be from a Trust long term, with formal loan agreements and General Security Agreements in place.  It is also important to make sure the profits have flown currently to the owner and this may require the need for dividends to move retained profits to the owner legitimately. 
 





 

 

 

 



Kind regards
Ross Barnett 

Simple Things to Remember for Year End 31 March 2017

 

 

 

 

 

 

 

 

Dear Client

With another 31st March rolling around, I thought it was a great time to remind you of the year end items you should be thinking about.
 
 
Rental and Business
Saturday is a great time to print bank and loan information from internet banking, so that you have proof of the 31/3/17 balances to give us with your accounting information.

Keep any documents, such as annual loan summaries or property manager statements.


Rental
Have you purchased a new rental in the 2017 year (1/4/16 to 31/3/17)?  If so, is it worth getting a chattels valuation done and you can check out www.valuit.co.nz, or give me a quick email or phone call.  If the property was purchased with newish chattels like carpet, dishwasher, heat pumps, curtains and stove, then most likely it will be worthwhile.  Whereas, if the property has low value or no chattels, then it won’t be worth it.  If you have done a major renovation and replaced all of the chattels, then we can use the cost price of each item and a valuation isn’t needed.
 

Business

  • More for Business but can apply to some rentals – Do you have bad debts?  This is customers who owe you money and there is no chance of recovering the debt.  If so, these should be written off as at 31/3/17.
  • Do you have stock and have you done a stocktake?  This is done at cost and excluding GST.
  • Do you have work in progress?  If so, it is great to bill as much of this as possible in March, and then we require a list of your unbilled work in progress at 31/3/17.  This is done at cost and excluding GST.
     
  • Debtors and Creditors:  Hopefully you have Xero or another system of tracking which customers owe you and what suppliers you owe.  But if you don’t, you need to keep a record of these as at 31/3/17.
  • Do you have cash on hand?  If so, we need the amount as at 31/3/17 to be included with your other financial information.


Our Annual Questionaires will change on our website from 2016 to 2017 on 1 April 2017.  You can access these here.
 
But remember, we would prefer you to wait until you have all the information before sending these into us.
 
 
Kind regards
Ross Barnett

Interest Only? Or Principal and Interest?

21 March 2017

INTEREST ONLY?  OR PRINCIPAL AND INTEREST?


This is a question that gets asked again and again in property circles, with a few different opinions.

In my opinion, the reason to own rental properties long term is to receive passive income.  Unfortunately, a lot of rentals run at a cash loss due to high interest costs.  But if the loan is slowly repaid and the interest costs slowly decreased, the rental can change to being positive cash flow and providing passive income.  This is a very safe method of becoming cash flow positive as you are not reliant on rent increases or lower interest rates.

So the main reason I go Principal and Interest (P&I) is to long term hold a debt free rental property providing passive income.

 

 

But ....... the "tax benefits"

A lot of experts and investors will argue "it's better to be on interest only, and to repay your personal home first, where there are no tax benefits".  In a very simple sense, this is true.  But:

  1. Is a tax refund really that great?  For high income property investors, you are paying $3 to the bank to get $1 back in tax benefit.  So really you are losing $2!  Wouldn't it be better to not pay the $3!
  2. How much tax are you really saving?  Based on a $500,000 rental, 36 year term and 5% interest rate, I compared P&I with Interest Only over the first five years.  In simple terms, you would be paying $2,684 per month on P&I versus $2,083 on Interest Only.  An extra $601 per month.  Over five years you have repaid $36,000 approximately, plus saved $4,400 in interest (as you are paying interest on a lower loan).  At 33% tax rate, this would have saved $1,462 in tax or $292 per year approximately over the five years.  Is it really worth it?
  3. What would happen to the money if you weren't P&I?  Most people find that money comes in, and the same money goes out.  If you increase the amount coming in, it still disappears.  If you increase the amount going out, you manage your money a little better and still survive.  So, paying Principal forces you to be a bit smarter with your money, and if you weren't doing Principal repayments, you would probably find this money just disappears on something else.

The second reason I like P&I is because it builds a buffer without relying on capital gains.  If you buy a rental for $500,000, pay P&I for five years, then you should only owe $460,000 approximately.  So, if in a worst case scenario you were forced to sell, after commission and other costs, hopefully you could repay the $460,000 loan.  Whereas, in a flat market, with interest only, the net sale proceeds might be less than the loan!

Where Interest Only can be appropriate

If you don’t have the cashflow to pay P&I , then you really have no option.  You are effectively gambling that long term the property will go up in value and be more than your loan.
 
I hope you found this useful and that it has given you something further to consider.

Kind regards
Ross Barnett 

Bright-Line - Tricky Issues and Update

6 March 2017

BRIGHT-LINE - TRICKY ISSUES AND UPDATE

 

 

 

 

 

 

 

 

Here are some important points around the Bright-Line Test that you need to be aware of:


Measuring the Bright-line Time Period:

  • Effective from 1 October 2015.  So, if Sale and Purchase Agreement dated before that, then Bright-Line doesn't apply.
  • Date of Acquisition = Normally Settlement.
  • Date of Disposal = Sale & Purchase Agreement date.

Must be residential land: There is some criteria around this:

  • Includes overseas residential land!  But should also get foreign tax credit if gain taxed overseas already.
  • Includes B&B's and AirBNB properties.

Off The Plan Sales:

  • Purchase = date of Sale & Purchase Ageement.
  • Sale =  date of Sale & Purchase Agreement.

Subdivided Land:

  • Date of Acquisition = registration of undivided land, i.e. when the whole property is purchased.
  • Date of Disposal = Sale & Purchase Agreement for sale of section.
  • NOTE:  Likely to be taxable under other tax provisions.

Leasehold to Freehold:

  • Date of Acquisition = date lease granted Gift.
  • Date of Disposal = date of registration

Compulsory Acquisition:

  • Date of Disposal = date of compulsory acquisition

Mortgagee Sale:

  • Date of Disposal = date of disposal by mortgagee.

Nominations: 

  • Nomination is disposal of land for Bright-Line rules
  • No association person relief
  • THIS IS A RISKY AREA!  For more information, click here to view my newsletter of 28/10/16.

Main Home Exclusion:

  • Can be Trust
  • Must be predominately main home, so more than 50% of time used as main home.  If vacant and renovated for more time than used as a personal house, then not main home.
  • Main Home Exclusion can only be used twice in 2 year period.
  • Doesn't apply if there is a pattern of buying and selling personal home.
  • Holiday ok if short term.  Longer time, depends on exact circumstances and as long as you don't set up another home, it should be ok.
  • Subdivide main house.  Generally section sale would also have main home exclusion but would suggest getting full advice on this to double check.


Main home looking at buying and selling for a profit:

  • If intention is to renovate and sell for profit, then taxable under other income tax sections.
  • Main home exclusion would not apply.
  • So be very careful with what your intention is and how this is documented!

Main Home intended to renovate and sell:

Gain is taxable.

Main Home, intended to live in and renovate.  But then later decide to sell:

Gain not taxable and exclusion for main home should apply (as long as no pattern of buying and selling, and still meet home exclusion provisions).


Relationship Property Transfers:

  • Generally excluded and transfers deemed to be at cost.

Inherited Property:

  • Generally excluded.

Change of Trustee:

  • If only a change of Trustee, then stays with original registration date.

Residential Land Withholding Tax (RLWT):

  • Applies from 1 July 2016.
  • Only for Offshore RLWT person who disposes of land subject to Bright-line rule.
  • Only relates to New Zealand land.
  • Obligation on conveyancer at settlement and to account to IRD.
  • If taxed under other tax provisions, but within 2 years, there will still be RLWT if vendor is an "Offshore RLWT" person.
  • There are three RLWT methods.


I hope this summary of the main points is helpful.

Kind regards
Ross Barnett 

2017 Annual Questionnaire Availability

3 March 2017

A reminder that the end of the financial year is fast approaching.  Our 2017 Annual Checklist Questionnaires will be available on our website (www.cswaikato.co.nz) from 1 April 2017. 
 
Email instructions and links to access the 2017 Questionnaires online will be sent to you during the week beginning 13 March.
 
The email is to give you the instructions and links only.  The 2017 Questionnaires will not be available to be completed until after 1.4.17.
 
If you have not received an email by 20 March, please contact us on (07) 839 2801.
 
Important note for businesses:  Don’t forget to do your stock take as at 31/3/17.


Hamilton Property Boom

24 February 2017

 

HAMILTON PROPERTY BOOM

 

The Hamilton property values have jumped over the last two years, as shown in the graph below. 

Hamilton median sale price at January 2017 is slightly above the NZ median for the first time since 1998.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prediction:  No one has a crystal ball, so my prediction is just a guess, the same as yours.  My prediction based on historic trends is the yellow line, and that Hamilton median sale price will stay pretty flat for the next 7 years.  This is similar to the last flat period from 2007 to 2014.  Obviously the prices could drop or go up, and this is just my prediction.
 
Apart from Auckland, I see the rest of New Zealand to be in a similar position to Hamilton and near the peak of the market.  Maybe some of the smaller towns delayed slightly.   From recent real estate firm's auction results, it is noticeable that a lot of houses are not selling at auction.
 
Keys from past cycles:

  • Don’t sell in a flat period, as you are likely to lose out.
  • If you buy now, make sure the figures work for you and so that you can hold it for at least 7-8 years to get through the possible flat cycle.  This is where a lot of property investors go wrong.  They jump into the property game too late and without a plan, then get sick of monthly cash losses and sick of tenants, then sell 2-3 years later for a $50,000 loss.

 There are still property opportunities out there, but I think you need to add value by buying extremely well, or subdividing, or smart renovations, so that you have some initial equity and positive cashflow.

Kind regards
Ross Barnett

Population Growth vs Number of Houses Being Built

20 February 2017

Population Growth vs Number of Houses Being Built


 

 

 

 

 

In our January 2016 Blog, we looked at these stats.  I have now updated them for the last year.

Hamilton

  • From the 2006 to 2013 census, the population grew 12,024 to 141,612.  This is an increase of approximately 1,700 per year.
  • HCC 10 year plan 2015 to 2025 "projected to grow from 153,000 in 2016 to 174,000 in 2025", or 2,100 to 2,300 approximately per year.
  • Statistics NZ show 1,179 new dwellings from January 2016 to December 2016.
  • From our January 2016 Blog, average 2.65 people per house.
  • New dwellings can house 3,124 new people in the year.

From this information, Hamilton is building more houses than it requires by around 350 houses or to accommodate 924 people.  This could be catching up a shortage.  I would, therefore, be cautious buying in Hamilton and make sure the figures really work.  It will be interesting to watch rental statistics over the next year to see if there are excess rentals!

Need 830 new houses per year  Vs  Building 1,179

Waikato

  • From the 2006 to 2013 Census, the population grew 22,815 to 403,638.  This is an increase of approximately 3,300 per year.
  • Statistics NZ showed 2.3% growth to June 2016 or 10,000 approximately per year.
  • Statistics NZ show 3,552 new dwellings from January 2016 to December 2016.  November 2014 to October 2015 was 2,756, so 796 more than around a year before.
  • From our January 2016 Blog, average 2.65 people per house.
  • New dwellings can house 11,903 new people in the year.

From this information, Waikato is building pretty much the perfect number of houses.

Need 3,585 new houses per year  Vs  Building 3,552

 

Tauranga

  • From the 2006 to 2013 Census, the population grew 10,905 to 114,789.  This is an icnrease of approximately 1,600 per year.
  • Tauranga City 10 year plan 2015 to 2025, 579 growth 2018-2023, or 1,900 approximately per year.
  • Statistics NZ show 1,695 new dwellings from January 2016 to December 2016.
  • From our January 2016 Blog, average 2.6 people per house.
  • New dwellings can house 4,407 new people in the year.

From this information, Tauranga is building more houses than it requires by around 950 houses.  I would, therefore, be very cautious buying in Tauranga and make sure the figures really work.  It will be interesting to watch rental statistics over the next year to see if there are excess rentals!

Need 732 new houses per year  Vs  Building 1,695

BOP new dwellings, 2,520 from January 2016 to December 2016.  November 2014 to October 2015 was 1,734, so 786 more than around a year before.

Auckland

  • From the 2006 to 2013 census, the population grew 110,589 to 1,415,550.  This is an increase of approximately 16,000 per year.
  • Statistics NZ showed 2.8% growth to June 2016 or 41,860 approximately per year.
  • Statistics NZ show 9,930 new dwellings from January 2016 to December 2016.  November 2014 to October 2015 was 8,935, so 995 more than around a year before.
  • From our January 2016 Blog, average 3 people per house.
  • New dwellings can house 29,790 new people in the year.

From this information, Auckland is not building enough houses to keep up with demand, and is approximately 4,000 houses short in one year!  This is similar to the stats a year ago, and Auckland seems to be getting further and further behind.

Need 13,953 new houses per year  Vs  Building 9,930


When you look at this information overall, it is concerning that Hamilton, Waikato, and Tauranga seem to be building considerably more houses than required.  This could create a large over supply and a possible 'bust'.

It appears that a lot of the lift in property prices in Hamilton, Waikato, and Tauranga is due to greed and the ripple effect, rather than being based on the true fundamentals of supply and demand.

Auckland, on the other hand, has a well-documented shortage, and over the last year the housing shortage has gotten worse by 4,000 houses.  If immigration stays high and the Auckland population continues to grow, then I still cannot see Auckland house prices crashing.  While there might be a flat period or blip, economics suggest that Auckland house prices will continue to rise.

Kind regards
Ross Barnett 

Great News for Landlords!

10 February 2017

 

GREAT NEWS FOR LANDLORDS!

This is a news article published on 9/02/17 in the Manawatu Standard:


FOXTON LANDLORD APPEALS NEW TENANCY RULES AND WINS  by Catherine Harris

The Foxton house was so badly soiled that the carpets had to be replaced.



A manawatu landlord has won what could be a precedent-setting case against his tenant who was let off a big bill for damaging his property.

David Russ of Tekoa Trust took his case to court after the Tenancy Tribunal ruled last year that his tenant, Amanda Stewart, was not liable for damage caused by her dogs urinating throughout the Foxton house she rented.

The tribunal based its decision on the landmark "Osaki" court case, in which tenants who accidentally set fire to their rental house did not have to pay for the damage.

Landlords around the country became concerned that if they had insurance, the tenant would not have to pay even in cases of carelessness.

However, the Palmerston North District Court has overturned the tribunal's decision and ordered Stewart to pay about $3790 in carpet replacement costs, court costs and lost rent.

Judge David Smith said he was "of the view" that the tribunal adjudicator was wrong for concluding the damage was unintentional.

Not only had the tenant breached a no-dog clause in her tenancy agreement, but she had continued to let them in after perhaps a couple of accidents.

Fairfax Media was unable to contact Stewart, who did not attend the case.

Russ said he was "pretty happy with the outcome.  Common sense has prevailed."  He said there was a big difference between damage based on a pot fire and damage which was allowed to happen.  "People have to be responsible for their actions."

Tenancy expert Scotney Williams of tenancy.co.nz said the appeal case would help both landlords and tenants by clarifying the meaning of unintentional damage.  "The decision being a district court decision creates binding precedent at the Tenancy Tribunal for similar cases", he said.  He said the District Court used a passage from the Brookers Summary Offence, a legal text book, to support its decision.

"Conduct will be intentional when it is deliberate, and not accidental, and [resulting damage] will be intentional if the defendant meant to cause it or {probably) knew it was going to result," the court order said regarding the reference.

Building and Construction Minister Nick Smith has proposed to change the current law so a tenant would be liable for damage of up to four weeks of rent or, if it was more, the landlord's insurance excess.

The law change is currently going through consultation.



Kind regards
Ross Barnett 

Recap of Commercial Property - major deductions missed!

Happy New Year everyone.  This is an old newsletter I wrote in 2015 which I thought I would use again, as it is very important if you own commercial property.

COMMERCIAL PROPERTY - major deductions missed!

I was shocked a few weeks ago with the level of advice given by another accounting firm recently to a commercial property investor.  Unfortunately most accountants don't specialise in property and miss some major deductions that can save thousands in tax for the investor.

In this example, a client had purchased a motel and the building alone was $1.9 million.  The accountant hadn't recommended a chattels valuation, and with no more building depreciation from 1/04/11, they had claimed $0 depreciation.  This is appalling!

  • One option is:  Under commercial rules you can actually still depreciate up to 15% of the buildings adjusted book value at 2% straight line depreciation. 
  • Or, a much better option, we became involved and recommended that Valuit complete a chattels valuation.  This has resulted in total chattels of $393,251, which will be depreciated long term.  For the first 11 months this resulted in $32,517 depreciation and saved $10,730.61 tax at 33%!  The cost was only $1,525.  The future depreciation will be $360,734 and over the next 10 years approximately, this will save a further $119,000 in tax.

While talking to the valuer, he mentioned a childcare centre he had recently valued and the depreciation was $50,000 for the first year!  If taxed at 33%, this would mean a $16,500 tax saving!

So please, if you have a commercial property or a residential rental with high value chattels, talk to me about chattels depreciation!  Or look at www.valuit.co.nz

Kind regards
Ross Barnett

Christmas Wishes and Trading Hours

We wish you a very Merry Christmas, and a safe and relaxing holiday break.

We are all looking forward to a well earned break over Christmas and New Year.  A reminder that our office will be closing for the Christmas period.

CHRISTMAS TRADING HOURS

Our Office is closing on Friday, 23 December 2016 at 12 noon.
We will reopen on Monday, 9 January 2017 at 8.00 am.



 



PROVISIONAL TAX AND GST

GST and the second provisional tax payment are due on 15 January 2017.  We will be sending out provisional tax notices before Christmas.   If you have any questions, please give Karen a call on (07) 839 2801 when our office re-opens on 9 January 2017.






 

 

 

 

 

 

 

Kind regards
Ross and the Team at Coombe Smith

You're Missing Out If You Haven't Had a Chattels Valuation Done!

2 December 2016

 

You're missing out if you haven't had a chattels valuation done!

Did you know that you can still depreciate carpet, curtains, stoves, heat pumps, dishwashers and other chattels?  From 1/04/11 there is no building depreciation, so depreciating chattels has become even more important.  For commercial property owners there are even more deductions available!
 

I've looked back at a few clients who had chattels valuations done by Valuit a few years ago:

  • Client 1:  Owned three properties for a number of years.  $79,001 total chattels depreciation claimed = approximately $26,000 tax saved.  Cost around $400 *3, so $1,200 total cost to save $26,000.  2167% return on investment.
  • Client 2: Owned one property for a number of years and recently sold.
    • $30,969 chattels depreciation claimed, saving $10,219.77 in tax.
    • Equivalent building depreciation would have been approximately $7,000, but this would have been recovered on sale, where as the chattels have actually reduced in value, so no recovery.
  • Client 3: Very simple commercial building fit out.  $52,102 chattels depreciation claimed = approximately $17,000 tax saved.

Over the last few years I've noticed a lot of property investors haven't had these done and have missed out on thousands in tax refunds.  For new purchases, you need to get a valuation done before the first tax return is filed and ideally at the start.  If you have already filed, it gets a bit trickier:

  • IRD don't like investors changing from just building to chattels split out but that doesn't mean they are right. 
  • If it has just been one year, maybe two, then it is possible to get a valuation that reflects the purchase values, then to calculate the opening book values and start depreciating.  You will have some 'black hole' depreciation but at least you get some going forward.
  • Over two years, you can swear and curse at your old advisers but that's about it.


Cost vs Benefit
 
Valuit charge $400 + disbursements +GST to complete a chattels valuation for a Single Tenancy Dwelling.

The benefit of the valuation depends a lot on the property you own.  If it is a brand new property, then there will be a large amount of chattels and it will make sense to get a valuation completed. 

But if the property is old, run down and only with a small number of low value chattels, then it probably won’t be worth getting a valuation done. 

In the middle is the grey area, where it really depends on the specific property.  If you are unsure, we suggest you either give me a ring, view Valuit’s website or talk to Valuit.

For example $10,000 of carpet:

  • If there is no chattels valuation (or separate cost), then it is included in building with no depreciation.
  • If there is a chattels valuation, then it is depreciable at 25% which is $2,500 per year.  In the first year this would give a $750 tax saving if the owner is on the 30% tax rate.  This would easily pay for itself in the first year!


Terry le Grove is the Waikato representative for Valuit.  He will let you know, at no cost to you, if it is not worthwhile doing a valuation.  So it is worth discussing this with him.  His contact details are:

Terry le Grove, Property Depreciation Specialist
Valuit
Freephone 0508 482 583
Mobile 027 296 0827
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website at www.valuit.co.nz


If you haven't depreciated your chattels,  email  This email address is being protected from spambots. You need JavaScript enabled to view it.  to see if there is something we can do for you.

  
Kind regards
Ross Barnett 

Update about Meth Contamination and the New Levels

25 November 2016

Here is a great update from NZ Property Investors Federation about Meth contamination and the new levels:

 

Andrew King updates members on meth contamination:

The much anticipated report on acceptable levels of meth contamination was released recently by the Ministry of Health.

The main finding of the report is that the current levels of acceptable meth contamination are to be amended. The new recommendations are that levels where meth has been manufactured will remain at 0.5 micrograms per 100cm2.

However where meth has just been used in a property, the level has been increased to 1.5 micrograms per 100cm2 if the property has carpet, or 2 micrograms per 100cm2 if the property doesn't have carpet.

This is good news for everyone. To put these levels into perspective, the current level of 0.5 micrograms per 100cm2 is the equivalent of a piece of meth the size of a grain of salt, divided by 1,000. It is microscopic and at a level that cannot effect even the most vulnerable.

Despite this, many thousands of dollars must be spent in order to get the level of meth in a property down to this level.

Meth cleaning companies have been chastised for the cost they charge. However it is extremely difficult for them to get a property below this level. In addition to the fact that many more properties will no longer being classified as contaminated, increasing the acceptable level where meth has been used should make the cleaner’s job easier.

There has been some confusion as to when these new recommendations should apply. Technically, each local authority needs to individually adopt these new recommendations, which could see different levels applying around the country.

However meth cleaning companies appear to be applying these new levels for new work they are taking on. They have encountered problems with customers who are half way through or just completed a cleanup under the previous recommendations. However the work was completed under the rules of the day and although it is understandable that these owners do not want to pay for a higher level of cleaning, it is unreasonable for these companies not to be paid for the work they have done.

The good news for these property owners is that rechecks after a property has been cleaned will likely be at the new recommended levels. This means that some will have a better chance of passing.

Standards NZ will be releasing its draft meth standard soon for public consultation.
http://www.nzpif.org.nz/news/view/58334


Kind regards
Ross Barnett 

Caution, Interest Rates and 13% Gross Yield

10 November 2016

 

CAUTION,  INTEREST RATES AND 13% GROSS YIELD

 

How do you buy a good property, in a good area, and get 13% Gross Yield?

Last night, the Waikato Property Investors meeting focused on 'maximising what you have'.  So, rather than buying a new rental with a poor return, you might be able to subdivide, build a minor dwelling, or build a duplex.  It was all about focusing on your current rentals and trying to maximise the return.


My favourite example, given by one of the speakers last night, is renovations.  The example was a renovation of a one bedroom unit for $20,000.  New kitchen, carpet, toilet, laundry tub, etc.  After the renovation the rent was increased by $50 per week, and the speaker thought it could really go up $60 per week.

So that is around $2,500 extra rent per year, or a 13% return or gross yield on the $20,000!  If you borrowed the $20,000 at current interest rates, it would cost around $900 per year, so would improve the rental's annual cash flow by approximately $1,600 per year.

The speaker also thought the $20,000 renovation would improve the value by $50,000!

So a simple renovation can give a great gross yield, improve cash flow, and create an equity gain.

 

Interest Rates

ASB recently increased their 3, 4 and 5 year rates.

BNZ just followed and increased their 3 year rate.

So while the OCR goes down, it seems the long term rates are going up.

No one has a crystal ball, and with all the uncertainty at the moment, I think we are all guessing.  One option is to spread your loans into some short term and some long term.  This means you win either way, rather than gambling on one outcome.

If you haven't already, I suggest you review your interest rate risk and strategy.

 

Caution

No one knows exactly what will happen with the property market.  Some people say it will crash.  Some say that it will go flat and yet others say that it will continue to boom. 

In my opinion, it is not a time to gamble and take a big risk.  If you are buying a new rental, I feel that you need there to be good cash flow or a large equity increase available through a twist.

With interest rates being so low, I feel that investors should be taking advantage of this and paying down debt.


Kind regards
Ross Barnett 

Stupid Tax Law - Be Very Careful With Nominations!

28 October 2016

STUPID TAX LAW - BE VERY CAREFUL WITH NOMINATIONS!

Consider this:  You buy a section off the plans for your personal home.  You put your personal name or nominee on the agreement as you need to discuss with your advisors which entity to put the section under.  You then nominate your Family Trust.  Surely there can't be any tax issues?  It's going to be your personal home too!

Well, there could be unexpected tax consequences.  If you are buying a residential property, and then nominating another entity, you need to consider the 2 year Bright-line test.

We are finding this situation is coming up quite often and we think the rules around this are a joke!

Bob signs a Sale and Purchase Agreement to buy a section for $200,000 in January 2016 to build his personal family home.

In October 2016, Bob has now established a Family Trust.  Bob nominates the Family Trust as the purchaser.  The market has jumped in value and the section is worth $300,000 at this time (October 2016).  Title is then available in January 2017, when Bob's Family Trust settles on the property.

  • IRD treat the nomination as a sale.  So for the 2 year Bright-line Test - purchased January 2016 and sold October 2016, which is within two years.
  • You might be thinking 'No worries, there is personal home exemption'.  WRONG.  This is just a section, so isn't Bob's personal home yet, so NO EXEMPTION.
  • Or, 'Surely there is something in the rules to allow for related party transfers like this'.  WRONG.  There is no allowance in the Bright-line Test for related party transfers (this is an area where you have to be particularly careful!).


SUGGESTIONS:

If you are looking at purchasing a property, ideally put the correct purchaser on the Sale and Purchase Agreement to start with.

If this isn't possible, then as soon as you are able to nominate the correct entity, get proof of the values (and keep this), and if there is no change in value, nominate the new party.

If there has been an increase in value, then you might have to wait until you can transfer the property into the correct entity without being taxed by the Bright-line Test (either after two years or once personal home test satisfied - it is worth checking this timing with an expert!).

See relevant excerpt below from IRD Tax Information Bulletin.

Kind regards
Ross Barnett


 

 



Simple Information for a Friday - 2 year Bright-line Rules

21 October 2016

Simple Information for a Friday - 2 year Bright-line Rules

 

If you are forced to sell a property, it is important to understand the five basic parts of the 2 year Bright-line rules.

1.  Only affects property purchased after 1/10/15:  Joe King signs a sale and purchase agreement to buy 241 Joke St on 15/9/15.  His intention is long term hold and he has no history of trading or association with trading.  Unfortunately, on 21/10/16 Joe is forced to sell the rental due to redundancy.

  • Even though the property has been owned for under two years, the Bright-line rules do not apply as the agreement was before 1/10/15.
  • As the property was intended as a long term hold property, other tax rules do not apply.

 

2.  Acquisition date for the Bright-line rules is the date the title is registered.

 

3.  Disposal date is the date of an agreement to dispose of the land:  Joe King signs the purchase agreement on 1/10/15 to buy a second rental, which settles on 30/10/15.  His intention is long term hold and he has no history of trading or association with trading.  Unfortunately, due to redundancy, he is forced to sell.  Two examples:

  1. Joe enters an agreement to sell on the 30/10/18, three years after purchase - Not taxable under Bright-line rules as over two years.
  2. Joe enters an agreement to sell on the 20/10/17, but settles on 20/11/17.  We look at the date title is registered (30/10/15) and date the agreement is signed 20/10/17, so this is within two years and therefore taxable under the Bright-line rules.

 

4.  Personal house exclusion.  Must be predominately used as main home, and can only use the personal home exclusion twice in two years.  So George King:

  • Buys first personal house that settles 1/11/15.  Sells 30/11/16.
  • Buys second personal house 15/11/16.  Sells 15/3/17.
  • Buys third personal house 20/2/17.

The sale of the first and second house would not be taxed by the Bright-line rules, as George gets the personal house exclusion.

If George entered into an agreement to sell the third personal house before 1/11/17, then any gain on this third personal house would be taxable.

IRD would also look at a pattern.  If George continued to buy and sell a large number of personal houses, even though he might not be taxable under the Bright-line test, IRD would look to tax under other tax rules.

 

5.  Normal tax rules apply:  If a rental property is purchased with the intention of selling for a profit, then the gains are taxable.  It doesn't matter if held for 1 month, 3 years or 30 years.  The gains will always be taxable.

 

Enjoy your weekend.

Kind regards
Ross Barnett 

 

 

Reducing Depreciation Recovery - Recap!

13 October 2016

 

Reducing Depreciation Recovery - Recap!

Quite a few property investors are thinking about selling, so I thought it was very timely to send through this article I wrote in 2013 on reducing depreciation recovery.   At the moment we have a few investors who are selling their properties to developers, and the developer are then demolishing or selling the existing building.  In this situation the building is worthless or worth a small sale value like $20,000.   So if you are selling to a developer, find out what they will be doing with the building, and then have a chat to me.  Most likely we would add a clause in the sale and purchase agreement to confirm the building value, and therefore stop any recovery!



Original Article published 23 November 2013:

Should you just accept that you will have to recover all the building depreciation you have previously claimed? ……… NO

In many cases, the building depreciation recovered is only a fraction of the total claimed and there are a number of ways to minimise it.


What is Depreciation Recovery?

In the past, property investors have been able to claim Building Depreciation.  An investor may have purchased an investment property for $350,000 of which $200,000 is land, $125,000 is building and $25,000 is chattels like carpets and curtains that have been valued by a Valuit Chattels valuation.  Most investors would have claimed 3% or 4% diminishing value depreciation on the $125,000 (or around $3,500 to $5,000) per year.  They also would have depreciated the chattels at their respective depreciation rates.  So over 5 years the investor may have claimed $20,000 of building depreciation, bringing the book value of the building down to $105,000.

In the past, the IRD has given a deduction for the reduction in value of the building.  If the building hasn’t been reducing in value, has increased in value, or has reduced at a lesser rate, then the property investor has been over-claiming building depreciation.  They have been claiming a deduction which is perfectly legal and allowable, but that isn’t really occurring in their circumstances.

When the building is sold, an investor who has been over-claiming this deduction, will then have to pay all or a part of it back again, which is depreciation recovery.

  • Depreciation Recovery generally only applies to buildings.
  • Chattels generally reduce in value at similar levels to IRD rates.  Therefore, when the investment property is sold, there is no recovery.  A chattels valuation could be obtained at date of sale to prove this.


Carrying on using the example given above, if the investment property is now sold 5 years later for $500,000.  The chattels might be worth $10,000, the building $190,000 and the land $300,000.  The building book value is only $105,000, so the $20,000 building depreciation claimed over the 5 years will be recovered and become taxable income.  From $125,000 to $190,000 is a $65,000 capital gain, which is currently non taxable in New Zealand.  In this example, the difference between the real building value $190,000 and the book value $105,000 is large, so there would be full depreciation recovery with no chance of reducing.  If the values are a lot closer, then there are a number of opportunities to reduce this.


How to reduce Building Depreciation Recovery?

1) Make sure your accountant or the person calculating the recovery knows what they are doing.  I have recently seen an example where an accountancy firm showed a recovery of $16,700 approximately when the recovered amount should have been $5,600 maximum.  This is a difference of $11,100 taxable income, or at the 33% tax rate $3,663 extra tax paid for no reason. This is a great reason to use a real ‘property accountant’, someone who specialises in and understands property.

2) A starting point to establishing the building value is normally the rates valuation.  From the rates information, work out what percentage is building and then apply this to the sale figure (less deductions!).  If this figure is over your building book value, then there will be building depreciation recovery (presuming you have claimed building depreciation in the past).

3) If the rates figure and the book value are similar, you could look at writing a clause in the contract.  The parties agree the building value is $XXXXX.

a.  Example – The building cost $125,000 and closing book value is now $105,000 so $20,000 building depreciation claimed.  The sale value is $300,000 and based on the rates valuation the building should be worth $112,500.  The parties could write a clause in the contract, “The parties agree that the building value is $105,000”.  As long as the two parties are not related, then this is the sale price.

b. You should not be too aggressive with this approach and the building value needs to be reasonable.


4) Any legal fees for the sale will be claimable under the new legal fees deduction rules.

5) Any commission or other costs incurred for the sale need to be deducted from the sale price, before the building value is calculated.

6) If you are confident the building value is close to the closing book value, then you could obtain a registered valuation to prove this.  We frequently do this for clients, as the rating valuations are not always realistic or are out of date.  Recently a client saved over $20,000 in depreciation recovery, or over $7,000 in tax at the 33% tax rate, just by obtaining two valuations for less than a cost of $500.

Overall, don’t just accept a depreciation recovery.  Think it over, ( “Has my gain come through land or building?” and “Has my building really decreased slightly in value?”), justifying any previous depreciation claims, and meaning there should be little or no depreciation recovery.

Kind regards
Ross Barnett 

 

Lessons from the Last Boom/Peak, plus Hamilton Boom

4 October 2016

 

LESSONS FROM THE LAST BOOM/PEAK, PLUS HAMILTON BOOM


I last looked at the Hamilton median sales price in November 2015.  Below is a graph that shows the huge increase over the last 18 months:
 

  • March 2015     $350,000
  • October 2015  $435,000 -  $85,000 increase or 24% in 8 months.
  • August 2016    $493,750 -  $143,750 increase or 41% in 17 months


(Click here to view full graph on Lodge Real Estate website.)

 

 

 

 

 

 

 

 

 

 

Don't get carried away with the media and the property market!

It can come down!  Buying on or near the top of the market has added risk!

  • There is no buffer if the market comes back a little.
  • Your interest costs are higher as you have paid more.


Example 1 – Built in 2007/2008
Cost $520,000
Losing $8,000 per year
Had to sell 2014
Sold $425,000
 
TOTAL LOSS = $150,000 approx!
 
 
Example 2 – Purchased new late 2008
Cost $335,000
Losing $9,000 per year
Had to sell early 2015
Sold $300,000
 
TOTAL LOSS = $98,000



I recommend being very careful if buying at the moment.  Make sure you have a clear strategy and a buffer for extra costs or if interest rates go up. 
 
I would personally only buy if the property was cash flow neutral or better, or if I had a short term strategy to turn it positive.
 
Otherwise you are gambling on prices going up – They may do, or they could go down too!



CASH FLOW IS KING!!!
 

For both of the above examples where property investors lost money, the properties were very negative and costing a lot of cash each year.

While we always hope everything goes well, if things go badly and you get sick, or lose a job, then funding negative rentals can be very hard!
 
If you are buying long term rentals at the moment, I feel you need to be buying a property that is neutral at worst, or else negative at the moment but you have a short term plan to convert this loss into a profit.  By subdividing, or adding a minor dwelling, for example, or paying down large amounts on the mortgage.


 
COMPLETE PROJECTS
 
I hear all the time, that “we can add a minor dwelling later to improve cashflow”, or “we can subdivide this long term and sell the section to improve cashflow”, or similar comments that there is a project that can be completed to improve cashflow.
 
After the last boom in late 2007, the banks changed their lending criteria and made it a lot harder for investors to borrow.  Therefore, a lot of investors who had these possible projects, could no longer get the finance to do them.  So rather than having a house, with a minor dwelling making cash each year, they were left with a negative rental that was dragging them down.
 
If you have possible projects that can improve your cashflow, I suggest you try to finish them now.


INTEREST RATES – Don’t put all your eggs in one basket!
 
No one has a crystal ball, and no one knows what will happen with interest rates.  Everyone is guessing.
 
Therefore, I generally suggest using a spreading approach and have some loans short term, some medium, and some long.  The idea is to ‘not’ have all your loans coming up for renewal at the same time, otherwise if rates change all your loans could be affected.
 
With a spreading approach to interest rates, you win whether rates go up or down!


BUYING OPPORTUNITY
 
When the market peaked in late 2007, there were quite a few buyers who had stretched themselves too far.  As property prices failed to go up over the next year or so, these buyers became more under pressure as they were putting in cash each week to top up their negative cashflow properties, but not getting the capital gains they needed.  Last boom it seemed to take 2-4 years for these buyers to get further and further in trouble, and then finally to sell when they were desperate. 
 
Therefore, there was great buying around 2009 to 2011, when there were quite a few desperate vendors in the market.
 
If you think the market will crash, or even go flat for a number of years as it did 2007 to 2014
(Rest of New Zealand excluding Auckland), then a good strategy can be to wait for 2-4 years after the boom and try to find some bargains.
 
I hope you found this useful
 
Kind regards
Ross Barnett

Are You Getting These 3 Rentals Basics Right?

9 September 2016

ARE YOU GETTING THESE 3 RENTALS BASICS RIGHT?

Many of you would have heard me talk about interest rates and strategies to reduce mortgage risk.  With interest being a property investor's major cost, this is a critical area to review and discuss.


Here is a link to a recent article in the NZ Herald that suggests interest rates could go up.  This is probably the first hint I have seen that interest rates could go the other way, as most people and experts seem to think that interest rates will still go down.  There are arguments to support interest rates going up and down, and really no one has a 'crystal ball'.  In August, the OCR went down 0.25 to 2%, but this had no effect on fixed interest rates, and there was only a tiny movement in floating rates.

My opinion:  I can't see fixed interest rates going much lower, as evidenced by the recent OCR change having no or minimal effect.

Can interest rates go up?  YES - the New Zealand housing market is booming, so our overall borrowing is going up and up.  This money needs to come from somewhere, and a lot of our New Zealand banks' borrowing is from overseas.  Therefore, if the cost of borrowing from overseas goes up, then our interest rates would rise.

OVERALL - THERE IS NO CERTAIN ANSWER AND ONLY TIME WILL TELL.

So, my approach is to spread mortgages and terms.  I like the old saying "don't put all your eggs in one basket".  An example of $920,000 borrowing might be:

  • $20,000 revolving credit that you aim to pay off over next 12 months
  • $300,000 fixed for 1 year, at around 4.25%
  • $300,000 fixed for 3 years, at around 4.3%
  • $300,000 fixed for 5 years, at around 4.8%

Under this approach, if interest rates go up, you have some long term protection for 3 and 5 years.  If interest rates go down, some of the loan comes up in 1 year so that you can take advantage of the lower rates.  Either way, you WIN!

 

NEW LANDLORD RESPONSIBILITIES

SMOKE ALARMS

From 1 July 2016, landlords are required to have working smoke alarms installed in all their residential rental homes. 
Any replacement alarms installed after 1 July 2016 need to have long life batteries and a photoelectric sensor. 
Hardwired smoke alarms are also permitted. 
Tenants will be responsible for replacing batteries in the smoke alarms and informing landlords of any defects. 
Click here  for more information.



INSULATION

Landlords are responsible for ensuring that insulation is installed in their rental homes and that it meets the Residential Tenancies Act requirements
All landlords are required to provide a statement on the tenancy agreement about the location, type and condition of insulation in the home for any new tenancy from 1 July 2016. 
Installing conductive foil insulation is now banned.  
Failure to comply with the regulations is an unlawful act and the landlord may be liable for a financial penalty of up to $4,000. 
For most rentals, they must have ceiling and under floor insulation installed up to standard by 1 July  2019.
For more information,  click here.


Kind regards
Ross Barnett

 

Could You Save 44% on Insurance and Get Better Cover?

19 August 2016

Could You Save 44% on Insurance and Get Better Cover?

Insurance costs have obviously increased a lot over the last few years and insurance cover is in the media a lot at the moment as some insurance companies only cover up to $25,000 for Meth damage or remediation.
 
Waikato Property Investors Association has recently taken on a new insurance sponsor who specialises in Rental Property Insurance, Initio.  (For more information:   https://rentalpropertyinsurancenz.co.nz/)
 
Below is a comparison between my current insurance on a rental property with NZI vs a quote from Initio.  I have tried to compare apples with apples as much as possible!
 

Big differences

  • Initio is cheaper.  $664.62 less or 44% savings!
  • Initio has a lower excess.  $250 less
  • Initio has unlimited Meth Damage
  • Initio has higher landlords contents and Public Liability cover.

 
 
Full comparison and information

Current insurance with NZI: Initio
1960's house Same house 1960's
212m2 house 212m2 house
Estimated Sum Insured $435,500 Estimated Sum Insured $435,500
Landlords Contents $10,000 Landlords Contents $20,000
Excess $750 plus extra $150 if rental, so total of $900 Excess $650
Loss of Rent $20,000 Loss of Rent $20,000
Landlords protection (which I think includes Meth $25,000) Deliberate Damage $25,000
Meth - Unlimited cover
Public Liability $1 million Public Liability $2 million
Total Cost $1,505.04 GST inclusive Total Cost $840.42 GST inclusive


Kind regards
Ross Barnett

Simple Meth Testing Information to Keep Your Rental Safe!

8 August 2016

Simple Meth Testing Information to Keep Your Rental Safe!

There is a lot of talk out there about meth contamination and possible issues for landlords and property investors.  Personally,  I really don't believe that Meth has to be that big an issue.  Here are a few key points:

  1. Make sure you review your insurance to ensure you have adequate Meth insurance and are fully covered, including Loss of Income, before you get any meth tests done.

     
  2. Get a Meth screening test done for under $200. 
     
    • This is just a Yes/No test.  It detects if Meth is present or not.
    • The reading is meaningless.  For example, 0.3 could still be a problem, as one room could be 2 and the other rooms nothing, resulting in a combined screen test of 0.3

       
  3. We are finding that screening tests are about 20% positive.  So 80% will be negative with nothing else required to do.

     
  4. If your screening test is positive, talk to your insurance company:  They should cover the main test, less the excess.

     
  5. The majority of main test results are coming back under the threshold of recommended guidelines.  So, again, there will be nothing else required to be done.

     
  6. If, however, further action is required, and you have made sure you have the right insurance cover (see point 1), then your insurance company will fully cover you and any fix up costs and/or loss of rental income will be paid by them.


So, if you follow these simple steps, there should be no problems!


I have recently set up Get A Meth Test Ltd, a small Meth Test company that specialises in helping landlords with testing.  Our team has been trained by industry leading InScience Ltd, and only does testing, not remedial work.

During August and September 2016, we are offering a special rate of $150 + GST for Meth screening tests.

  Click here or call Get A Meth Test on 027 514 0514 for more information.



Kind regards
Ross Barnett

House Prices, NZ Dollar, about to burst?

22 July 2016

 

House prices, NZ dollar, about to burst?

This is a quote from David Hisco, CEO of ANZ New Zealand, taken from an article in the NZ Herald on 20/7/16:

"In the quick snack media world we live, sadly many are making decisions based on the last headline or quote rather than research and facts. Here is a fact: property markets can and do go backwards."


I found this article very interesting, so have a look ...

http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11678081

So many people are saying the property market is risky, so it's just a matter of being careful!


Kind regards
Ross Barnett

40% deposit required for Property Investors

19 June 2016

40% deposit required for Property Investors

Wow! I'm amazed that the Reserve Bank has finally done something!

From 1/9/16 property investors will require a 40% deposit. Also the Reserve Bank wants banks to start applying this new policy straight away.

This is going to make property investing very hard for new investors, as they will either need a large cash deposit, or else great equity in their existing personal home.

Past scenario (non Auckland)

Personal house worth $600,000, say current debt of $400,000 - Bank would lend up to 80% or $480,000, so $80,000 available

Could buy an investment property for $400,000 with 100% debt - Bank would lend 80% or $320,000 plus use the $80,000 from personal house.

Total assets $1 million and total debt $800,000, so at 80% Loan to Value Ratio (LVR)

Current scenario banks are likely to adopt from today

Personal house worth $600,000, say current debt of $400,000 - Bank would lend up to 80% or $480,000, so $80,000 available

Could buy an investment property for $200,000 with 100% debt - Bank would lend 60% or $120,000 plus use the $80,000 from personal house.

Total assets $800,000 and total debt $600,000, so at 75% Loan to Value Ratio (LVR) overall

So in this example, the investors buying power would have halved!

Existing investors will also find these rules tough, even if they are in a good position!

Established long term hold investor

Number of properties worth $3 million

50% LVR being $1.5 million of debt - very good and safe LVR

Want to buy a new rental for $800,000 with 100% debt.

This would move the LVR on the rentals to 60.5%, so without a personal house being included, this probably wouldn't be possible!

Debt to Income restrictions - "Wheeler also said work was also progressing on debt-to-income restrictions"

Non bank lenders - There are still non bank lenders available who are not restricted by the Reserve Bank rules, so if you are looking at buying it might be worth talking to your mortgage broker about this option.

Ross

Holiday Homes and GST Risk

15 July 2016

 

HOLIDAY HOMES AND GST RISK   

From the 1/04/11 the definition of a dwelling changed for GST purposes.  In the past a holiday home would be exempt for GST, but this change of definition most likely makes them liable for GST.  If purchased before 1/4/11, there is an amendment that excludes holiday homes, but any holiday home purchased after 1/4/11 DOES NOT have the exemption!

So, in theory, you could claim GST on the purchase of a holiday home (as long as not purchased from a GST registered vendor as then zero rating, or purchased from an associated entity as a limitation can apply), and the portion used, for the rental business.

You would then need to pay GST on rent, but could claim GST on other expenses.


Issues with claiming GST

  • Property goes up in value, so when you sell you have to pay a lot more GST than you claim.
  • Watch out for any GST registered vendors when purchasing, as compulsory zero rating (get specific advice!)
  • Often private component, which creates hassles and deemed supply rules.

So, often we recommend that a holiday home is kept out of the GST net and NO GST is claimed.


Risks        

1)  Over GST threshold of $60,000 
For example, an investor buys a multi-million dollar holiday home on Waiheke Island and it is rented for more than $60,000 for the year.  Non GST registered entity:

  • Have to GST register as over threshold, so pay GST on income.
  • Deemed supply (see point 7 below).             

 
2)  GST register entity later
For example, an investor has a holiday home in a Trust and it is rented out, but for under the $60,000 threshhold.  The Trust buys a commercial property, so GST registers.  The Trust will now have to pay GST on the holiday home rent and be liable for GST on the eventual sale.
 

3)  A Trust is GST registered with commercial property and holiday home

  • If holiday home is not rented and just used privately, then no issue.
  • But if there is a change of circumstances and the holiday home is rented, then falls into GST net.  So might just rent for 2 weeks over Xmas to get the high rent!

  General rule is not to put holiday homes in a GST registered entity.
 

4)  Leftfield result
Entity owns a commercial property, is GST registered and also owns long term residential rental properties.  In theory, there should be no issues as the residential rental properties are exempt for GST.  But:

  • rental property at Papamoa, was long term residential rental, but becomes vacant , so is rented out as a holiday home over summer.  Now falls into GST net.
  • rental property in Christchurch is rented out as long term residential rental property.  But tenant is using it as an office, so no longer fits dwelling definition, so would fall into GST net.


  5)  Farms - Watch what the dwellings are used for.

  • used as family home, will be exempt.
  • rented as long term home to farm worker, will be exempt.
  • used as short term accommodation and rented to shearers, then not exempt.

 
6)  Commercial and Residential

  • If buying from a developer, then not used as dwelling, so whole land and building is zero rated.
  • Bad from purchaser's perspective as effectively paying more!

 
7)  Deemed supply

  • Have to pay GST on deemed value of private use and could push you over $60,000 threshold.      For example, have a holiday home and received $30,000 of rent.  Holiday Home is also used for private use, and market value would be $40,000.  The rent combined with the private use market value is over $60,000, so have to GST register and fall into GST net.
  • Have to pay GST on rent and on deemed private use.
  • Would also have to pay GST on sale!


Clause 13.3

"The vendor warrants that any dwelling and curtilage or part thereof supplied on sale of the property are not a supply to which 5(16) of the GST Act applies".

If you are GST registered, be careful if this clause is changed, as it probably means the dwelling is either not a dwelling for GST purposes, or that GST has been claimed on this by the vendor, so would be zero rated.  Overall result if you're not careful is that the purchaser can pay too much.

Often it pays to check what the dwellings are used for to make sure they are exempt for GST when purchased . This especially applies to farms as per point 5 above.


Kind regards
Ross Barnett

New Smoke Detector Requirements For Landlords

28 June 2016

NEW SMOKE DETECTOR REQUIREMENTS FOR LANDLORDS

New smoke detector regulatory requirements come into force as from Friday, 1 July 2016 as part of the changes to the Residential Tenancy Act (RTA) aiming to reduce fire-related injuries and deaths in rental accommodation.  Here are the main points that you need to know as a landlord:

  • There must be a minimum of ONE working smoke alarm within 3 metres of each bedroom door, and in a sleep out, self-contained caravan, or similar, there must be a minimum of ONE working smoke alarm.
  • The landlord is responsible for making sure the smoke alarms are in working order at the beginning of every new tenancy.
  • The tenant is responsible for replacing batteries (if required) during their tenancy. 
  • In multi-story units there must be ONE smoke alarm on each level within the household unit.
  • Where there are NO EXISTING smoke alarms, long life photoelectric smoke alarms are now required (from 1/7/16).
  • When existing smoke alarms are replaced, they must be replaced with long life photoelectric smoke alarms (from 1/7/16).
  • Hard wired smoke alarms are also acceptable.
  • All smoke alarms must be replaced in accordance with the manufacturer's recommended replacement date stated on the alarm.
  • All new and replacement smoke alarms in rental properties are to be installed in accordance with placement requirements provided in the manufacturer's instructions.   Click here to view illustrations from New Zealand Standard 4514 provide a simple guide on where to place alarms. You can also find helpful information on the NZ Fire Service’s website.
  • When smoke alarms are installed or replaced, landlords need to ensure the alarms purchased comply with the manufacturing standard:  Australian Standard AS3786:1993; or equivalent international standard: UL217 (USA), ULCS531 (Canada), BS5446: Part 1 (United Kingdom), BS EN 14604 (United Kingdom) or ISO12239 (International). (This should be displayed prominently on the packaging.)


Note:  It is an unlawful act for tenants to cause or permit any interference with, or to render inoperative, any means of escape from fire - which includes smoke alarms.  The maximum fine for this offence is $3,000.

These regulations don't override any additional compliance requirements for smoke alarms in other legislation, e.g. multi-unit residential complexes, student accommodation, or boarding houses.

Click here to view the full information on the MBEI website.


We have secured another small supply of long life photoelectric smoke alarms through the New Zealand Property Investors Federation.


SPECIAL OFFER FOR COOMBE SMITH CLIENTS ONLY

ST-620 Thermoptek Smoke Alarms

Smoke alarms save lives.

Here is an exciting opportunity to be proactive, look after your tenants and save money at the same time.  As these smoke alarms have a 10 year life span, the savings are ongoing.

Thermoptek is a photoelectric type that also includes thermal enhancement, providing fast reaction to both slow smouldering and fast flaming fires in a single alarm. It has a large central reset button that makes it easy to reset.  They are recommended by the NZ Fire Service and the NZ Property Investors Federation. 


 
For information about installing the fire alarms, click here


 

The special price for Coombe Smith clients is $27 per unit (Cash or Eftpos) or $27.75 if purchased by Credit Card.  (Pick up required.)
These alarms retail elsewhere for $44.95! 

 
We have limited supplies, so you will need to be in quick!

Phone us on (07) 839 2801 and ask for Mareese or This email address is being protected from spambots. You need JavaScript enabled to view it..


Kind regards
Ross Barnett

IRD SCAM ALERT

22 June 2016

 

IRD SCAM

We received the following alert from IRD today:

Over the past two weeks Inland Revenue has received reports of a telephone phishing scam from several hundred customers around New Zealand.

The scam calls have been made to landlines and mobile phones, with messages being left on voicemail if the calls haven’t been answered.

The callers state that they are from the Inland Revenue Department and the following scenarios have been reported, that the customer:

  • is wanted for historic tax evasion or tax avoidance
  • has a red flag on their file
  • is in debt

and they or their lawyer must return the call as soon as possible. Some customers have been told to make a payment via Western Union within 30 minutes, or risk arrest.

They are often told to ring a Wellington number – (04) 830 2441 – and recommended to speak to a “Kenneth Matthews”, “James Matthews” or “Kevin Sousa” to arrange an immediate payment so as to avoid serious repercussions.

Customers have reported the callers as having “foreign sounding” accents, with many different accents reported. Sometimes the caller is female. The callers are very confident and convincing, and we have received anecdotal reports that some customers have been taken in and paid significant sums of money to the scammers.

Some customers have called the number referred to above and reported the background as sounding like a Contact Centre environment with multiple accents.  These customers have also reported the callers as becoming angry and aggressive when challenged.

We would like to remind all Tax Agents that Inland Revenue staff would not leave messages like these for your clients.

If your clients receive a suspicious email, SMS scam message or a fraudulent call, please email This email address is being protected from spambots. You need JavaScript enabled to view it. and include:

  • the email received, or
  • the number that the text message or phone number (CallerID) originated from (if not blocked)
  • any names and call-back numbers given by the text sender or phone caller
  • details about the scam including:
    • the amount of tax refund quoted
    • the reference number
    • the information requested, and
    • any other relevant information.

Inland Revenue sent out a media release last week warning customers about the scam and this has been reported in several local publications.


Kind regards
Ross Barnett

Do you want to buy and sell properties for profit?

17 June 2016

This is an old newsletter I wrote in August 2013 about property trading, but we are finding a lot of people are looking at trading at the moment, so I thought it might be of interest to you.


Do you want to buy and sell properties for profit?


GST and Zero Rating

If you trade residential properties, then you will have to register for GST once you have a continuous taxable activity.  This means that you can claim GST on purchase costs that have GST but you also have to pay GST on the sale. 

If you do a one-off trade, then this is not a continuous taxable activity.  Therefore you would not be required to register for GST.  But there can be a fine line, and it is often difficult to determine, if the trade will be a one-off or if you are likely to do numerous property trades, thus becoming continuous.  I suggest seeking professional advice from a property accountant on this subject and the best approach is to be honest.  If you intend on buying numerous properties to do up and sell for the profit, then you should GST register at the start.

For long term residential property investors, there is no GST, so the above comments are just for property traders.


Zero rating – Over the last year we have heard about a lot of mistakes around the Compulsory Zero Rating (CZR).  Real Estate agents commonly get this wrong and a few recent forum posts on www.propertytalk.com even show lawyers and non property accountants getting this wrong.  If both the vendor and purchaser are GST registered, then the sale will be zero rated for GST.  Therefore if you are a GST registered purchaser and the vendor is GST registered, you should be making any offer for the GST exclusive amount, plus GST (if any).

So for example, you are GST registered and purchasing a section from a developer.  The developer is advertising the section for $240,000.  You want to offer $230,000.  You would therefore work out the GST exclusive value $200,000 ($230,000 / 1.15) and offer on the contract $200,000 plus GST (if any).  As the developer will be GST registered, the sale is then Zero Rated, so you would pay $200,000 but can’t claim back the GST, and the vendor would receive $200,000 but have no GST to pay to IRD.

Following the example above, some recent mistakes I have heard of are the contract being written at $230,000 inclusive of GST.  This sale would still be Zero Rated, and Zero Rated at the $230,000.  So the purchaser would effectively be paying $230,000 + GST, or $264,500.  This would be a $30,000 mistake and this can often be the difference between a good , profitable trade and a bad one.

Therefore it is very important to ensure you know whether a vendor is GST registered or not when you are buying trading properties.  I recommend that you talk to your lawyer about inserting a clause in the sale and purchase agreement to ensure that the vendor is unable to change their GST status once the contract is signed.  Many traders and educators use a standard clause that your lawyer should be able to provide you.


Second hand goods claim – If you are buying from a vendor who is not GST registered (this will often be the case, as they are just personal house owners), then as a GST registered trader you will be able to make a second hand goods claim.  You can only do this on the payments basis for GST (i.e. claim the GST once you pay for it).  The property trader would then claim the GST back in the next GST period and get the GST back as a refund.  This is the purchase price divided by 23 * 3, so for example if a trader purchased a property for $230,000, they would get $30,000 GST back.  IRD will generally audit large GST refunds, so we often get clients to just claim the land/building purchase in that GST period, to keep the GST return very simple for the IRD audit. 
 


GST on rental income if trading properties

We have taken on a client in the past whose old accountant has returned GST on rental income for the last 6 years.  The client owes or has paid around $12,000 in GST per year, totaling $70,000 approximately over the 6 years.

If you are trading properties and registered for GST, you should not be returning GST on rental income!  For properties purchased before 1/04/11 it is best practice to use Lundy adjustments.  For the client above, using the Lundy adjustments reduced the GST adjustment down to approximately $2,000 per year or $12,000 for the 6 years.  Overall we hope to save at least $50,000 and are in the process of reassessing the old GST returns with IRD.  Again, if you are involved in property transactions, it is essential that you use a specialist property accountant who is fully aware of property tips and tricks.

If the property was purchased after 1/04/11, new rules have come in that generally require more GST to be paid back to IRD.  But the first adjustment required is not until 31 March of the year after.  For example, if you purchased a section, built a house in May 2013 and tried to sell it, then couldn’t, so rented it out, the first adjustment period would be for May 2013 to 31/03/15, with the GST adjustment due in the 31/03/15 period.




Profit on Trading Property

There are a lot of people looking at going full time into property trading to make a living and gain wealth.
My first comment is be very careful about quitting your day job.

- This job brings you day to day cash flow, which enables you and your family to live.

- Banks love a steady, solid income.   So without one, you might find lending difficult.

Secondly, do the figures really stack up?   In today’s market it is easy to buy, easy to renovate but the problem lies with selling.   This can result in additional holding costs and also with a lower than expected selling price.

Here is an example of a Property Trade that I have heard an investor talk about.


Example

Purchased for $275,000
Renovations cost $5,000
Could sell for $300,000
From a quick glance, a lot of people think “that’s not too bad” and it’s $20,000 profit.   But, unfortunately, that is not the case.   Below are the likely expenses and I have included commission because in today’s market, many sellers are needing to use an agent to get a good price. 

      Incl GST   Excl GST
INCOME          
           
Sale of Property   300,000    
Less GST - Divide by 23 * 3 39,130    
          260,870
           
EXPENSES        
Purchase     275,000    
Commission on sale   10,350    
Legal - $1,000 to buy and $1,000 to sell 2,000    
Accounting   500    
Advertising - Agent or other 1,500    
Insurance for 3 months 200    
Rates - 3 Months   500    
Renovations   5,000    
Telephone     25    
Travel - 86 cents per km * 300 260    
           
Subtotal Expenses   295,335    
Less GST     38,522    
           
Subtotal Excluding GST     256,813
           
Less Loan Fee - NO GST     1,000
Less Interest 3 months @ 6%     3,750
           
TAXABLE PROFIT       -693


   
So based on the expenses included, the Trade would make a loss of $693.   If commission is excluded the profit would be $8,307 before tax, or around $6,000 after tax at average tax rates. 

This example shows how quickly a perceived profit can disappear.   If the property was held for longer, then it is likely to make more of a loss.

There are a number of property investors getting tutored about property trading and my understanding is that there are around 90 such students targeting areas in South Auckland.

In my opinion this is too many traders concentrating in the one area. I would suggest being very careful about trying to trade in this area as it is likely there are too many other traders competing to sell their properties.

$50,000 rule

I always think that you need a $50,000 gap between the purchase and sale, with limited renovation expenses.   So for example, buy at $250,000, spend $5,000 on renovations and sell for $300,000.   Based on the same kind of expenses including commission, the profit before tax would be approximately $20,000. 

This level of profit gives the trader some room to move with either the selling price, or to hold the property for longer and to still make some kind of profit.
 
Overall

Property Trading is not easy and you need to ensure you have a market in which to sell your finished product.   With Trading you need to keep your properties moving, so the idea is to do them as quickly as possible and then move onto the next one.   Historically where I have seen Traders come undone is where they take too long or where they get too big too quick (i.e. have 2-3 or more on the go at once).


If you are thinking about trading properties, I suggest you organise a meeting with me to discuss the structures used and the implications of tainting.  Ring Mareese on 839 2801 to organise a meeting or email This email address is being protected from spambots. You need JavaScript enabled to view it.  Please note: there will be a charge for this meeting, depending on the work and information required.

 


Kind regards
Ross Barnett
Principal



 

Scary Tenancy Tribunal Decisions on Meth!

1 June 2016

 

Here is some important information about Meth Testing and recent cases from a NZ Property Investors Federation website article posted 26 May 2016:


Consequences for Landlords when P is found on their properties

Two recent Tenancy Tribunal cases have increased the risk levels for landlords where P is found in their properties.

The first case involved a rental property where the owner and the property manager didn't know that the previous occupants had smoked P in the property. It was a neighbour who told the tenant that they should get the property checked for meth.

The tenants paid for an inspection and the reading came back at 0.53 micrograms per 100cm2. The Ministry of Health currently recommends that following a meth lab cleanup, levels should not exceed 0.5 micrograms per 100cm2 to be acceptable for reoccupation. To provide some context, a property used as a meth lab may have concentrations of 300 micrograms per 100cm2.

The tenant immediately gave notice and left on 5 December 2015, just three weeks after the tenancy had begun.

The landlord obtained his own test on 5 January, which showed residual levels of P considerably below the MOH guidelines. This test found that the highest concentration level was in the kitchen, and was only 0.17 micrograms per 100cm2. The other seven test areas were considerably lower than this.

There have been reports of testing companies adding up the levels found in different areas of a property, which can overstate the level of residual P in a property. It appears that the first testing company did this.

The tenant took the landlord to the Tenancy Tribunal to end the fixed term tenancy and the return of the bond plus refund of the $569.25 letting fee they paid, $199 cost for the Meth Test and $315 to remove their possessions.

The adjudicator awarded all of this to the tenant. When the lost rent is factored into this, the landlord is considerably out of pocket.

The adjudicator said that landlords had a responsibility to provide a property in a reasonably clean state. Although it was found that the property was actually well below the MOH guidelines, the adjudicator found that "a property with any level of methamphetamine" is unclean.

He ruled "That the landlord belatedly obtaining a contrary result does not relieve the landlord, in my view, from liability for the situation that rose a month earlier.Accordingly I find that the landlord is in breach for failing to provide a property that was habitable."

The adjudicator acknowledged that "the effect of this decision may be onerous on landlords in that a landlord who does not have a property tested for methamphetamine contamination prior to renting, risks financial consequences, irrespective of whether or not the landlord had cause to suspect that the property was contaminated".

This case raises many points. There clearly needs to be standards put in place for the testing of meth. Adding together all amounts of residual meth found in a property clearly overstates the level.

It appears that a tenant who wants to break a fixed term tenancy can merely smoke some P in the property to achieve their aim.

The case also places a high cost on all landlords and all rental properties if they are required to undertake independent meth tests before and after a tenancy has begun.

There also needs to be some independent and rational investigation into what is a reasonable level of P in a property below which it can be viewed as reasonably clean. The MOH guidelines state that after cleaning a property used for meth cooking, it is habitable if the level is not greater than 0.5 micrograms per 100cm2. Surely this should be the level that demonstrates that a property is reasonably clean.

The second case is even more concerning as the financial cost was high. Although the levels of residual meth were not presented, the adjudicator made a similar finding to the first case that the property was uninhabitable. However the award that was made was quite different.

The tenants had occupied the rental property from August to November 2015 and claimed all the rent they had paid over that time,$7,275 to be returned. The tenants also claimed $4,025 for disposing of possessions they claimed were contaminated and storage costs for other items amounting to $890.

The adjudicator did not award that all the rent money should be returned to the tenant, acknowledging that they did get over three months of accommodation. However he did state that it was not the accommodation they "bargained for", and ruled that $3,500 should be returned to the tenant.

The cost for disposing of some possessions was also upheld, but not the storage. So in total, the landlord was required to pay the tenant a total of $7,525.

The NZPIF will be discussing the issue of meth contamination with the Principal Tenancy Adjudicator. We are also having discussions with MBIE about how the issue of meth can be handled so that tenants are protected but the risks to landlords are also mitigated.

Standards New Zealand is looking at how meth testers and cleaners can and should be regulated and we have applied to be part of the committee devising these standards.

It may be that best practice for landlords will be to test for meth at the beginning and end of tenancies. Apart from confirming when a property was and wasn't free of any residual meth, this could persuade tenants not to smoke meth in the property.

If this is to occur then we will be advocating that self testing can be undertaken to keep costs down and will be looking at options to lower the cost of self test kits for members.

(reference http://www.nzpif.org.nz/news/view/57925)

Kind regards
Ross Barnett

Watch Out for Exchange Gains if you have loans overseas & Free Stuff

13 May 2016

 

If you have loans overseas, you need to watch out for exchange gains.  Have a read of this example:

Joe Bloggs lives in NZ, so is a NZ tax resident.
 
He owns a rental property in the UK.   The original loan 200,000 pounds.
 
The exchange rate when the rental was purchased around 10 years ago was 3 times.  So the loan in NZD was $600,000
 
Joe is eligible for Cash Basis, so only needs to account for any exchange gain or loss when the property is sold.
 
Now in 2016, Joe sells the property.  The loan is still 200,000 pounds, but now as the NZD stronger at 2 times, the loan is only $400,000 NZD.
 
So unfortunately Joe has made an exchange gain of $200,000 which is taxable!



 
FREE STUFF
 
If you are a paying client of Coombe Smith, we have some information which we can give you for FREE:

  • A list of Five Strategies
  • A list of expenses you can claim
  • Simple Spreadsheet for rental cash flow
  • Simple Spreadsheet for trading properties
  • Trading property notes, including GST and zero rating.
  • Rental Property Basics Seminar Video
  • Advanced Property Investors Tricks and Tips Video

Please email This email address is being protected from spambots. You need JavaScript enabled to view it. if you would like any of these.
 

Kind regards

Ross Barnett


Best Insurance Tip and Hamilton Market Update

6 May 2016

BEST INSURANCE TIP

Robyn Marsters, Managing Director of Quality Rental Management www.qrm.co.nz, suggested that all landlords review their 'Meth' cover in their insurance.  A lot of property managers are starting to test for 'Meth' between tenancies, and there are a lot of positive results.  It is best to review your insurance before any 'Meth' test is done to ensure you have cover against potential damage.  I also suggest you ring your Insurance Company or Broker today to ensure you are insured from this risk.


HAMILTON UPDATE

Obviously the Hamilton market is booming at the moment.  Here is some interesting information:
 

  1. From 1/2/15 to 31/1/16 there have been 3,081 new dwelling consents in the Waikato.  From a blog I did back in January, that equates to 2.65 people per dwelling on average.  So, Waikato is building enough new dwellings for just over 8,000 extra people over the last year. (http://www.stats.govt.nz/browse_for_stats/industry_sectors/Construction/BuildingConsentsIssued_HOTPJan16.aspx)
  1. The median sale price of Hamilton in March 2015 was $350,000.  A year later the Hamilton median has jumped to $472,000.  That is an increase of 35%.  The graph on the Lodge Real Estate website shows how flat the Hamilton market has been from 2008 to 2015, then with a huge spike over the last nine months. (http://www.lodge.co.nz/Residential/Residential-Property-Overview)
  1.  I have picked a few recent auction sales, and shown their last purchase date, amount, CV and recent auction sale price.
Property Last purchase date Amount CV Auction Sale Price
March/April 2016
% above CV
Flagstaff March 2014 $515,000 600,000 $645,000 7.5
Bader October 2006 $260,000 285,000 $350,000 23
Pukete December 1995 $200,000 460,000 $500,000 9
Dinsdale June 2003 $179,000 375,000 $402,000 7
Deanwell October 1993 $80,000 340,000 $372,000 9.4

 

4.  With the large growth in Hamilton, the Hamilton median sale price is still a long way behind the NZ median, when historically it has caught up.  So, as at January 2016 (the graph is completed in January each year),  the Hamilton median was below $400,000, whereas NZ was at $450,000. (http://www.cswaikato.co.nz/services-property-accountants-hamilton/useful-information-accounting-hamilton)


INDICATION / PREDICTION
This graph and trend could indicate that Hamilton will continue to catch up and experience strong growth over the next year.  This is similar to what a lot of property professionals are indicating.  Obviously there is no crystal ball and this is just reading the historical data.  It doesn’t mean or guarantee that Hamilton will continue to boom.
 
 

  1. Number of listings for sale – When I searched www.realestate.co.nz there were 510 listings in Hamilton.  Normally there is closer to 1,000 houses for sale.   So there is a shortage of properties for sale in Hamilton.  With large demand and low supply, the laws of economics suggest that house prices will rise.  Note: A lot of Hamilton real estate firms don’t list on Trademe, so it’s a great idea to look on the real estate site.  You will also note that a lot of properties are going to Auction, as the agents and vendors try to maximise the sale price.
  1. Population growth – It is very difficult to get information on the update of population growth.
  1. From my blog in January, the last Census information showed an increase in population of 3,300 per year, and an expectation of around 4,000 (1.1% growth) growth from 2014 onwards.
  2. Hamilton City Council (from a 2015 report) expect the Hamilton population to increase from 153,000 in 2015 to 174,000 in 2025.  This works out to around a 1.3% growth or close to 2,000 per year, which would be in line with the Waikato growth expectations.

 
INDICATION / PREDICTION
Looking at the new dwelling information at the top of this blog, which can house 8,000 new people, versus the growth of around 4,000 people into the Waikato, this data shows that too many new houses are being built to be sustainable.  So this would indicate a bust or slow period is coming at some point.  It is very hard to predict when.
 
 

  1. Interest rates – The OCR dropped  down to 2.25% on 10/3/16.  The next announcement is on 9/6/16.  This link is to a graph which shows how low the OCR is compared to earlier years.  If you select ‘MAX’, you can compare back to before 1986.  The Reserve Bank report in March 2016 predicts flat interest rates for the next year or two.  But, from presentations I have been to, the Reserve Bank often get it wrong!

 
RISK
If interest rates go up, what will the effect be on house buyers?  A rise in interest costs could put extreme pressure on many buyers who have stretched too far.  This could force more sales, which then leads to more supply than demand, and means house prices could quickly flatten or drop.
 
 

  1. Auckland and the media – Some of the increase in Hamilton is due to Auckland buyers and the general media constantly writing about price increases.  If the Auckland market slows or turns, this trend could quickly follow in Hamilton.  A turn in the Auckland market could also happen as a result of government, Reserve Bank or council changes.  A land tax on foreign buyers could also cause a change.

 
So it is important to keep an eye on what is happening in Auckland!


Kind regards

Ross Barnett 

XERO TIP - Great if you manage your own properties or are years behind with your accounting.

18 April 2016

xero logoXero gives an easy way of invoicing your tenant every period (eg. weekly).  It then matches the rent payments you have received and can identify any missed payments.  So, by doing the 'repeating invoice' process in Xero, which takes 5 or 10 minutes, you can easily identify that Joe Bloggs has underpaid $1,400 of rent over the 12 months 1/4/15 to 31/3/16!

Watch out for our short video demonstration over the next two weeks!

The instruction example given below is for a new Xero user, but the 'repeating invoice' feature is also great for existing Xero users who are managing their own properties.

Xero has a great 'help' feature, so it has instructions on how to do each of these points as well!

How to add a 'repeating invoice' in Xero

Go to Accounts menu, then Sales
Click on Repeating in middle screen (next to invoices)
New Repeating Invoice

So, you might be doing your 2016 financial statements.  You could sign up for Xero now.  Download the bank transactions from 1/04/15, then use the Repeating Invoice in Xero and fill in the relevant details, eg.

  • Repeat every week
  • Invoice Date, starting 1/04/15
  • Warning Box appears - Xero gives you a warning that all these invoices will be generated but not sent (great!)
  • Due on invoice date
  • Code to rent and also Track to property
  • See screenshot [Demo Company NZ] at bottom of this email.
  • Tick Approve, once happy.


Add Bank Account:
Then once done, a Green box comes up "[XXX NAME] Bank Account added.   [XXXX NAME] Get started by Manually importing your bank transactions".

Click Manually Importing your bank transactions.

You can now import your bank transactions from 1/04/15 to when Xero starts.  So this will bring in all the 2016 information!

For this, your screen should look something like this:

xero img1

Click OK if the transactions match, i.e. 1/04/15 rent invoice is obviously the 1/04/15 rent payment.



Once all done, you can then look under Reports/Accounts Receivable.  My example shows that an amount of $1,400 is still owing by Joe Bloggs.

xero img2

Next go to Accounts, Sales, and Send Statements.  Run a report for Joe Bloggs from 1/04/15 to 31/03/16.  This gives the details of the under and missed payments.  You could then chase your tenant for $1,400 if need be.

 

xero img3

I hope you find these tips helpful.

What does the new Health & Safety at Work Act 2015 mean to landlords?

Are you a landlord? Here is some information from New Zealand Property Investors Federation about your obligations under the new Health & Safety Act.

 

Tuesday, Apr 05, 2016

What does the new Health and Safety at Work Act 2015 mean to landlords?

 

The Health and Safety at Work Act 2015 (the Act) came into effect this week. It is a complicated piece of legislation as it has to apply to many different circumstances throughout the country.

The NZPIF has contacted WorkSafe New Zealand to clarify how rental property owners may be affected.

WorkSafe explained  that the new laws were primarily aimed at reducing the number of serious accidents and deaths in workplaces. Prosecutions are for serious breaches or repeated offences.

As most serious accidents happen in high risk work environments, rental property owners will only be marginally affected. However it is still extremely important to know what your requirements are as a rental owner.

As a rental property owner, you are in the business of operating a rental property. A central part of the new Act is that the Person Conducting a Business or Undertaking (known as a PCBU) will have the primary health and safety duty under the new law. As the owner of the rental property, you are the PCBU and have a primary duty of care. WorkSafe said that, "A PCBU has a duty to ensure health and safety ‘so far as is reasonably practicable’. It’s about what the PCBU can reasonably do to manage health and safety".

Some people have thought that this means you are ultimately responsible for everything that happens on the property, but this is not the case. As a PCBU you are only responsible for elements of health and safety that you have, or should have, control or influence over. This responsibility extends to yourself, your tenant, anyone you engage to work on the rental or any member of the public that may come into the property. This does not mean that you are responsible for everything that happens to tenants while they are occupying your rental property – what they do on a day-to-day basis in the comfort of the home they rent from you remains their business. Your responsibility is only in respect of the things you influence and control as the landlord/ property owner – like the building repair or maintenance work you get done. Home occupiers are exempt from the PCBU requirements of the Act, which means tenants are exempt but rental property owners are not.

Tenants being exempt from the Act as an occupier is quite important. It means that if a tenant takes it upon themselves to carry out some repairs on the property and a serious incident occurs, you as the owner will not be liable under the new Act.

Another example is employing a tradesperson to work on your rental. The company doing the trade work is also a PCBU. They share the primary duty for health and safety with you as property owner.

Usually the contractor will have more specialist skills and expertise about the job at hand than you do, and they may also be employed by another PCBU that has duties towards them as well  – so you are not expected to become an expert yourself or try and manage everything for that worker.  You just need to focus on what you influence and control, and play your part.

For example, you might need to inform a tradesperson that there is a dog on the premises and arrange with the tenant to keep the dog contained. This is to protect the tradesperson’s safety and is your responsibility.

As the rental property PCBU you also have a responsibility to ensure that the person you employ is competent and qualified to undertake the work you have employed them to do. The Act says that you need to take reasonable steps in this regard, so if you choose a tradesperson who is a member of a trade organisation or you have used them many times before, then it is reasonable to expect that they are competent and qualified. You do not need to have them sign an agreement to confirm this in writing.

The new Act doesn't mean that you’re not able to do any work on your rental properties yourself, but you still need to think about the health and safety risks involved and take action to manage these as appropriate.  There are going to be some minor or routine tasks that can be done by just about anyone taking basic precautions (such as touching up paintwork), whereas others are clearly a job for the specialists (like restricted electrical work or asbestos removal).  Trying to do everything yourself thinking you can avoid obligations under the Act would be a mistake.

Some Meth or P detection companies have been advising that rental property owners may be at risk of breaching the new Act if they do not screen for meth between tenancies. WorkSafe have told us that this is not the case unless you had a belief that the property was contaminated.

If you had a belief that P had been manufactured in your rental property then you would have an obligation to investigate this and react accordingly to protect the health and safety of anyone  who goes into the property.

So the new regulations are not as scary as you may have heard. However they do clarify that you need to consider aspects of health and safety in your rental property that are under your control.

Reference:
http://www.nzpif.org.nz/news/view/57831

Simple Things to Remember for Year End 31 March

Dear Client

With another 31st March rolling around, I thought it was a great time to remind you of the year end items you should be thinking about.
 
 
Rental and Business
Saturday is a great time to print bank and loan information from internet banking, so that you have proof of the 31/3/17 balances to give us with your accounting information.

Keep any documents, such as annual loan summaries or property manager statements.


Rental
Have you purchased a new rental in the 2017 year (1/4/16 to 31/3/17)?  If so, is it worth getting a chattels valuation done and you can check out www.valuit.co.nz, or give me a quick email or phone call.  If the property was purchased with newish chattels like carpet, dishwasher, heat pumps, curtains and stove, then most likely it will be worthwhile.  Whereas, if the property has low value or no chattels, then it won’t be worth it.  If you have done a major renovation and replaced all of the chattels, then we can use the cost price of each item and a valuation isn’t needed.
 

Business

  • More for Business but can apply to some rentals – Do you have bad debts?  This is customers who owe you money and there is no chance of recovering the debt.  If so, these should be written off as at 31/3/17.
  • Do you have stock and have you done a stocktake?  This is done at cost and excluding GST.
  • Do you have work in progress?  If so, it is great to bill as much of this as possible in March, and then we require a list of your unbilled work in progress at 31/3/17.  This is done at cost and excluding GST.
     
  • Debtors and Creditors:  Hopefully you have Xero or another system of tracking which customers owe you and what suppliers you owe.  But if you don’t, you need to keep a record of these as at 31/3/17.
  • Do you have cash on hand?  If so, we need the amount as at 31/3/17 to be included with your other financial information.


Our Annual Questionaires will change on our website from 2016 to 2017 on 1 April 2017.  You can access these here.
 
But remember, we would prefer you to wait until you have all the information before sending these into us.
 
 
Kind regards
Ross Barnett 

IRD recently put out PUB00260, INCOME TAX - Land Acquired for a Purpose or with an Intention of Disposal

4 March 2016

IRD recently put out PUB 00260 , INCOME TAX – LAND ACQUIRED FOR A PURPOSE OR WITH AN INTENTION OF DISPOSAL.
 
The whole document is available on the IRD website under Public consultation, or at http://www.ird.govt.nz/public-consultation/
 
Example 5 is quite interesting and worth a read if you are a long term hold investor.  The key part is to be very specific with your intention and not to have a set sale time!
 
Example 5 – More than one purpose or intention
54. Chris purchased a property in August 2012. The property was marketed as being an attractive investment – ideal as a rental property, and expected to have “great annual capital growth”. Chris decided to buy the property to rent it out for three to five years, by which stage he hoped to be able to realise a capital gain on the property. Chris has paid tax on the rental income. He sold the property in October 2015 for a sizeable profit.

55. The 2-year “bright-line” rule does not apply to the sale of the property, because it was acquired before 1 October 2015. Even if the property had been acquired on or after 1 October 2015, the 2-year “bright-line” rule would not apply because the property was not sold within two years of being acquired. Therefore, in those circumstances it would still be necessary to consider s CB 6.

56. An amount that a person derives on the disposal of land will be income under s CB 6 if they acquired the land for a purpose or with an intention of disposing of it. A purpose or intention of disposing of the land does not need to be the only purpose or intention the person had when they acquired the land. It also does not need to be their dominant or main purpose or intention. It is enough if disposal is one of their purposes or intentions.

57. Chris was attracted to invest in the property in question because it was expected to have great annual capital growth, and could be rented out in the meantime. He purchased the property with the purpose of renting it out in the short-medium term and then selling it to realise the expected capital gain.

58. It does not matter that Chris acquired the property for more than one purpose, and disposal was only one of those purposes. When he acquired the property, Chris had a firm purpose of disposing of it in three to five years to hopefully make a capital gain.

59. Neither the residential exclusion (s CB 16) nor the business exclusion (s CB 19) apply in respect of the property, because Chris did not live in it or carry on a business from it.

60. The proceeds on the sale of the property are therefore income to Chris under s CB 6.

61. It is not relevant that the rental income was subject to tax – the Act taxes rental income as well as the proceeds on the sale of the property.

62. Chris can get a deduction against the sale proceeds for the amount he paid to acquire the property and for any capital improvements he made to the property. In each year he owned the property he will also have been allowed to deduct the interest on the money he borrowed to purchase the property, the cost of insurance on the property, and the cost of any repairs and maintenance on the property that were not capital in nature.
  
Kind regards
Ross Barnett
Branch Manager
Coombe Smith Chartered Accountants
Hamilton Branch
 
Normal Office Hours: Monday - Friday, 8am - 4pm

Phone: (07) 839 2801
Fax: (07) 839 2802 
Level 1, 851 Victoria St,
PO Box 9317, Hamilton 3240
www.cswaikato.co.nz

 
This may be a 'Tax Advice Document' subject to non-disclosure rights under the Tax Administration Act 1994. You should not disclose the contents to any party without first obtaining professional advice. Disclosure may void the non-disclosure right. This electronic mail message together with any attachments is confidential. If you are not the intended recipient please email us immediately and destroy the email. You may not copy, disclose or use the contents in any way. The contents and attachments, may contain views or opinions that are those of the sender and not necessarily the views or opinions of Coombe Smith Hamilton LP. Coombe Smith Hamilton LP accepts no responsibility for changes made to this e-mail or to any attachments after transmission from Coombe Smith Hamilton LP. Thank you.
 

How to Have More Luck With Your Property Investing

26 February 2016

This article was written last year by Graeme Fowler, well-known property guru.  Graeme has kindly allowed me to share it with you.

How To Have More Luck With Your Property Investing

People will often say to me, you were lucky that you got in at a good time when you started your investing, you couldn't do that now.  Or, it was lucky you found some good agents to help you find properties when you started, there's too much competition from other investors now.

Roger Hamilton uses a word analogy with the work "Luck", mostly with operating a business and comparing it to a game of soccer (football).
I've used it below in a similar way to show you how it works if you are a property investor and want to become luckier!

LOCATION
In the game of football, you may think someone like Christian Ronaldo or Lionel Messi is lucky in the way the ball is passed to them, and all they have to do is kick it past the goal keeper to get a goal.  And they get paid millions of dollars each year to do that.  You might think, well I could kick the ball past them too, it looks so easy - why not me?

The first letter stands for location which means being in the right place at the right time.

The same applies in real estate:  Where are you located when all the deals are happening?  Are you out working in a job or a business, or are you doing work around your properties because you think you're saving money?

So location is very important.  You need to be in a location and available to act quickly when you need to.



UNDERSTANDING
With football, the players must understand why they are there.  What is their purpose, or intention for being in the right location?  They need to understand that their purpose is to get as many goals as they can.

In real estate, you also need to have an understanding of what you want to achieve.  What are your financial goals, what plan are you following, and what are your rules for investment?  You need to have a good understanding of what you are doing, and why you are doing it.



CONNECTIONS
You can be standing in the right place and also understand why you are there in the game of soccer, but you might turn around and nobody is there, or wonder why nobody is passing you the ball.  That is where connections are very important.  You need to have a good team of people around you that will pass you the ball so that you can score the goals.

You must have good connections in real estate investing too, a good team of people you can rely on in many areas.  These people will let you know about the potential deals, whether it's real estate sales people or other investors passing you deals.  You may also have various trades-people available to do maintenance on your properties that needs doing from time to time.  This would include plumbers, builders, painters, electricians, carpet/lino layers, etc.  If you don't manage your own properties, you will need to have good property managers to find you tenants, do inspections, and make sure the rent gets paid on time.  You will also have people to handle the legal side of things for you when buying and selling properties, also an accountant to do your accounts at the end of each financial year.

All of these are very important people who you will form part of your team, or your connections.


KNOWLEDGE
This is where you must know the rules of the game. In soccer, you must know what you can and can’t do to stay on the field of play. You must have an in-depth knowledge of the game itself.

In real estate, you must also have knowledge in many areas.

Firstly, the city you are investing in. What streets should you avoid buying in, are there any suburbs you should stay away from?
You’ll also need to know what the market-value of properties are in your area, properties that are similar to ones you want to buy. If you don’t have an in-depth knowledge of the market, how will you know if you are getting a good deal or not?

Do you know how to negotiate well as a buyer and a seller?

How do you structure your offers when buying property, what do you do if you are bidding at an auction?

There are other things you should be knowledgeable about as well, things like what are your banks’ lending criteria, what yield do you need from your rental properties when buying, what are the current bank interest rates for borrowing, keeping good records for your accountant, what it will cost if you need to do maintenance or renovations on a property when buying, all sorts of things you will need to have good knowledge of.


YOU
You may have all of the above and yet still not succeed. In the game of football, if nobody on your team likes or respects you, they may not even want you to score any goals, so will keep the ball to themself.

You will need to be a good team player and know that most of the time - you need them more than they need you.
Investing in real estate can be the same, how do other people see you?
Do you have a good reputation in the eyes of these people?
Why should they do business with you?

Your reputation and integrity are very important and can be the make or break of your success.
When you say you’re going to do something, do you do it? Or do you have a reason or excuse why you didn’t follow through? Some people think - saying you’re going to do something, then not doing it, plus a good excuse - is the same as actually doing it.

You need to be able to relate to others, and they relate to you.
Are you approachable when people ask something of you, or do you not have any time for anybody apart from yourself?

Do you get easily distracted from your goals or your plan?
Can you stick within your rules for investing, or break them because things seem boring to you?
Will you keep going when the going gets tough and it would be so much easier to quit?

Do you have good money management skills?
Can you oversee your entire operation to make sure everything is operating and performing as it should be?
Think of yourself as a stock on the share-market.
Would other people invest in you if you were a stock they could buy?
Would they see value in you, and see the long term prospects?
Or would they want to buy now and then sell again in a short space of time because they see too much long term risk in you?

All of these are important things to look at for yourself.

If you look at each of these:

Location’,
Understanding’,
Connections’,
Knowledge’ and
You’,

the ‘You’ is the most important, and brings it all together.

You could be perfect in all other areas and get this wrong – and it could cost you everything you’ve worked for.
So it’s important to make sure you’re someone that people want to do business with and can relate to.

If you take a look at each of these five things in detail, then rate yourself honestly from 1 to 10 for each.  You may give yourself a low rating in some and a high rating in others. By doing this, you will immediately see what you need to do in order to improve your own rating in each area.

When you can honestly say to yourself that you are 9 or above in each of the L.U.C.K.Y. areas, then you will find that you do indeed become luckier in the eyes of not only others, but yourself as well.

However luck really had nothing to do with it at all :)
Graeme Fowler



I hope you enjoyed the article.  There are some great tips in there to consider when investing that will help you to be successful.

Kind regards
Ross Barnett



Population Growth vs Number of Houses Being Built

14 January 2016

Population Growth vs Number of Houses Being Built


 

 

 

 

 


I decided to do some research about population growth versus the number of new homes being built in certain areas of New Zealand, starting with Hamilton, Tauranga and Auckland.  For the purposes of my research, the definition of "new homes"  included new houses, apartments, minor dwellings on the back of properties, and garage conversions.  The sources I used to get my statistics were from the NZ Government Census (2006 to 2013 period) and Building Consent data from the Construction Industry Sector. (Please see links at end of email).

My initial gut feeling was that both Hamilton and Tauranga were building more new homes than population growth warranted.  Whereas Auckland would most likely be the other around. 

Here are my findings:


Waikato
 
  • From the 2006 to 2013 Census, the population grew 22,815 to a total of 403,638.  This is an increase of approximately 3,300 per year.
  • More up to date stats show an expectation of 1.1% growth or around 4,000 extra people per year.
  • As at 2013 Census, there were 152,493 occupied dwellings
  • There were also 29,514 unoccupied dwellings!
  • So, an average of 2.65 people per dwelling
  • The number of Building Consents issued from November 2014 to October 2015 was 2,756.

So,  Waikato is building 2,756 new dwellings, that should house 7,303 extra people, each year.  (2,756 x 2.65)

But the Waikato region's population is only expected to grow by approximately 4,000 per year.  So, that means that nearly twice as many houses as will actually be needed are being built!


Bay of Plenty

  • From the 2006 to 2013 Census, the population grew 10,362 to a total of 267,741.  This is an increase of approximately 1,480 per year.
  • More up to date stats show an expectation of 1.2% growth or around 3,213 extra people per year.
  • As at 2013 Census, there were 103,500 occupied dwellings
  • There were also 13,473 unoccupied dwellings!
  • So, an average of 2.6 people per dwelling
  • The number of Building Consents issued from November 2014 to October 2015 was 1,734.

So,  the Bay of Plenty is building 1,734 new dwellings, that should house 4,508 extra people, each year.  (1,734  x 2.6)

However, the Bay of Plenty region's population is only expected to grow by 3,213 per year, so it  will also have new builds surplus to requirement (approximately 1,300).


Auckland

  • From the 2006 to 2013 Census, the population grew 110,589 to a total of 2,415,550.  This is an increase of approximately 16,000 per year.
  • More up to date stats now show an expectation of 1.34% growth or around 32,000 extra people per year, which is significantly more than 2006-2013.
  • As at 2013 Census, there were 473,448 occupied dwellings
  • There were also 33,360 unoccupied dwellings!  Interesting that there are not that many more unoccupied than in the Waikato region!
  • So, an average of 3 people per dwelling
  • The number of Building Consents issued from November 2014 to October 2015 was 8,935.

So,  Auckland is building 8,935  new dwellings, that should house 26,805 extra people, each year.  (8,935  x 3)

If you go on the up to date stats above, this means that the population growth in Auckland is far out-stripping the building consents, which will ultimately mean a shortage in housing availability!

Interestingly, this information links back to the predictions I made in my November newsletter (click here to view) i.e. that Auckland will keep increasing over the longer term due to a shortage of houses. But for Hamilton and Tauranga, I think the boom will be short as prices have gone up too quickly and long term there will be more houses built than buyers in the market will need.

So, to summarise, I struggle to see how the Auckland property market can go down, with less new builds than population growth on the horizon.  On the other hand, I also struggle to see how Hamilton and Tauranga can boom for a long period when there are simply more builds being done than will be required.


Kind regards
Ross Barnett 

 

Some Strategies and Lessons from the Last Boom/Bust

22 December 2015

Some Strategies and Lessons from the Last Boom/Bust

 

 

 

 

 

 

 

This will be my last newsletter for the 2015 year.  I'd like to take the opportunity to wish you all a very Merry Christmas and a relaxing holiday. 

Following on from my November newsletter about property markets and possible predictions, here are those strategies I promised.


 

ALREADY OWN 5+ PROPERTIES

Conservative

Based on the last boom, the current boom should go for some time, and you could see property values double from March 2015 values.

If you already have 5+ properties, then the conservative option is just to sit back, relax, and enjoy the ride.  Having a reasonable number of properties means that you are going to get large gains from any lift in the property market.

You will also be perfectly placed to take advantage of the following flat period.  So that would be the time you would look to pick up bargains that suit your investment strategy.

If you have any lemons, you would look to sell these over the boom period, and then replace in the flat period.

Property investment is a long term gain, so sitting idle for 2 to 5 years is not that terrible.  And, the slow and steady approach often wins the race!

This would be my suggested approach in general, and definitely if you are younger as you don't need to take the risk.

Aggressive

Based on the last boom, this boom should go for another four years.  So the aggressive approach would be to revalue and use the equity in your existing rentals to buy some more.  The more aggressive, the more properties.

The big problem is that you are really gambling on the property market and needing it to go up.  The new rentals are likely to be slightly negative cash flow.  If interest rates go up long term, they could be quite negative.  If the boom goes for a long period, this strategy will work very well.  BUT, if something changes (see below) and property goes flat or backwards, then you could be worse off, or even in financial trouble, if you have pushed too far.

Conservative & Aggressive

You should establish strategy and buying rules.  If you find the right property that meets your buying rules, then you should still buy this.  For example, your buying rules might be:
 

  • In a major city
  • With an 8% gross yield
  • Close to a hospital or major employer.

So, if you found this in Hamilton today, it would still make sense to buy it, even if you think the market is a little over-heated.


 

New Investor or Under 5 Properties

It still depends on your level of risk and your level of 'greed'.

If you have no properties, and the market does boom for five years, then you will find it very hard to get your foot in the door.

Conservative

If you have high income and have a low personal home debt:  An easy strategy is to buy an investment property, pay down the mortgage quickly so that it becomes cash flow positive.  For example, say you have high paying jobs, have just finished paying off your house,and have $40,000 extra in savings per year.  If you purchased a $600,000 house in Rototuna, with a 100% debt, it will be negative by around $4,000 per year.  But if you can pay off $160,000 over the next four years, this rental would start to turn a profit and pay for itself.  You could continue to pay down this property, and then when the debt is at a low level for your personal risk, you could buy the next rental and slowly pay it down.  The cash flow from the first rental would then start to pay off the second.

If you have lower income, or still have a high personal home debt, then you need income.  You need to buy around a 7% Gross Yield for the rental to pay all the expenses at current interest rates of 4.6%.  So you need to look at rentals with multiple income streams to give you a higher yield.  For example, it could be a block of three flats, or a property where you can subdivide or build a minor dwelling, or even just an apartment where you can add a bedroom.

With any strategy, be careful of interest rate rises and fix a portion of the longer term to reduce this risk.

Aggressive

Trade properties to create cash flow and equity, that can enable you to buy more long term holds in the future, and reduce your personal debt.  Trading properties is hard work and there are some catches.  If you are a Coombe Smith paying client, then we have some great trading notes we can give you.

Gamble:  If you are on lower incomes and still have a higher personal debt: A lot of investors buy a negative property and just hope (or gamble) that the property will go up in value more than the cash loss.  The cash loss is sometimes financed by debt.  This is a risky approach and lots of investors have come undone using this approach.  If you were looking at taking this approach:

  • Try to buy under value, to give you a buffer (my current favourite trick is to knock on the neighbour's door, say you own the rental or house next door, and you were wondering if they were thinking about selling?)
  • Buy in capital gain areas, and look at population numbers to ensure it is growing.
  • Be very careful about the cycle.  If the market flattens, you do not want to be left with too many properties!
  • Still be a bit conservative and don't push it too far.
  • Make sure your structure is tax effective, to reduce the cash flow drain.  Also, Special Tax Codes can help, but with really low interest rates, I would try to avoid requiring one.
  • Still plan for interest rate increases.
  • Hamilton had a flat period of around 7.5 years from September 2007 to March 2015.  You need to think long term and allow for a possible and/or probable future flat period in your gamble.

I look forward to hearing from you in the New Year.

Kind regards
Ross Barnett

Efficiencies and Xero

15 December 2015


 

 

 

 

 

 

Late 2015 and early 2016 is all about efficiencies in our office.  We want to work smarter and pass the savings on to you.

Office Move

We are now settling in to our new fancy offices.  From a client's perspective, this would usually mean higher fees in order to pay for the new building.  BUT NOT IN THIS CASE!  We have been clever with our building choice, and we have managed to keep our costs very similar to our old building.  But we are now benefitting from some wonderful improvements:

  • New office layout that is more efficient for our team
  • Sunny and light area, with new air conditioning, to keep us all feeling alive and to improve concentration levels
  • TV screens in meeting rooms to enable us to review reports and other information online with you.

 

 

 

 

 

 

 

So What does this mean for you?  A Price Freeze!

We are offering a PRICE FREEZE for 2016 Annual Financial Statements.  If your requirements stay the same, your Financial Statements for 2016 will be quoted at the same price as 2015, with NO increase. For example, if your company owned five rental properties in 2015 and still has the same five properties in 2016, the price will remain the same. 

If you have had changes in property ownership (i.e. sold or purchased property), or other major changes to your business, we will need to complete a new quote.  However, we are sure you will still be pleased with the value for money offered.

   


 

 Xero Efficiencies

Xero is working with us to help our back office systems become even more efficient.

For clients currently on Xero, we will now be completing your financial statements within Xero.  Xero offers our firm some Assistance and Workpaper Packages which makes it both quicker and easier for us to complete your Financial Statements.

Another advantage is that once we have completed your end of year accounts, your financial information in Xero will align exactly with our Financial Statements.

 

Xero Changeovers

For our clients on Banklink, or for those of you who compile your financial data in another manner, we will be looking at whether it is worthwhile for you to move to Xero.  There are different packages available to suit most needs:

 

  Non GST Cashbook
 
$12 per month from 1/12/15

 This is very similar to Banklink, but is all online.

  GST Cashbook
  $21 per month from 1/12/15

 

  Starter Package

 Limited number of transactions, but you can invoice and use most functions.

  Standard Package
  $55 per month from 1/12/15

 Designed for business use.  You can invoice customers, keep track of who owes you money and to whom you owe money, plus run full accrual profit and loss and balance sheets.

 

 
 
 
 
 
 
 
 
 
  I

 
 
 
 
 
 
 Xero offers a free trial subscription for 30 days so that you can have a play and see how it will actually work for you.  I recommend you check it out and be ready to take advantage of the many benefits!
 

There are some great training videos, all freely available on Xero U.  These can be accessed from www.xero.co.nz.  Select "More" on the menu bar, then "Training & Events - Xero U".  Some people will be able to watch these videos and then set up and start their own Xero.  For others who don't feel so confident, we can put you in touch with a cost effective bookkeeper to train you on Xero and help you set it up.

For those clients where we control your Banklink or Xero subscriptions and do the coding for you, we can continue to offer you this service, but rest assured,  you will still gain from the efficiencies outlined above.  Similarly, we may recommend a change to Xero from Banklink for those clients we complete all Banklink coding for, in order to streamline our processes.

The start of a new financial year is an excellent time to change over to new accounting software.  So you will hear more from us over the next few months to ensure you are ready to go on 1 April 2016.


Kind regards
Ross Barnett

 

Hamilton Market and Possible Predictions

30 November 2015

 

Hamilton Market and Possible Predictions


Here is a copy of the median sale price graph from the Lodge Real Estate website.


 

 

 

 

 

 

 

 

 

 

(Click here to view on Lodge Website)

 This shows how much the Hamilton market has changed in the last eight months:

  • March 2015     $350,000
  • October 2015  $435,000

So an increase of $85,000 or 24% in eight months!
 

Last Booms

Looking at the earlier information in the graph, you will see the last boom started around October 2002 ($154,000) and continued for around five years to September 2007 ($365,000).

So, over this five year period, the median sale value increased $211,000 or 137%.

The boom before that, from September 1992 ($105,000) to November 1997 ($168,250), was also around five years, with a gain of 60% over this time period.

 

Flat Periods

  • September 2007 to March 2015, approximately 7.5 years, with decrease of $15,000!
  • November 1997 to October 2002, approximately 5 years, with decrease of $14,250!

 

Trend and Prediction


So the booms are getting bigger in terms of percentage increase, but the flat periods are also getting longer.

Based on history, you would expect the current boom to go for around five years, so until March 2019.

However, the growth, or increase in value, has been extreme over the last eight months.  This would hint that the current boom will be shorter, as it should be impossilbe to sustain that level of growth for a long period.

You also have to take into account the changes to the World economy, changes to LVR, and future changes the Government could introduce.  For example, if the Government / Reserve Bank introduce borrowing limits based on income (such as the 4.5 times income that has been talked about), this could have a huge effect on the property market and could see the property market stall.


 

 

 



My personal prediction?  Let me make it clear, I don't have a crystal ball, so this is just a guess, the same as any other person can make a guess.

  • I feel that prices are going up too quickly in Auckland, Hamilton and Tauranga, and that this growth is unsustainable.
  • Following the LVR changes, I feel other changes must happen.
  • From a Hamilton perspective, we don’t have the same population growth and demand as Auckland.  I’m also very worried that we are reliant on Auckland, and any changes decided to slow Auckland could have major implications on Hamilton.
  • If interest rates go up, many people won’t be able to sustain the mortgages they have taken out.

 

From this, my personal prediction is that the Hamilton and Tauranga boom will peak in around 12 months, so approximately November 2016.  It will be interesting to review in a year to see how close I am!

The Auckland market could be quite different.  There is a large shortage of houses, as well as huge population growth.  So I believe the Auckland market must slow at some point as it has been booming for a number of years.  However, once it slows, it is still likely to keep increasing, just at a slower rate.


I hope you have found this article useful.  Keep an eye out for a further article coming up before Christmas that will suggest some strategies you could put in place around this, depending on your circumstances.


Kind regards
Ross Barnett 

Reducing Depreciation Recovery - Recap!

23 November 2015

 

Reducing Depreciation Recovery - Recap!

Quite a few property investors are thinking about selling, so I thought it was very timely to send through this article I wrote in 2013 on reducing depreciation recovery.


Should you just accept that you will have to recover all the building depreciation you have previously claimed? ……… NO

In many cases, the building depreciation recovered is only a fraction of the total claimed and there are a number of ways to minimise it.


What is Depreciation Recovery?

In the past, property investors have been able to claim Building Depreciation.  An investor may have purchased an investment property for $350,000 of which $200,000 is land, $125,000 is building and $25,000 is chattels like carpets and curtains that have been valued by a Valuit Chattels valuation.  Most investors would have claimed 3% or 4% diminishing value depreciation on the $125,000 (or around $3,500 to $5,000) per year.  They also would have depreciated the chattels at their respective depreciation rates.  So over 5 years the investor may have claimed $20,000 of building depreciation, bringing the book value of the building down to $105,000.

In the past, the IRD has given a deduction for the reduction in value of the building.  If the building hasn’t been reducing in value, has increased in value, or has reduced at a lesser rate, then the property investor has been over-claiming building depreciation.  They have been claiming a deduction which is perfectly legal and allowable, but that isn’t really occurring in their circumstances.

When the building is sold, an investor who has been over-claiming this deduction, will then have to pay all or a part of it back again, which is depreciation recovery.

  • Depreciation Recovery generally only applies to buildings.
  • Chattels generally reduce in value at similar levels to IRD rates.  Therefore, when the investment property is sold, there is no recovery.  A chattels valuation could be obtained at date of sale to prove this.


Carrying on using the example given above, if the investment property is now sold 5 years later for $500,000.  The chattels might be worth $10,000, the building $190,000 and the land $300,000.  The building book value is only $105,000, so the $20,000 building depreciation claimed over the 5 years will be recovered and become taxable income.  From $125,000 to $190,000 is a $65,000 capital gain, which is currently non taxable in New Zealand.  In this example, the difference between the real building value $190,000 and the book value $105,000 is large, so there would be full depreciation recovery with no chance of reducing.  If the values are a lot closer, then there are a number of opportunities to reduce this.


How to reduce Building Depreciation Recovery?

1) Make sure your accountant or the person calculating the recovery knows what they are doing.  I have recently seen an example where an accountancy firm showed a recovery of $16,700 approximately when the recovered amount should have been $5,600 maximum.  This is a difference of $11,100 taxable income, or at the 33% tax rate $3,663 extra tax paid for no reason. This is a great reason to use a real ‘property accountant’, someone who specialises in and understands property.

2) A starting point to establishing the building value is normally the rates valuation.  From the rates information, work out what percentage is building and then apply this to the sale figure (less deductions!).  If this figure is over your building book value, then there will be building depreciation recovery (presuming you have claimed building depreciation in the past).

3) If the rates figure and the book value are similar, you could look at writing a clause in the contract.  The parties agree the building value is $XXXXX.

a.  Example – The building cost $125,000 and closing book value is now $105,000 so $20,000 building depreciation claimed.  The sale value is $300,000 and based on the rates valuation the building should be worth $112,500.  The parties could write a clause in the contract, “The parties agree that the building value is $105,000”.  As long as the two parties are not related, then this is the sale price.

b. You should not be too aggressive with this approach and the building value needs to be reasonable.


4) Any legal fees for the sale will be claimable under the new legal fees deduction rules.

5) Any commission or other costs incurred for the sale need to be deducted from the sale price, before the building value is calculated.

6) If you are confident the building value is close to the closing book value, then you could obtain a registered valuation to prove this.  We frequently do this for clients, as the rating valuations are not always realistic or are out of date.  Recently a client saved over $20,000 in depreciation recovery, or over $7,000 in tax at the 33% tax rate, just by obtaining two valuations for less than a cost of $500.

Overall, don’t just accept a depreciation recovery.  Think it over, ( “Has my gain come through land or building?” and “Has my building really decreased slightly in value?”), justifying any previous depreciation claims, and meaning there should be little or no depreciation recovery.

Kind regards
Ross Barnett 

When it goes bad...

3 November 2015

 

When it goes bad

Picture 1

We all invest in property and business hoping that it will all go well, that the business will make good cash flow, and that properties will make good cash flow/equity gains. But, unfortunately, sometimes it does go wrong. Here are 5 ideas or provisions that can be put in place to improve your position.

 

1. General Security Agreement (GSA)

These are more important for business or property trading. If you are going to advance funds to a business or property trading entity, then you should put in place a formal loan document through a lawyer and a GSA. This helps the loan rank higher than other creditors or the IRD. So, if it all goes bad, then you should get your money back before these other parties.

Generally, the bank will have property as security and personal guarantees, so they will get their money first. Thus, a GSA does not improve your position in relation to the bank.

Example:

Joe Bloggs loans $100,000 to Awesome Property Trading Ltd, and with help from his lawyer, has a full loan agreement and GSA.
Awesome Property Trading Ltd (APT) buys a trading property for $300,000, with a bank loan of $200,000.
APT gets a GST refund of $39,000 approximately.
APT spends $80,000 renovating the property, by using the GST refund and owing suppliers $41,000.

Unfortunately, the property market crashes. Now the property is only worth $280,000 (IT CAN HAPPEN!)

Property is sold and bank is paid its $200,000. Leaving proceeds of $80,000.
GST is due on sale of $36,000 approximately.
Creditors are owed $41,000.
Joe Bloggs is owed $100,000.

Because Joe has a GSA in place, his debt has priority ahead of the others, and Joe would receive the $80,000.

BUT IF NO GSA WAS IN PLACE:
• IRD would get their $36,000 first as GST is a higher priority debt.
• Then the creditors and Joe would be entitled to the remaining $44,000 on a pro rata basis. So, they would get 31 cents in the dollar. This means Joe would only get $31,000 back.
Overall, if you are looking at lending a business or property trading equity money (whether yours or just as an investor), I recommend you discuss this with your lawyer!

 

2. Separate Banks

Picture 2Using multiple banks is a common way of reducing risk. If you have all your assets and properties with one bank, then they have a high degree of control over you. If things go wrong, then they could force you to quickly sell properties or assets that might not be in your best interest overall.

By having multiple banks, you can often sell some assets, and maybe, in a worst case scenario, have to sell all properties with one bank.

 

3. Limited Guarantee on Personal Home

If you are using your personal home as security to buy a business or further rentals, then I suggest limiting the guarantee or security the bank has over it.

For Example:
• You have a debt free house worth $500,000.
• You are buying an Auckland rental for $600,000 and require $180,000 deposit.
• If given the opportunity, the bank will take full security of the rental and your personal house.
• BUT, you could limit the guarantee or security over your personal home to $260,000 approximately. 70% of this is the $180,000 deposit you need.
In a worst case scenario, the bank then only have limited security over your personal house, so could only demand that amount is repaid.

NOTE: The bank has most likely also got a personal guarantee, so you might be forced to repay the loan anyway!

 

4. Separate Bank for Personal Home and Separate Entity

Carrying on from Point (3), if you can separate the two banks, that can give you greater protection.

If personal property is put into a Trust, and borrows the $180,000 deposit from ANZ, secured over personal home (now Trust property):
Then for rental, $420,000 is borrowed from Westpac with personal guarantees.

If the rental somehow goes all wrong, and Westpac demands the loan repaid:
Say the property is only sold for $300,000. Westpac will then chase the individuals for the $120,000 remaining, but will have no claim over the Trust or the Trust property. So the individuals could go bankrupt. The Trust would still be stuck with the $180,000 loan it has borrowed from ANZ, but nothing futher.

Long term, it is a good idea to separate your personal home to a different bank, and a Trust can be a good ownership structure to help protect your assets. BUT, you do need to think through the costs and hassles, and whether you would just pay the shortfall anyway, rather than going bankrupt?

 

5. Avoid Linking Entities

Picture 3

Try to avoid any risky entity lending money to other entities. Otherwise, if the risky entity is sued or gets into financial difficulty, this could link in the long term holds and they could be forced to repay loans.

For example, if you operate a business or property trading activity that makes good profit. You might lend money from this entity to your long term hold rentals. Say $100,000 as per the example below:

Picture 4

 

 

 

 

 

 

 

A better approach would be to funnel profits back to the owners (Trust in diagram below), then for the Trust to lend the money to the Rental entity. This way the business and the rentals are not linked. If the business goes bust, then there is no effect on the rentals.

Picture 5

 

 

 

 

 

 

 

I would recommend getting advice on the best way to funnel profits back to the owners, and also on the overall structure that works best in your particular circumstances.

I hope this has given you some extra information to think about.

Kind regards
Ross Barnett
Branch Manager
Coombe Smith Chartered Accountants

Interest Tips

16 October 2015

 


I spoke at the Waikato Property Investors Association meeting on Wednesday night.

 

 

 

 

 

 

 


There were three things that the members seemed very interested in.


1.   Is it smart to have $300,000 floating?

If you are going to float, you may as well fix for six months instead because six months is over so quickly and you can save 1% - 1.5% in interest.  Current floating rates are 5.89% and 6 months 4.85%.  (www.interest.co.nz)

$300,000 @ 5.89% = $17,670 per year             
$300,000 @ 4.85% = $14,550 per year              Saves $3,120 per year
$300,000 @ 4.35% = $13,050 per year              Saves $4,500 per year


 

2.   Interest rates in the next three or four years.

Out of a show of hands of approximately 120 Waikato property investors at the meeting, 75% thought interest rates would go back up in three or four years’ time.

If you are thinking of breaking or fixing short term, I would start to anticipate a rise in three or four years’ time.   But you will need to make sure your strategy is working the best for you!

 

3.   My personal approach is to:

    • Float $20k to $50k
    • Fix 1/3rd 5 years, close to 5%
    • Fix 1/3rd for 2 or 3 years. 4.5%?
    • Fix 1/3rd for short term, maybe 1 year 4.35%
    • Avg 4.62%



Kind regards
 
Ross Barnett

Coombe Smith is moving to new premises

2 October 2015

Moving Trust

 

 

 

 

 

 

Dear Clients,

Coombe Smith is very excited to be moving to new premises. 

As from Monday, 12 October 2015 our offices will be located at: Level 1, 851 Victoria Street, Hamilton.  (Click here to see a map)

Our telephone number, email addresses, and postal box address are not changing.

For your convenience, we will still have client parking located at the rear of our building.

Please note that we will be closed on Friday, 9 October 2015 while we move premises.

We hope you will come and visit us soon.

Kind regards
Ross and the Team at Coombe Smith

Refresher About 1 October 2015 Changes

24 September 2015

 

REFRESHER ABOUT 1 OCTOBER 2015 CHANGES

 

So why the new rules?

  • 25.8% of Auckland dwellings sold within two years.  (8.4% 1 year, 17.4% 2 years).
  • North Auckland 59% of new property titles changed in 12 months (29% in 3 months and 30% in 9 months).


Further to my newsletter sent out on 3 September 2015, here is an update on some of the key points for you:


Conveyancing/Information Reporting Bill

  • Trusts will need an IRD number and New Zealand bank account.
  • Applies to all agreements entered into on or after 1 October 2015.
  • Applies to all transfers of title which occur post 1 April 2016, even if contract entered into pre 1 October 2015.

 

Possible Withholding Tax on Sales of Property by Foreign Owners

  • Withholding tax based on lower of:
    • 33% of vendor's gain (standard rate)
    • 10% of total purchase price (default rate)
  • Not a final tax
  • Most likely to apply as from 1 July 2016.


Bright-Line Test for Residential Land

  • Watch restrictions!!!
  • If taxpayer sells "residential land" within two years of acquisition, it will be taxable.
  • Unless personal home exemption
  • Any loss ring fenced and can offset any Bright-Line profit.
  • Only applies to a purchase of the property where the Sale & Purchase Agreement is entered into on or after 1 October 2015.  So if you have an existing rental, it will not be affected by new rules, unless you restructure it.
  • Start date for 2 years = Settlement date                                   ]  Shortest
  • Sale date for 2 years  = Date of Sale & Purchase Agreement  ]  possible time
  • Current tax laws still apply.  So if you buy a property with the intention of selling for a profit in November 2015, then sell 2 1/2 years later, the gain is still taxable as intention was to sell for a profit.
  • Lifestyle Blocks:
    • Most will not qualify for the main home exclusion.
    • So most likely taxable gain if sold within 2 years once the rules apply!!

Click here to see my earlier Blog on this topic.


Kind regards
Ross Barnett

2 Year Bright-line Test

3 September 2015

 

2 Year Bright-line Test


Restructure before 30 September 2015, otherwise who cares???

 

In general, if you are a true long term hold investor, the 2 year Bright-line won't affect you.
 

Restructure

Are you looking at putting your rentals into a Trust or LTC?

Under the current Issues paper and draft legislation, there is no relief for restructures.  So, for example:

 

  • You own a rental for 10 years
  • Transfer to Trust on 1/12/15 for $500,000 at the fair market value
  • Then Trust sells rental on 1/12/16, one year later for $550,000
  • Trust has held rental for under 2 years, so under information in Issues Paper and draft legislation, the $50,000 gain will be  taxable.

So I would recommend if you are thinking of restructuring to a Trust or LTC, to do this before 30 September 2015.

 

Bright-line Facts

The main aim of the new legislation is to tax the gain on sale of residential rental or speculative properties, if sold within 2 years.  There is a specific exemption for personal homes, so that sale of personal homes are not taxed, but bear in mind the two points below regarding personal homes.


1. Only applies to a purchase of the property where the Sale & Purchase Agreement is entered into on or after 1  October 2015.
    So if you have an existing rental, it will not be affected by new rules, unless you restructure it.


2. 
Start date for 2 years    Settlement date                                   ]    Shortest
     Sale date for 2 years 
   Date of Sale & Purchase Agreement  ]   possible time

3.  Residential Land     Not farmland or business
                                   
  Includes residential sections

4.  Personal Home Exemption  
  Does not apply if already used the exception twice in the previous two years.

5.  Current tax laws still apply.  So if you buy a property with the intention of selling for a profit in November 2015, then sell 2 1/2 years later, the gain is still taxable as intention was to sell for a profit.

6.  If you get clever, still taxed.
     For example, if you have a company that purchased a property, then you sell the company after 1 year, there is a specific clause to catch this.

7.  Main Home Exclusion
    
Must be "used predominantly, for most of the time that the person has owned the property, as their main home".


I would not expect many property investors to be affected by these new rules but wanted to keep you informed.

Kind regards
Ross Barnett

Interest Rates and Break Fees

25th August 2015

 

INTEREST RATES AND BREAK FEES


BNZ recently announced their 4.69% for 2 years, and it seems the mortgage wars might be starting, with possibly lower interest rates coming if the OCR is dropped further.

So what should you be doing as an investor?

I have set out some steps that you can apply to see if you can reduce your overall interest costs. I prefer to use a mortgage broker, so I would recommend skipping steps 1-3 and using a mortgage broker to find the best deal for you!


Step 1 – What are your Break Fees and Cash Contribution?

If you are fixed for over 5.5% , then you should ask your bank, "What is the break fee, if I were to break my XX mortgage for $XXX,XXX, and what cash contribution will the bank give me?"

Some clients are finding that the cash contribution some banks are offering is equal or more than the break fee!

The next OCR announcement is 10/9/15, so ideally you want to find out the break fees before this date, so that you can decide to break or not, before 10/9. The next OCR announcement after that is 29/10/15.


Step 2 – What interest rate will you change to, over the whole period of your old fixed loan?

So if you did break your fixed loan, what term and interest rate will you go on?

    • Aggressive, might mean 4.5% for 2-3 years, which seem to be the best rates available at the moment.
    • More conservative, might mean 5.29% for 5 years.

Say you have a 4.25 year fixed at 5.9%. So, you might fix for 2 years at 4.5%, but then you need to think about what will be the cost of the 3rd, 4th, and final part year?


Step 3 – Is it worth breaking?

It depends on the bank and your relationship with them. If you are a Coombe Smith client, I have a spreadsheet we can send you that might help you make a decision.

It is easiest to show an example: $450,000 loan fixed at 5.9%, with 4.25 years to go. The break fee might be $24,000 and the bank might offer a contribution of $12,500. This situation should be pretty common as many investors fixed for 5 years at just under 6% around one year ago. You might choose now to fix for two years at 4.5%?

Year 1 - Changed from 5.9% down to 4.5%, so save $6,300 for the first year
Year 2 - Changed from 5.9% down to 4.5%, so save $6,300 for the second year
Year 3 - You might guess that interest rates will be back up to 6%, so actually costs you $450 as increased from 5.9% to 6%.
Year 4 - You might guess that interest rates will be back up to 6.5%, so actually costs you $2,700 as increased from 5.9% to 6.5%
Year 5 - You might guess that interest rates will be back up to 7%, so actually costs you $1,238 as increased from 5.9% to 7%, but only for 1/4 of a year.

You will pay the $24,000 and get the $12,500 back.

Plus, you will have to pay interest on the $24,000 break fee less the $12,500 cash contribution.

Overall - You will lose $5,961!!!! So in this example, it would be better NOT to break! A lot depends on your prediction of future interest rates. If you predicted year 3-5 will have lower interest rates, then that could change the outcome and on your figures you might be better to break.


Step 4 – Other things to consider

Are your circumstances likely to change?

If you are expecting a big inheritance or redundancy of $450,000 within 12 months for example? This is likely to change your new fixed term, and you would keep the new loan term to 6-12 months or even floating. It would also make sense to break before the next OCR announcement to ensure the break fee is as low as possible.


Step 5 – Mortgage broker

In some cases, the bank will give you a great answer, and it will make sense to break the loan.

In most cases, the bank won't quite play ball. At this stage I would suggest using a mortgage broker to push your cause further, and to also see what other banks are prepared to offer. Mortgage Brokers don't charge you anything, and they get paid from the bank. So why not use them to see if they can get a better deal for you.

If you don't have a good mortgage broker, email me your location and I can suggest a good mortgage broker to help you.


Some Examples

I have seen investors break with BNZ, Westpac, ANZ, and Kiwibank. The bank still required a break cost but this was covered by the cash contribution. So, overall, no cost to the investor for breaking!

Example from property forum:

    • $17,000 break cost
    • $11,000 cash contribution
    • $380,000 fixed 6.6% for 3 years

The interesting part about this example is that the bank was going to pay the $11,000 cash contribution anyway. So by asking about the break fees, the investor got $11,000 cash contribution he wasn't expecting! Therefore, for this example, as the cash contribution was going to be paid even if the investor didn't break, then I wouldn't include the cash contribution in my calculations.

    • $245,000 with 3/4 of a year to go, fixed at 5.9%
    • Break fee from ANZ was going to be $3,500
    • No cash contribution

So, in this example, by moving to 4.5%, would save $2,500 approximately in interest. However, after paying break fee, would lose $1,000 overall!


What interest rate and term is best?

There is no perfect answer, as, like you, I do not have a crystal ball.

I generally try to spread loans and terms, so that you 'win' no matter which way interest rates go.

For example, $900,000 total loans:

    • $300,000 fixed for 5 years at 5.29%
    • $300,000 fixed for 3 years at 4.49%
    • $300,000 short term - This is the tricky part. You could fix for 6 months to 2 years at 4.5% approximately. My gut feel is to wait for the next announcement and then look at fixing this short term based on the best interest rates. So, I would ask the bank for a discounted floating rate until after the October announcement if you are being more aggressive, or just float until 10 September if more conservative.
     

Before fixing any rate, you could wait until the upcoming OCR announcements to see if there is anything better. With the longer term portions, I normally wouldn't bother, as otherwise you get into the problem of waiting too long.

Capture

 

 

 

 

 

The graph below shows historic interest rates. As you can see, the current interest rates are extremely low compared to the longer term. Therefore I consider 5.29% for 5 years to be extremely good!

Figure 1. Mortgage Rates Since 1990 (last updated 31/07/15)

Mortgage interest rates

 

 

 

 

 

 

 

 

 

http://www.rbnz.govt.nz/statistics/key_graphs/mortgage_rates/

 

Let me know how you get on with breaking your loans!

Kind regards
Ross Barnett

3 Important Things In August

18 August 2015

 

Provisional Tax

The first instalment of provisional tax is due 28/8/15 for standard balance dates.  If you pay provisional tax, you should have received a letter and payment notice from us earlier this month.  If you haven’t heard from us, and think that you should be paying provisional tax, please phone Debi or Karen on 839 2801, or This email address is being protected from spambots. You need JavaScript enabled to view it. to email Debi.
 
For many of our clients we work out monthly voluntary tax payments, so that clients can pay smaller amounts monthly, rather than larger sums at the three provisional tax dates.  If you are interested in paying monthly voluntary tax, then please email Debi and we can look at your circumstances.
 
Please note – voluntary tax can be paid at any time, and is a good way to keep up with your tax obligations.
 

Free Seminar 27th August - Rental Property Basics

 
We still have a few seats available to our Free Rental Property Basics seminar on 27th August.  We have extended the numbers, to accommodate a few more investors, but please RSVP as we most likely won’t be able to accept any unregistered people.  Click the link below to register.
 
https://www.eventbrite.co.nz/e/are-you-interested-in-learning-the-basics-about-rental-properties-tickets-17823382216


Newsletter about saving interest
 
Interest rates are obviously a key topic at the moment.  I’m currently working through a newsletter to go out late this week or early next about breaking loans and break fees, best interest rates and options available.  So please keep an eye out for this information, as it will help to save many investors thousands.

 

Kind regards
Ross Barnett

Residential Property Conveyancing after 1 October 2015

28 July 2015

 

I recently attended a Webinar on Residential Property Conveyancing to find out about the new tax information requirements in relation to transactions involving "residential land" that will apply from 1 October 2015.

The definition for Residential Land is "land which has a dwelling on it, or there is an arrangement to erect a dwelling." This excludes business premises and farmland.

Sections 156A to 156I have been introduced to the Land Transfer Act 1952. Specifically these state "An instrument for transfer is not in order for registration unless each of the transferors and transferees complete a "tax statement".

It will most likely take your Conveyancer/Lawyer longer to complete your transactions. So, you need to be aware of these changes to avoid the possibility of a late settlement and/or default interest. You will also need to watch for nominations, as last minute changes will no longer be possible due to the new information requirements. Here are some important points:

  • The new obligations will come into effect for settlements on or after 1 October 2015. This is the case, even if your actual Sale & Purchase Agreement was dated prior to 1/10/15. It is the Settlement Date that is the determining factor.

  • Bright-line test for tax purposes (i.e. if residential land is bought and sold within two years, then the gain is taxable).  If you are an "offshore person" and the S & P agreement is after 1 October 2015, there are new requirements. Namely, you will need to have a New Zealand IRD number and a bank account number from a NZ registered bank. Note: Before you can apply for the IRD number, you need to already have the NZ bank account.

  • Every trust buying or selling "residential land" will need to have an IRD number. So you will need to be organised. If your Trust does not already have an IRD number, we suggest that you get us to apply for one for you, and sooner rather than later to avoid any delay in future Settlements!

 


 

IF YOU WOULD LIKE US TO OBTAIN AN IRD NUMBER FOR YOUR TRUST, PLEASEThis email address is being protected from spambots. You need JavaScript enabled to view it.THE COST WILL BE $100 + GST.

 


 

  • Definition of Offshore Person

For an individual this means:


- A NZ citizen who is outside NZ and has not been in NZ within the last 3 years,

- A person who holds a resident class visa and who is outside NZ and has not been in NZ within the last 12 months,

- A person who is not a NZ citizen or does not hold a resident class visa.

 

For a non-individual this means:

- A person who would be an overseas person under the OIA (Overseas Investment Act) - broadly a 25% test - replacing the term "overseas person(s)" in the OIA with "Offshore Person" per above.

 

  • Be careful with Trusts! If your Trust Deed has a beneficiary with fixed entitlements and that person lives overseas, it might fall into the above definition. For example, you have two children, Sam & Joe. Joe resides overseas. Under your Trust Deed, Joe is a final beneficiary and entitled to 50% of the Trust fund upon final distribution. Therefore, your Trust is an Offshore Person!

 

Kind regards
Ross Barnett

Cambridge Office News

21 July 2015

 

Coombe Smith Cambridge Office News

After having a presence in Cambridge for six years, and much consideration, we have decided to change how we will be operating the Cambridge office.  From 27 July 2015, the Cambridge office will be open by appointment only.  We feel that we can more fully meet our clients' needs by consolidating the team in Hamilton.

The existing Cambridge premises will continue to be a drop-off point for your records (with the staff at Construction Advantage), or by arrangement with Debi or Ross.

We will still have the meeting rooms in Cambridge available, should you require a meeting with Ross in Cambridge.

Jenny Shaw will be retiring from the firm at this time, after more than 25 years sterling service - first with Beban Associates and then Coombe Smith.  We are sure you will continue to see Jenny around Cambridge town, or at the sports field, so make sure you say "hello" as Jenny loves to catch up with you.

Debi Hudson will continue to be your familiar face, working in our Hamilton office Tuesday to Fridays.

Our last official day in Cambridge will be Wednesday, 22 July.  We will be saying farewell to Jenny with drinks and nibbles at the office from 3 to 5 pm.  If you are around town, please feel free to drop in for a drink and a chat.

If you have any questions or concerns at all, please feel free to contact us.

Kind regards
 
Ross
 
Ross Barnett

Trading house becoming Rental?

7 July 2015

 

Trading house becoming Rental?

If you buy a property with the intention of selling for a profit, any gains are taxable.

If this property is transferred to a related party (i.e. you sell from your trading Company to long term hold Trust):

  • GST would be paid on the sale at market value.
  • Income tax would be paid on any profit on the market value sale.

BUT Section CB15 of the Income Tax Act also catches this.  So, when the property is sold later, any gains are still taxable.  Section CB15 has no timeframe, so the property gains are always taxable.

Example:

Joe Trading Ltd owns a trading property that is worth $230,000 incl. GST.  It cost $201,250 incl. GST.  It sells to Joe Holding Trust for $230,000.

  • Joe Trading Ltd would have to pay $30,000 GST on the sale.
  • In simple terms, the Company made a profit from $175,000 excl. GST to $200,000 excl. GST.  So $25,000 that it would pay tax on (obviously there would be legal and other costs in a real example).

Joe Holding Trust owns for 15 years, then sells for $430,000.

  • As the Trust is associated to the Company, Section CB15 applies, and the $200,000 gain is taxable.
  • There would be deductions for any costs such as renovations, commission, legal expenses, etc.



Options for a trading property that you want to become a long term rental

1. My preferred option is for you to sell the trading property to a third party.  Then if you want another long term hold, you can buy a separate property that suits your long term holding rules:

    1. If you are still trading, the long term hold will be tainted and the gains taxable if sold within 10 years.
    2. But after 10 years, there is long term capital gains and tax free. 
    3. The certainty of the 10 year period is better than the uncertainty of the two options below!

2. Sell trading property to long term hold entity:

    1. Hope that the property is then held for a long time.
    2. Hope that eventual sale is not found by IRD.
    3. Gains on sale will always be taxable, and this option is not technically correct.   Some advisers and traders hope that if held for over 10 years, IRD will not find it.
    4. I do not like this approach!

3.  Change of use within trading entity [we have heard other advisers using this]:

    1. Complete a change of use for GST, and pay the GST at market value.
    2. Work out the profit to date, and pay tax on the market value.  So effectively try to change the use from Trading to Holding for income tax:
      1. This is debateable, and IRD might not agree.
    3. At some stage after, the property would be sold from Trading to Holding entity.  Now a long term hold, so CB15 doesn’t apply:
      1. Need to move from trading entity, if has other trading property as IRD are likely to link the eventual sale to trading/GST activity, which could cause major hassles later.
      2. This sale is likely to attract IRD attention, as your trading entity would be selling a property but not returning GST.
    4. This approach is not 100% technically correct, and subjective.  IRD could have a different view and could still deem any gains from the long term sale of the property to be taxable.
    5. I think this approach is better than just hoping with option 2, but is still not 100% safe!



Kind regards
Ross

Issues with Overseas Rentals

 

26 June 2015

 

Issues with Overseas rentals

If you are a New Zealand tax resident and borrow money overseas, then you may have an obligation in NZ to deduct Non Resident Withholding Tax (NRWT). 
 
A common example of how this occurs is, you buy a rental property in Australia, and borrow $200,000 in Australia.  The rental income goes into an Australian bank account and this pays the interest on the loan of say $10,000.


There are 4 options around this:

1.  If the Australian bank has branches in NZ , then there is unlikely to be a NRWT obligation.  So presuming Westpac and Commonwealth Bank have branches in NZ, then if you borrow from these banks in Australia, there is no requirement to deduct NRWT or AIL.  The attached link shows the banks currently registered in NZ - http://reservebank.govt.nz/regulation_and_supervision/banks/register
 

2.   Pay NRWT to NZ IRD.  For example, the NRWT rate is 10% for Australia, so pay $1,000 Non Resident withholding Tax if the interest is $10,000 NZD.  The Australian bank is unlikely to accept that you should pay $1,000 less to them, so this is likely to cost you an extra 10% or $1,000 in this example.  IR291 on the IRD website (www.ird.govt.nz) has more information, and IR 290 has a list of the country NRWT rates. 

3.  Apply for Approved Issuer Status/ Levy (AIL).  This reduces the cost to 2% of the interest paid.  So if you paid $10,000 interest, you would pay $200 in Approved Issuer Levy to NZ IRD.  IR 395 from the IRD website also provides more information.  To do this;
 

a)  You must register as an approved issuer.
b)  You must register the loan as an approved security.
c)  You and the bank cannot be associated.
d)  You and the bank must agree that AIL applies to the loan (IRD recommends that the agreement is in writing).

 

4.  You could borrow from a NZ bank instead to avoid NRWT, but you would need to be careful of exchange rate changes.
 

So a general tip is to borrow in Australia from a bank that has a branch in NZ such as Westpac or Commonwealth Bank.  Otherwise become an Approved Issuer and pay AIL.


4 Year Exemption


If you have moved to NZ, you might be entitled to a 4 year exemption.  This means your overseas rental income would be exempt for four years.

 

  • Must not have been a NZ tax resident at any time in the past 10 years, prior to your arrival date in NZ.
  • This is a once in a lifetime exemption.
  • You and your partner cannot receive Working For Families Tax Credits while being tax exempt from foreign income.

If you think the 4 year exemption may apply to you, I suggest you discuss it through further with me.



Exchange Gain/Loss and Tax

An exchange gain or loss is taxable.  This is best shown with an example:
 
You borrow 100,000 pounds to buy a UK rental.
The exchange rate is 0.33, so in NZ terms this is a $300,000 loan.
 
Over time, the NZ exchange rate improves to 0.50.  Now in NZ terms the loan is only $200,000.  So you have made an unrealised gain of $100,000!
 
Most investors are on cash basis, so if this property in the UK was sold, and the loan in NZ terms had reduced from $300,000 to $200,000, you will need to pay tax on the $100,000 gain!
 
If the investor is on accrual basis, then they must return the exchange gain or loss each year, even though it is not realised with a sale!


Cash Basis
 
These are simple notes. If you are investing overseas, I would recommend you get specific advice.
 
A tax payer whose:

a)  Income and expenditure from financial arrangements is $100,000 or less.
b)  Value of financial arrangements has a total value of $1 million or less.

 

A comparison must also be carried out between cash and accrual basis, and if the difference is greater than $40,000, the person must return on accrual basis.


I hope this information has been useful.


Ross Barnett


Knowing the Numbers

11 June 2015


I'm amazed at how often the media, investors and others get the numbers wrong. This is a recent example:
"The $300 weekly rent is more than enough to cover his interest-only mortgage repayments, rates and insurance."   http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11457713&ref=NZH_FBpage

Below are my numbers! With the $45,000 deposit and working on 50 weeks and 5.5% interest rate, it is negative $5,855 per year Even with just interest, rates and insurance, it is negative $1,825, but obviously there will be repairs, property management, and other costs too!

This shows that it is critical to know the numbers! Long term average interest rates are 7.5%, and at this level, this property would be losing almost $11,000 cash per year!

There can be some depreciation and tax perks to help an investor, so it is always important to get expert advice.

 

What should you do if you own a rental like this?

I'd prefer if every investor purchased a cashflow positive property, but they are hard to find, and even harder to get in a good area with good tenants.

If you are going to buy a negative property, or currently own one, you should have a plan as to how to turn it positive.

 
  1. If this example pays off $10,000 per year for 10 years, then the property would be at a break even point.  So that is one way to turn a negative property into neutral or positive.
  1. Another is to gain more rent:

a)  Smart renovations and improvements such as heatpumps can gain more rental income

b)  Or converting an unused lounge into a bedroom

c)  Frequent rent reviews

d)  Legal conversion of a garage to a sleepout

e)  Minor dwelling on the back of the property.

For this example to break even, there would need to be around $417 rent per week!

 

I'm a big believer in paying Principal and Interest, so that your loan slowly comes down, and therefore your interest slowly reduces. With interest rates being extremely low at the moment, a great tip is to keep your payments the same as your loans are refixed!

 

Expected Rental Return:           
                 
                 
                 
House Value $300,000            
      $300,000          
Less Deposit   $45,000          
                 
Total Borrowed   $255,000          
                 
Income:              
                 
Rent - Weeks 50       15000    
  Per week 300            
    As a % of total house   5.00%      
                 
Less Expenses:              
                 
Accounting       1200      
Bank fees       50      
Body Corporate       0   If interest goes up:
Insurance       800      
Interest Rate 5.50%   14,025   7.50% $19,125.00
Property Management at 7.5% plus GST   1,294      
Rates         2000      
Repairs and Maintenance     1000      
Seminars       100      
Subscriptions       300      
Travel         _________86      
                 
Total Expenses         ____$20854.75   $25,954.75
                 
NET CASH SURPLUS (DEFICIT)       -$5854.75   -$10,954.75

 

Kind regards
Ross Barnett

 

Property Trader Provisional Tax Example

28 May 2015

 

Joe Blogs has quit his day job (be very careful making this decision) and started trading properties.
• He has set up a company, Bloggs Trading Ltd.
• Between April 2014 and March 2015, Bloggs Trading Ltd bought, renovated and sold one property.
• The GST exclusive figures are sold for $450,000, and total costs $400,000, so a profit of $50,000.

 

Tax due

In this example, as Joe is doing all the work, the Company would most likely pay him a shareholder salary of $50,000. This $50,000 then becomes an expense to the Company, leaving it with a $0 profit and the $50,000 becomes taxable in Joe's name.

As this is Joe's first year of trading, and previously he had a PAYE job, he is new to provisional tax and is not required to pay any provisional tax from 1/4/14 to 31/3/15. As Joe uses a tax agent, he has until 7/4/16 to pay the terminal tax on the $50,000. Presuming the $50,000 is Joe's only income, he has $ 8,020 terminal tax due 7/4/16 (Click here to see IRD Tax on Annual Income Calculator on home page).

For the next year, (2016 tax year in this example) provisional tax assumes you earn the same profit as last year, plus 5% (if over $2,500 tax to pay). You also have to pay this tax over 3 instalments, 28/8/15, 15/1/16 and 7/5/16, so effectively you pay the tax due throughout the year.

Prov tax example 1

 

 

 

 

 

If tax return for 2015 year filed after 28/8/15
Then the provisional tax gets spread over the two remaining payment dates 15/1/16 and 7/5/16, so $4,210 approximately each.

If tax return for 2015 year filed after 15/1/16 – RISK
Then the provisional tax all gets paid in the 7/5/16 payment. The big risk is that in this example there would be $8,020 terminal tax due 7/4/16 and then $8,421 provisional tax due 7/5/16. So $16,441 tax due within a month!

 

 

prov tax example 2

 

2016 year

As Joe has already paid $8,421 of provisional tax, any terminal tax due 7/4/17 is likely to be less. So for example, if Joe receives a shareholder salary of $60,000 for the 2016 year, the tax due is $11,020 less the $8,421 provisional tax paid. So there would be $2,599 terminal tax due 7/4/17. Provisional tax for the 2017 year would then be paid on the $11,020 due plus 5%.

 

 

 

 

 

 

 

 

Disclaimer:
This is just an example. There are many different structures that could be used as the trading entity (LTC, Trust , etc.) and also different ways the profit could flow to the owners. So this example is intended to show the terminal and provisional tax due on an example profit of $50,000, not the best structure to use.

 

Kind regards

Ross Barnett

Reserve Bank Changes For Auckland Property Investors

13 May 2015

 

The Reserve Bank governor, Graeme Wheeler, announced this morning;

  • 30% deposit required for Auckland investment properties.
  • Outside of Auckland, a change from 10% to 15% of loans being allowed over 80% - This should make it easier for more people to buy homes outside of Auckland.
  • Banks will be required to hold more capital for property investors, to reflect the 'higher risks inherent in such lending'.
  • Likely to take effect from 1/10/15. But banks will most likely start to use this criteria from now onwards, with it being harder to borrow 70% to 80% on Auckland investment properties from now on.

 

The likely effects of this:

  • Auckland market? I think it is too early to know how big the effect will be on Auckland house prices, and with the large demand it might be barely noticed initially. Long term it must take some of the buyers out of the market.
  • More possible buyers in other areas, should allow other areas to experience growth. Hamilton is likely to be further targeted by Aucklanders who now can't buy in Auckland with the new 30% investor threshold, but can probably borrow 90% on a Hamilton investment.
  • Property investor interest rates over the whole country are likely to go up, as the higher capital requirement is introduced. Banks could start pricing that in immediately for investors.

 

Here are a few articles:

 http://www.landlords.co.nz/article/5377/auckland-landlords-face-new-lending-restrictions

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11447836
Tenants will be the losers.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11447728
New Mortgage Rules for Auckland Investors: They must have 30% deposit.

 

Kind regards

Ross Barnett

 

Worth a Try! Reducing Interest Costs

5 May 2015

 

Interest rates are extremely low at the moment,

with great long term rates available,

so it is a good time to review your strategy.

 

 

 

 1. Are you on a higher long term rate, over 6%?
 Ask your bank what the break cost would be. We are finding that some clients are managing to get no break fees, so it is worth asking the question!


2. Do you have a high floating amount, over $50,000?

 On www.interest.co.nz the standard floating rate is around 6.74%. In comparison, you can fix for 2 years at 5.39%.

 So, in general terms, it is not a good idea to have too much on floating, and ideally you want this to be an amount that you expect to pay off before your next term loan comes up for renewal. I also find that a small balance of $20,000 or $30,000 is easier to pay off, whereas a big amount like $300,000 is psychologically harder to get to terms with and just never seems to substantially reduce.


3. Long Term Risk

I like to spread loans between short, medium, and long term. It's the old saying of "don't put all your eggs in one basket."

I try to get a rate that I'm happy with, and that suits my property portfolio, rather than chasing the best rate.

So, for example, if you had $630,000 debt, you might:

  • Float $30,000
  • Fix $200,000 for 1-2 years, maybe around 5.1% to 5.2%
  • Fix $200,000 for 3 years, maybe around 5.4%
  • Fix $200,000 for 5 years, maybe around 5.5%

 This gives a very low average interest rate, but also good long term protection if interest rates do go up.


4. Reserve Bank Risk

The Reserve Bank, Government, and media seem to be constantly talking about ways to stall the Auckland property market. There are ideas discussed all the time, like capital gains tax, land tax, higher interest for property investors, ringing fencing losses, etc. Click here to read an interesting article ("Property Investors Urged to take Precautions") that appeared recently in the NZ Herald.

So be careful and just don't presume that "you'll be right" and that interest rates will stay low. In my opinion, it is better to spread your risk and look at an option like my Point 3.

 

Main point if you are re-fixing:

Ask for a better rate than advertised. It doesn't hurt to ask and the worst that you can get is "no". But if you are in a good position, with good income, you should be able to get a better rate than publicly offered. For floating rates, you can quite easily get 0.50% off, and fixed rates are negotiable. If you can't get a good rate, talk to a good mortgage broker!

If you need help, I can put you in touch with a great mortgage broker in your area, just email me.

 Kind regards

Ross Barnett

 Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

New Financial Year

28 April 2015

As we are in April, it's a great chance to review these items for your rentals and your business.

1. Is your shareholding right?

Many property investors use a Look Through Company (LTC) to enable the profit or loss to flow through to the shareholders.
Has your situation changed?
• Are your rentals starting to make a profit rather than a loss?
• Have you just won Lotto, inherited some money, received a redundancy payout, or otherwise have a large amount of extra cash that you are going to use to reduce your rental's mortgage? If so, this is likely to reduce the losses, and in some cases result in a profit instead.
• Have you added extra dwellings or income streams that will now give an overall profit?
• Has your or your partner's income changed? For example, if the husband was the higher income earner but has now lost his job or gone back to study, then having the losses of the rental still going to him might not be appropriate anymore.
• Have your interest costs increased and changed your profit to a loss?
All these situations are examples of where it may be appropriate to change the shareholding in your LTC. If there is a large loss, we want the shareholding, and therefore loss, going to the highest income earner. If there is a profit, then we want the shareholding going to the lowest income earner (and therefore lowest tax rate), or we might look at a Trust for asset protection and long term flexibility with allocating profit to beneficiaries.

We recommend reviewing your situation and if you think your overall result has changed (profit to loss, or loss to profit) we recommend giving Ross a call on (07) 839 2801, or email This email address is being protected from spambots. You need JavaScript enabled to view it..

For business owners, often an LTC is used with a Trust being the shareholder, so that the business profit flows through to the Trust, and then the Trust is able to distribute the profits to the beneficiaries. If you have a business operating through an LTC, it is important to consider if this structure is still working correctly for you. If you were expecting large losses or you still have individuals owning the shares, then it would be a good time to review your structure.

2. Who is director or has the right to become a director?

For many Companies there is only one director (maybe the husband who operates the building business for example). What happens if this person dies, or becomes incapacitated, or if there is a relationship breakdown?

If you are not a director and own 50% or less of the shares in the Company, then under standard rules you have no control and cannot appoint yourself as a director.

Obviously you could go through the courts to have yourself appointed as a director but this may be time consuming or expensive.

Another option is to have a simple shareholders' agreement, whereby the minority shareholder (maybe the wife in the building company that owns 1%) has the right to appoint themselves as a director. This means in a worst case scenario such as death, the minority shareholder can become a director and then operate the Company. In a relationship break up, this means at least both parties would be directors and have some level of control and say.

If you are currently a director but have a minority shareholding, then you need to be careful that the other shareholder could remove you as a director. So having a simple shareholders' agreement giving you the right to be a director could still be important!

3. Chattels Depreciation

If you have purchased a new investment property since the last financial year, it is a great time to review if you should get a chattels valuation done. Have a look at www.valuit.co.nz.

A chattels valuation gives the value of the chattels so that we can then depreciate them. We have done some articles on this in the past, so I will keep this quite short. (View my Blog). The chattels depreciation is then an expense for tax purposes so will either increase your refund or reduce your tax to pay.

A chattels valuation costs around $400 and for a new property is extremely worthwhile . For older properties, it will be less worthwhile and the key items to consider are:
• Carpets
• Curtains
• Dishwasher
• Stove
• Heat pumps or heating.
If the value of these is $5,000 or more, then it would make sense to get one done. If you are not sure, it is best to ring Terry le Grove at Valuit and he can discuss this with you further. There are lots of smaller items that also depreciate, or large items like driveways that depreciate over a long time. All these little bits do add up, and a few months ago we put some examples in a newsletter of clients saving over $10,000 from chattels depreciation.

4. Personal debt to deductible debt

Do you have a large personal debt but either:
• Some equity in your rentals?
• Or a large shareholders' current account?
If so, it might be possible to restructure some of the personal debt to make it tax deductible. If you let me know that you have read this article, I'm happy to speak to you for 10 minutes for Free to see if it is worth exploring this further.

5. Do you just own 1% of a Company and your partner the other 99%?

Often for tax purposes we have the lower income earning partner owning 1% of the LTC, so that the majority of the losses go against the higher income earner's tax. But what happens if you have relationship issues or your partner dies?

We recommend for relationship property that you check this with your lawyer. Another option is to draw up a share option, so that you have the right to buy 49% of the shares for a set price at a future date if you want to.

If your partner dies, your partner's Will should say who the shares go to! But do you have up to date Wills? This would be a good time to discuss this with your lawyer and just to check that your Wills are up to date and that the shares would transfer to the right place upon death.

 

Year End Questionaires

This year we are doing things a little different. Our Annual Questionnaire Checklists are available online at our Website: Click here.
You can either complete the online forms, which will be emailed directly to us, OR you can download a PDF copy to fill in manually and return to us.

You need to complete a questionnaire for each entity that was active in the 2015 financial year (1 April 2014 to 31 March 2015), as well as a Personal questionnaire for each individual required to file a tax return. Please also complete one Overseas questionnaire. Remember when completing the questionnaires online, we do still require copies of bank statements, etc.

You can also choose to complete the questionnaires online but still bring in your records personally, and/or have a meeting with Karen Smith, our Practice Manager, to go over your information. Just contact our office on (07) 839 2801 to arrange an appointment.

Should you have any questions or problems, please contact Jo Leask, Customer Services Assistant on (07) 839 2801 or email This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Cambridge Office

Did you know we have an office in Cambridge which is open Tuesdays and Wednesdays from 8am to 4pm? If it is easier for you, you can drop your year-end records into Jenny at our Cambridge office. Also Ross is available for meetings in Cambridge on Wednesdays.

Contact details are:

Coombe Smith, Chartered Accountants
Unit 5a, 53 Alpha Street
Cambridge
Ph: (07) 827 7244

Kind regards, Ross Barnett

So What is Happening to Hamilton Prices?

20 April 2015

graph

 

March 2014 was $375k. March 2015 is $350k. Does that mean the Hamilton market is dropping?

NO, it is probably just timing and if you look at November/December the Median was $380,000. The graph on the Lodge website is a great place to get information and it will be interesting to see the next 6 months. I'm expecting steady growth with all the Auckland buyers in the market!

  www.lodge.co.nz

COMMERCIAL PROPERTY - major deductions missed!

20 March 2015

I was shocked a few weeks ago with the level of advice given by another accounting firm recently to a commercial property investor.  Unfortunately most accountants don't specialise in property and miss some major deductions that can save thousands in tax for the investor.

In this example, a client had purchased a motel and the building alone was $1.9 million.  The accountant hadn't recommended a chattels valuation, and with no more building depreciation from 1/04/11, they had claimed $0 depreciation.  This is appalling!

  • One option is:  Under commercial rules you can actually still depreciate up to 15% of the buildings adjusted book value at 2% straight line depreciation. 
  • Or, a much better option, we became involved and recommended that Valuit complete a chattels valuation.  This has resulted in total chattels of $393,251, which will be depreciated long term.  For the first 11 months this resulted in $32,517 depreciation and saved $10,730.61 tax at 33%!  The cost was only $1,525.  The future depreciation will be $360,734 and over the next 10 years approximately, this will save a further $119,000 in tax.


While talking to the valuer, he mentioned a childcare centre he had recently valued and the depreciation was $50,000 for the first year!  If taxed at 33%, this would mean a $16,500 tax saving!

So please' if you have a commercial property or a residential rental with high value chattels, talk to me about chattels depreciation!  Or look at www.valuit.co.nz

Not to be Missed – “This Man has the Secret to Early Retirement”

4th March 2015

The Waikato Property Investors Association (WPIA) has secured well known property investor and author, Graeme Fowler, to speak at their March meeting.

Graeme owns over 40 investment properties that generate thousands in passive income.  In 2013, Graeme set a new goal.  His aim was to begin with just a 20% deposit for one house, which he would then parlay into a portfolio of 10 investment properties within a three year time frame.  So completely separate to his other wealth and income.

Just nine months later, in November 2014, Graeme was on the front page of the NZ Property Investment Magazine and had already secured 13 investment properties under a new Trust, and had to reset his goal to 20 investment properties in under three years!

Picture-from-Ross-for-WPIA2

Whether you are new or an old hand to property investment, I suggest you come along to hear Graeme speak.

If you are not a member of WPIA, I would highly recommend that any Waikato property investor joins WPIA, as it is only $245 for individual members or $325 for couples.

However, if you aren’t a member, you can still come along for $30, and if you do decide to join WPIA later, this comes off your subscription.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

 

 

 

 

Christchurch Information

26th February 2015

Over the last few years I have been watching Christchurch with interest.  I see there being a big opportunity for investors who really know Christchurch well, but also a large risk for other investors.

Reading articles and listening to economic commentators, I’ve formed the view that at some point many in the construction industry will move from Christchurch, leaving an over supply of houses for sale and to rent.  This would normally lead to a reduction in house prices and rents received.

The difficult part is the ‘when’ and ‘how bad’? 

Click here to view a Vero report on Christchurch that gives some interesting information:

  • Page 13  20,000 or 5.5% moved out of Christchurch.
  • Page 19  25,800 people working in the construction industry.  This is 60% above 2006.  So maybe 15,000 extra construction workers.
  • Page 19  Also an increase in other professions associated with rebuild.  No specific numbers included, but sounds significant.
  • Page 38  Vero’s payments created 1,367 FTE employment in 2013 and expected to drop each year.  But at 2025, still expected to be 725.

Interesting figures on page 38 re jobs created.  I would have thought that the number of jobs would have dropped off quicker, but the work is still predicted to be creating a lot of jobs in 10 years time.  But still between 2014 and 2020, number of jobs created by Vero is expected to drop by one-third.  If this is the same over the constuction industry, that is a large number of people who will move out over the next six years, as they will no longer have construction related jobs.

 

The graph above shows median sale prices from 1995 to 2014.  From the scale on the right, recent monthly sales are 400 per month.  From the Vero report on the number of construction workers being 15,000, there might be 4 per house (2.7 people per house is around the NZ average), so 3,750 houses.  If this number of houses were put on the market, it would take almost a year of normal sales to sell them all.  So this comparison shows the huge impact the construction workers and their houses could have on the Christchurch market!

If you are looking to buy rental properties in Christchurch, I would suggest you exercise caution and research thoroughly.  Obviously a major area is the rent you are likely to receive, and for most investors I suggest they talk to at least two property managers to discuss the demand of renters, how easy it is to rent, and likely rent they will receive.  For Christchurch, I would also suggest discussing the likely long term demand with the property managers, as this could give you relevant information from the people closest to the action.

I hope this information has been interesting!

Ross

 

Predictions on interest rates and capital gain, plus a free ANZ Beginners Seminar this week

16th February 2015

Last Wednesday night, I attended a Waikato Property Investor Association monthly meeting and heard Rodney Dickens from Strategic Risk Analysis Ltd (www.sra.co.nz) speak.  His expertise is in following trends and in giving his clients early warning of major changes to the economy, interest rates, property prices, etc.

There were two main points of interest from the presentation:

1.  Future capital gain and house prices 

Rodney indicated that the next 18 months to 2 years could be good for property in the Waikato, but was cautious of the long term possibilities.  He spoke about the trends of NZ compared to Waikato, and that the NZ median price had gone up over the last few years but that Waikato was lagging more than it normally did.  Attached is a graph from a seminar we did with Lodge Real Estate that highlights this gap.  As you can see from the graph below, Waikato is normally close to the NZ median, but currently there is a large gap, which in theory should close.

Property-Accountant-Hamitlon-Property-MarketA Major reason Rodney thought that Waikato prices may not increase long term, is the possibility of a housing accord, or low cost housing being provided in the Waikato in conjunction with government initiatives.  I found this quite interesting, as I personally hadn’t thought this would have a big impact on prices, but Rodney’s opinion was that this could provide sections cheaper, so stop section and house prices in the Waikato increasing too much.

Auckland – Rodney thought that the large number of new houses being provided through housing accords and initiatives with the government and private firms would have a large impact on the supply of housing and slow down future capital growth in Auckland.

Christchurch -  Long term there is concern that a large number of houses are getting built in Christchurch and that both rents and house prices have boomed too much.  At some point the builders and construction workers will no longer be required and this will create a huge oversupply of housing, which would then lead to large drops in rents and house prices.  I personally recommend investors be very careful with investing in Christchurch.  If you really know what you are doing, there are large opportunities, but for most investors there is a large risk of buying at too high values and losing substantially.

Obviously with house price predictions, no one has a crystal ball, so you cannot rely on other people’s predictions.  But it is interesting to hear others’ opinions and remember any key parts.   Click here to read an article about Rodney Dickens.

 

2.  Future interest rates
Rodney talked about other factors that affect the economy such as the unemployment rate.  He thought that interest rates would remain low for a year or so, but that long term the unemployment rate was at an unsustainably low rate that would cause the Reserve Bank to raise interest rates over the longer term, say two years.

Following on from this information and my own thoughts, I recommend that investors look at spreading their risk.  Having some short, some medium and some long term interest rates.

I think the TSB rate of 5.89% for 10 years is a great product and reduces long term risk.  Or the 5.29% for 5 years just out by HSBC is also a great rate.  I also look for a rate and term that suits me, and gives my desired outcome, rather than chasing the best rate.  Under 6% for 5 years, to me this gives great long term stablility and at a great rate when compared to historic rates.

If you would like some help with your loans, or interest rates, we have some great mortgage brokers we can refer you to.  Just flick me an email and I can put you in touch with the best mortgage broker for your circumstances.

“ANZ – The Basics of Property Investment Seminar”
Practical information and tips from the experts for aspiring or new investors.
The Waikato Property Investors Association, in association with ANZ, is running a free seminar on Wednesday,  18th February 2015, 5.30pm start.  Registration Essential via www.waikatopia/org.nz

Helpful tip – banklink memorisations

14th March 2013

Are you on Banklink? Do you code your data every month or two months?

If you said yes to these two questions then it is probably the right time to check your memorisations. Banklink memorisations are a helpful tool used in Banklink to automatically code entries that come up on a regular basis e.g. bank fees or monthly payments. If you highlight the transaction that you want to memorise, then click the ‘Mem’ button from the top tool bar, then click on the description that commonly comes up on Banklink, then select the code then ok. That is the basics on memorising transactions.

If you have any questions please contact our office to speak with Rachel or one of our other team members.

20% gross yield by maximising what you already have

4th April 2013

Our recent free seminar highlighted some great things you can do to improve your rental portfolio’s performance. One example was David Kneebone (Lodge Rentals) talking about the return on doing up a property.  His client spent $40,000, which was mainly repairs so after tax deductions the real cost was only $27,000.  His client is now getting $115 extra rent per week, which based on 50 weeks is an extra $5,750 rent per year.  As a gross yield on the money spent this is 21%!!

The cashflow will also be great because if he borrowed $40,000 at 6%, the $2,400 per year extra interest cost would be covered by the $5,750 extra rent, giving a $3,350 surplus.

The other part that can be difficult to work out, is the increase in value. Obviously this depends on the area of the properties and other factors, but one way of looking at it is the capitalisation rate on rent. Say 7% capitalisation rate expected on $5,750 rent = $82,000 increase in value. So in theory based on capitalisation rate valuation the renovations cost $40,000 (less tax perks), and this therefore increased the value by $82,000.

So overall good cashflow, plus good capital gain.

With your rentals, can you concentrate on what you already own and maximise the return?

We will be holding the same seminar again either late April or early May, so please email us by clicking here if you would like to attend.

Cheers

Ross

$30,000 clean up cost and 10-30% reduction in property value

15th April 2013

I’ve just been talking to a business that specialises in reducing Meth risks for rental properties.  We will provide some further information on our website, but thought you might be interested in the following brief summary.

Insurance companies are changing their criteria, and your property might not be covered for Meth damage.

The average cost to clean up a property after a Meth problem is $30,000.  Ouch!
Plus worse still, then no one wants to buy a property that has had Meth issues.  This commonly reduces the value of the rental property by 10-30%.  So if you have a rental worth $300,000, the total real cost in terms of clean up and lost value could amount to over $100,000!  If banks hear about Meth issues they then relook at LVR ratios, which can make the borrowers life difficult.

The Company I was talking to:

- Provides a buying service for $99, where you can check to see if the house has traces of Meth.  Gives a simple Yes/No – I think this is a no brainer and you should be obtaining some kind of report before purchasing to ensure your next rental does not have a Meth issue.  Also you should be asking the vendor and the agent about Meth.

- Provides a monitoring and testing service for around $500 per year to ensure the property is kept Meth Free.  They feel that being Meth free is a bonus, and that if advertised well might get the landlord $10 extra per week which then pays for the monitoring cost.

www.methminder.co.nz contains further information as well!

“Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?”

Tips and tricks to save you thousands

9th May 2013

Interest Rates (again)

I discuss interest rates with most clients and it is amazing how much you can save by asking.  Whether you are a business person, rental owner or just have a personal home loan, you need to review your loans and interest rates.  Here are a few recent examples of good deals that I have seen:

- Business borrowing not secured by buildings at 6.49% through BNZ.
- Finance Company writing of over $10,000!  A client couldn’t quite refinance away from a Finance Company that was costing over 10% interest to a main stream bank, so as they were slightly short of equity, they asked the Finance Company to accept  $10,000 to $20,000 less than the whole loan amount, and the Finance Company accepted.
- I have a loan come up with Westpac in June, and the standard 1 year rate is 5.19%.  I asked for a better rate by email, and got a phone call back yesterday offering 4.89% for 1 year.
- I have recently fixed a Sovereign loan for 6% for 5 years.  We have had a couple of clients manage 5.79% through Westpac recently, but lots more getting 5.99% for 5 years through a variety of banks.
- 4.99% advertised with SBS for 6 months, 1 year or 2 years.

We have recently helped a client save $13,076 per year in interest, just by fixing some loans over different periods from 1 to 5 years.  This also gives them some long term interest rate protection!

6 ways to improve business profit by 56%

Often when business isn’t going well, we try to make a large change in one problem area.  A large change can be very hard to successfully implement, plus can be time consuming and costly.

Another way is to make small changes over 6 different areas.  If you can get a 5% improvement in each of the following areas, then this increases your net profit by 56%!

- Number of quotes
- Conversion rate
- Average $ spend per customer
- Average number of transactions per year per customer
- Costs of goods sold (ie 5% discount from key supplier)
- Other expenses

The key is initially recording and knowing what these figures are, and then improving on them.  A 10% improvement gives a 129% increase in net profit.

If you are interested in simple ways to grow your business profits, email me at This email address is being protected from spambots. You need JavaScript enabled to view it. and I will send you some further information on this.

Rearranging Personal Debt

In some cases we can borrow in your business or rental entity, and then use this money to repay personal debt.  This normally gives us an added tax deduction that can amount to thousands.  For example, we recently moved $183,000 from personal to business, this has $10,065 interest at 5.5% which saves $3,321 per year in tax at the 33% tax rate.

In some cases rearranging personal debt can incur costs, so it is important to consider the costs vs the benefits.  In the case above the cost was a $250 loan application fee.  But for other restructures it can add up to thousands in tax on building depreciation recovered, legal fees and/or Company formations.

Chattels Depreciation

I met with a new potential client recently who had obtained Valuit chattel valuations on a number of properties, costing over $1,000 in valuation fees.  This should have given the client over $10,000 of benefit over the last 5 years.  But unfortunately, their old accountant never included the chattels depreciation as a tax deduction!  Depreciation is a funny expense, in that once you have made a decision to not claim chattels depreciation, you can’t then go back and amend those past years.  So this client has lost that tax benefit forever!  This shows the benefit that can be obtained by using a property accountant!

GST on rental income if trading properties

We have recently taken on a client whose old accountant has returned GST on rental income for the last 6 years.  The client owes or has paid around $12,000 in GST per year, totalling $70,000 approximately over the 6 years.

If you are trading properties and registered for GST, you should not be returning GST on rental income!  For properties purchased before 1/4/11 it is best practice to use Lundy adjustments.  For the client above, using the Lundy adjustments reduced the GST adjustment down to approximately $2,000 per year or $12,000 for the 6 years.  Overall we hope to save at least $50,000 and are in the process of reassessing the old GST returns with IRD.  Again, if you are involved in property transactions, it is essential that you use a specialist property accountant who is fully aware of property tips and tricks.

If the property was purchased after 1/4/11, new rules have come in that generally require more GST to be paid back to IRD.  But the first adjustment required is not until 31/3 of the year after.  For example, if you purchased a section, built a house in May 2013 and tried to sell it, then couldn’t so rented it out, the first adjustment period would be for May 2013 to 31/3/15, with the GST adjustment due in the 31/3/15 period.

Free Insulation

Waikato DHB is offering free home insulation until 31/5/13 in certain cases.  There are 5 main criteria (below) that you need to meet.  The link to the application form is also below:

- Live in/own a home built before 2000 (within 30km of Hamilton City)
- Be a Community Services Card holder (the primary tenant or owner must be the card holder)
- Have children under the age of 16 years living in the home (or frequently staying)
- The home is not a Housing NZ (Housing Corp) home
- Landlord approval has been granted

The link to the application form is http://www.waikatodhb.govt.nz/file/fileid/46637

“Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?”

Are you ready for the 1st December changes?

29th May 2013

Earlier this month I attended Waikato Property Investors Associates (http://www.waikatopia.org.nz/events.php) meeting, which highlighted some key changes coming up for rental properties.

Digital TV

Are your rental properties ready for the upcoming digital changes? From 1/12/13 non digital TV reception will no longer work in the Waikato.  If your rental houses don’t have sky or freeview aerials, then they won’t be able to get TV!

We suggest you check what TV aerials your rental properties have, otherwise your tenants might be very upset if they can’t get TV in December.

Insurance

As you may already know, insurance is about to change for NZ houses.  Insurance companies are moving to a specific sum insured.  Have a look at www.needtoknow.co.nz

Ideally, you want to insure your houses for the amount that it would cost to replace them.  But you also need to think about extra costs such as demolishing the old house and removing rubble.

If an earthquake or other major disaster occurs, will the cost of products and contractors increase?  Yes, of course they will.  So, in my opinion, you need to allow an extra amount to cover likely costs if a major disaster occurs.

I’m personally going to try to work out the actual cost to replace our rental properties.  Then compare this insurance premium against $50,000 and $100,000 extra.  If the insurance isn’t too much more, I’m probably going to over insure by $50,000, so that I know I’m covered.  I would personally hate for a rental or personal house to burn down, and then only be able to replace it with a house two-thirds the size, so prefer to go slightly over.

Each year you are going to have to review the cost to replace the house, as cost of material and labour is likely to increase!

If you are looking at buying old properties, especially 1935 or earlier, then make sure you can obtain insurance cover for the property before you go unconditional.  Murray Wills from Harcourts told me about a recent example where an investor purchased a house built before 1935, and then found out from the insurance companies that they would not insure the property unless the wiring was redone.  This meant the investor had to spend a reasonable sum of money, over and above what they were expecting to spend.

“Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?”

Holiday homes

11th June 2013

There are some major changes for Holiday Homes, and IRD is targeting overseas investments, incomes, pensions and shareholdings.  If you have any interest overseas, we suggest you email me by clicking here to ensure we are accounting for this correctly.

Mixed-use Assets (Holiday Homes) changes:

The Finance and Expenditure Committee reported back last week and their recommendations are:

  • 1/4/14 application date for boats and aircrafts
  • Still 1/4/13 application date for holiday homes
  • Recommended transitional period, so that assets (including Holiday Homes) can be transferred out of a Company without incurring tax liability for depreciation recovery (but new entity will still be liable for the depreciation recovery)
  • Reduce assets covered to be Boats, Aircrafts and Holiday Homes that cost over $50,000
  • Private use to include use by associates
  • Any income derived from private use to be treated as non-assessable (this matches to the expense being unclaimable)
  • If Gross Income is under 2% of the Market Value, then losses can’t be claimed and carried forward to when there is a profit
  • If under $4,000 income, can opt out, and not return income or claim any expense
  • “Mixed-use” is where the asset is used for private and income earning use, and it is not in active use for its intended purpose for at least 62 days. (So if rented for whole year or 303+ days, then mixed-use rules don’t apply.)

It is likely at this stage that any holiday homes that are used for Mixed-use, will be sold out of companies during the transitional period.  Otherwise interest claims may be limited.

Example 1: Current rules

- Income from renting for 30 days = $9,000.

- Total Expenses $25,000.

- Available for rental 90% of year, so could claim $22,500 expenses.

- Loss for tax purposes $(13,500).

- Depending on the ownership structure, this loss could normally offset other income and save up to $4,400 of tax per year.

Example 2: Proposed rules

- Income from renting for 30 days = $9,000.

- Total Expenses $25,000.

- Used for 36 private days vs 30 rental days, so can claim 46% of expenses = $11,500.

- Loss for tax purposes $(2,500).

- If rental worth over $450,000, then not receiving 2% of market value, so losses available $0, and carried forward $2,500 to future profits from holiday home.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

IRD is on the warpath! Please let us know if any of these 4 apply to you

11th June 2013

1.  Foreign Investments, Overseas Bank account, Shares in overseas companies, inheritance overseas 

Generally these are taxed under Foreign Investment Fund (FIF) tax rules, unless an exemption applies.  There is an exemption for natural persons where the cost is under $50,000 and also a four year transitional exemption.  IRD are looking for NZ tax residents who own shares in overseas companies, or have overseas investments that they aren’t declaring.

2.  Foreign Rental Properties

There are a number of requirements to consider:

  • Exchange gain or loss is taxable – in some cases we must return the exchange gain or loss as taxable income in each year (even though not realised).  Or if exemption applies, is taxable in year of sale.
  • Approved Issuer Levy – Depending on who you have borrowed the money from, you might have to pay Non Resident Withholding Tax (NRWT) at 10 to 30% of the Gross interest paid.  This can be reduced to 2% by using Approved Issuer Levy (AIL).  If lenders have a branch in NZ (such as Westpac if borrowing in Australia) then this can be reduced to 0.

3.  Foreign super schemes or entitlement to inherit a foreign super scheme

Only NZ is entitled to tax overseas pensions that NZ tax residents are receiving.  Therefore, you cannot claim a tax credit in your NZ tax return for foreign tax paid.  Instead, you would need to make an application to the overseas country to get any tax back.

There are new changes that have just occured.  There are options available to transfer overseas pensions before 31/3/14 and pay a straight 15% tax.  This is just one option, and there may be a better option available.  But if you have an overseas pension or an entitlement to inherit one, then please contact me by clicking here.

4.  Certain overseas investments

IRD are checking the tax treatment of investments in OMIP and Ross Asset Management Group.  If you have investments in these, please email me by clicking here.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Reducing Depreciation Recovery

25th June 2013

Should you just accept that you will have to recover all the building depreciation you have previously claimed? ……… NO

In many cases the building depreciation recovered is only a fraction of the total claimed and there are a number of ways to minimise it.

Below is a copy of our March 2012 article as we feel it has great value.

What is Depreciation Recovery?

In the past, property investors have been able to claim Building Depreciation.  An investor may have purchased an investment property for $350,000 of which $200,000 is land, $125,000 is building and $25,000 is chattels like carpets and curtains that have been valued by a Valuit Chattels valuation.  Most investors would have claimed 3% or 4% diminishing value depreciation on the $125,000 (or around $3,500 to $5,000) per year.  They also would have depreciated the chattels at their respective depreciation rates.  So over 5 years the investor may have claimed $20,000 of building depreciation, bringing the book value of the building down to $105,000.

In the past the IRD have given a deduction for the reduction in value of the building.  If the building hasn’t been reducing in value, has increased in value or has reduced at a lesser rate, then the property investor has been over claiming building depreciation.  They have been claiming a deduction which is perfectly legal and allowable, but that isn’t really occurring in their circumstances.

When the building is sold, an investor who has been over claiming this deduction, will then have to pay all or a part of it back again, which is depreciation recovery.

- Depreciation Recovery generally only applies to buildings.
- Chattels generally reduce in value at similar levels to IRD rates, therefore when the investment property is sold, there is no recovery.  A chattels valuation could be obtained at date of sale to prove this.

Carrying on the example above, if the investment property is now sold 5 years later for $500,000.  The chattels might be worth $10,000, the building $190,000 and the land $300,000.  The building book value is only $105,000, so the $20,000 building depreciation claimed over the 5 years will be recovered and become taxable income.  From $125,000 to $190,000 is a $65,000 capital gain, which is currently non taxable in New Zealand.  In this example the difference between the real building value $190,000 and the book value $105,000 is large, so there would be full depreciation recovery with no chance of reducing.  If the values are a lot closer, then there are a number of opportunities to reduce this.

How to reduce Building Depreciation Recovery

1) Make sure your accountant or the person calculating the recovery knows what they are doing.  I have recently seen an example where an accountancy firm showed a recovery of $16,700 approximately when the recovered amount should have been $5,600 maximum.  This is a difference of $11,100 taxable income, or at the 33% tax rate $3,663 extra tax paid for no reason. This is a great reason to use a real ‘property accountant’, someone who specialises in and understands property.

2) A starting point to establishing the building value is normally the rates valuation.  From the rates information, work out what percentage is building and then apply this to the sale figure (less deductions!).  If this figure is over your building book value, then there will be building depreciation recovery (presuming you have claimed building depreciation in the past).

3) If the rates figure and the book value are similar, you could look at writing a clause in the contract.  The parties agree the building value is $XXXXX.

a. Example – The building cost $125,000 and closing book value is now $105,000 so $20,000 building depreciation claimed.  The sale value is $300,000 and based on the rates valuation the building should be worth $112,500.  The parties could write a clause in the contract, “The parties agree that the building value is $105,000”.  As long as the two parties are not related, then this is the sale price.

b. You should not be too aggressive with this approach and the building value needs to ne reasonable.

4) Any legal fees for the sale will be claimable under the new legal fees deduction rules.

5) Any commission or other costs incurred for the sale need to be deducted from the sale price, before the building value is calculated.

6) If you are confident the building value is close to the closing book value, then you could obtain a registered valuation to prove this.  We frequently do this for clients, as the rating valuations are not always realistic or are out of date.  Recently a client saved over $20,000 in depreciation recovery, or over $7,000 in tax at the 33% tax rate, just by obtaining two valuations for less than a cost of $500.

Overall don’t just accept a depreciation recovery.  Think it over, “has my gain come through land or building?” and “has my building really decreased slightly in value”, justifying any previous depreciation claims and meaning there should be little or no depreciation recovery.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Is Hamilton Next?

3rd July 2013

As a property investor, with investment properties mainly in the Waikato, I have been watching the Auckland market with interest and have been wishing that I owned some central Auckland properties.  But, there is a lot of information that points to Hamilton catching up!

Last Wednesday we held a free property seminar in conjunction with Lodge Rentals, Priority Home Loans and Lodge Real Estate, and I came away with some new insights into the Hamilton Market.  The key to our seminars is information from a variety of experienced sources, and I find that with each seminar I personally learn something new from hearing the other speakers.  Last seminar, it was a return on doing a rental up (see http://www.cswaikato.co.nz/blog/20-gross-yield-by-maximising-what-you-already-have/ ), and this seminar I learned a lot about the Hamilton market from Vaughan Heslop (Lodge Real Estate).  Here is a little bit of what Vaughan discussed:

Comparing Hamilton to NZ

In the past, the Hamilton median house sale price always stays in line with the NZ median house sale price.  In 2001 Hamilton started to get behind, but then caught up in 2004 to 2006.  This and previous information that Lodge Real Estate have gathered shows that the Hamilton market lags the NZ market.

So in the current cycle, from 2010 the NZ median has increased but Hamilton has stayed consistent. As at 2013 the gap between NZ and Hamilton is the biggest it has ever been.  No one has a crystal ball, but based on history the Hamilton market will start to catch up and have a strong growth period over the next few years.

So while Auckland seems very attractive at the moment, Hamilton should be next!  This is quite encouraging for Waikato Property Investors.

Next Seminar

We are repeating the same seminar on 27th August (Tuesday) to help more property investors buy the right rental, and to stop people buying a “lemon”.  If you are looking at buying a rental property, then I suggest you come along for the next seminar.  We would love to see your friends and family too, and the seminar is completely free with no hard sell or hype.

http://rental.eventbrite.com/

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

It's worth checking depreciation recovery

17th July 2013

On the weekend I reviewed another accountants financial statements for a rental property:

- property was purchased 2009
- fully furnished, so depreciation on furniture rented
- LTC

The accountant was a CA, who mainly did businesses.

The property was sold in the 2013 year.

I can’t remember the exact figures but here are some of the mistakes:

- TV purchased in 2009 for say $800.  Accountant sold out in 2013 for $900.  Realistically TV would be near worthless now!
- Beds and other furniture also sold for more than cost??
- Land and building sold for slightly more than cost, but all building depreciation recovered.  This could be correct, but more likely land increased and building probably hadn’t

Could have looked at clause in sale and purchase agreement, to reduce or eliminate building depreciation recovered.

Could have changed shareholding, so that non earning spouse received profit.

Overall, accountant showed around $5,000 tax to pay, when probably should be a loss.

If you are thinking about selling, or have recently sold a rental, I recommend checking how the depreciation recovered is calculated.  Many non property accountants get this wrong.

My blog on our website www.cswaikato.co.nz, also has a recent article on depreciation recovery.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Way for first home buyers to get ahead – 30 year loan down to 13 years!

22nd July 2013

We have all heard in the media how difficult it is for first home buyers to get into the market and to get ahead.  Here is a great option that might work for you, your friends or family, so please feel free to pass this email on.

What about a home and income?  Normally a three bedroom house, with a two bedroom house on the back or front.  If done well, there can be separate living areas for both houses, and they operate as two completely separate properties, that appear to be subdivided, but that are really on the one title.  The main reason to look at this option is cost savings.

Auckland example

A normal first home might cost $400,000.  The main cost is the loan repayments; based on a $20,000 deposit, 3 year interest rate and Westpac’s online calculator for 30 year loan, this would cost $2,288 per month.

The total expected cost would be approximately $2,700 per month or $32,000 per year, as attached.

Just personal house      
       
  Monthly Annual  
Loan repayments 2,288 27,456  
Rates 167 2,000  
Insurance 100 1,200  
Other 100 1,200  
       
TOTAL 2,655 31,856  
Or a weekly cost of $613      
             
             

iFindProperty are property finders and they have given me an example of a property in Wattle Downs which is in Manukau, Auckland.  If you are looking at buying a personal home or a rental property, I recommend you sign up to their newsletter at www.ifindproperty.co.nz.

The property cost $395,000.  It was actually purchased by property investors but would work well as a home and income.  It isn’t a mansion but it is a reasonable house, in a reasonable area, that can help get a first home buyer into the market.

If a first home buyer lived in one of the houses, the other could be rented for $390 (or more per week).  This brings in an additional $19,500 of income based on 50 weeks.  As attached, expenses are only slightly higher based on the home owner looking after the property management on the second house.  Property management would cost an additional $1,700 approximately per year.

Home and Income    
     
  Monthly Annual
Loan repayments 2,288 27,456
Less rent received -1,625 -19,500
Rates 183 2,200
Insurance 125 1,500
Other 300 3,600
     
TOTAL 1,271 15,256

Or a weekly cost of $293

Savings for Auckland example

So by buying a home and income, a first home buyer could reduce their weekly costs from $613 per week, to $293 per week.  A savings of $320 per week.

A smart investor would then use this extra money to pay off their mortgage quicker.  These extra repayments would reduce the 30 year loan down to 13 years!!!  It’s amazing what a difference this makes and how much this would help a first home buyer get ahead.

Hamilton example

A normal first home might cost $300,000.    The main cost is the loan repayments; based on a $15,000 deposit, 3 year interest rate and Westpac’s online calculator for 30 year loan, this would cost $1,716 per month.

The total expected cost would be approximately $2,066 per month or $25,000 per year, as attached.

Just personal house    
     
  Monthly Annual
Loan repayments 1,716 20,592
Rates 150 1,800
Insurance 100 1,000
Other 100 1,200
     
TOTAL 2,066 24,592
Or a weekly cost of $473    

 

This is an example of a property that Dan from the Hamilton office iFindProperty recently sold.

It cost $297,650.  It is in an average area of Hamilton (Grandview Road, Nawton) but very close to shops.  It has a 3 bedroom house plus self contained unit.

If a first home buyer could live cheaply for the first few years, they could live in the sleepout and rent the house for $310 per week.  This brings in an additional $15,500 of income based on 50 weeks.  As attached, expenses are only slightly higher based on the home owner looking after the property management on the second house.  Property management would cost an additional $1,300 approximately per year.

Home and Income    
     
  Monthly Annual
Loan repayments 1,716 20,592
Less rent received -1,292 -15,500
Rates 167 2,000
Insurance 117 1,400
Other 300 3,600
     
TOTAL 1,008 12,092

Or a weekly cost of $233

Savings for Hamilton example

So by buying a home and income a first home buyer could reduce their weekly costs from $473 per week, to $233 per week.  A savings of $240 per week.

A smart investor would then use this extra money to pay off their mortgage quicker.  These extra repayments would reduce the 30 year loan down to 13 years!!!  It’s amazing what a difference this makes and how much this would help a first home buyer get ahead.

An added bonus for this Hamilton purchase was that it was purchased for $20,000 below market value, so instantly gave the purchaser some equity.

iFindProperty are experts at sourcing residential investment properties.  They generally find high yielding investment properties that quite often have some equity for the purchaser as well.  They charge a fee based on the value of the property but they save you all the time and hassle in searching for a rental.  Often the fee is well below the extra equity obtained, so it makes sense to look at what they have available.  Not every property is going to meet your needs but if you watch, wait, and contact iFindProperty your perfect house or investment might come along.  www.ifindproperty.co.nz

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Do you want to buy and sell properties for profit?

15th August 2013

GST and Zero Rating

If you trade residential properties, then you will have to register for GST once you have a continuous taxable activity.  This means that you can claim GST on purchase costs that have GST but you also have to pay GST on the sale.

If you do a one-off trade, then this is not a continuous taxable activity.  Therefore you would not be required to register for GST.  But there can be a fine line, and it is often difficult to determine, if the trade will be a one-off or if you are likely to do numerous property trades, thus becoming continuous.  I suggest seeking professional advice from a property accountant on this subject and the best approach is to be honest.  If you intend on buying numerous properties to do up and sell for the profit, then you should GST register at the start.

For long term residential property investors, there is no GST, so the above comments are just for property traders.

Zero rating – Over the last year we have heard about a lot of mistakes around the Compulsory Zero Rating (CZR).  Real Estate agents commonly get this wrong and a few recent forum posts on www.propertytalk.com even show lawyers and non property accountants getting this wrong.  If both the vendor and purchaser are GST registered, then the sale will be zero rated for GST.  Therefore if you are a GST registered purchaser and the vendor is GST registered, you should be making any offer for the GST exclusive amount, plus GST (if any).

So for example, you are GST registered and purchasing a section from a developer.  The developer is advertising the section for $240,000.  You want to offer $230,000.  You would therefore work out the GST exclusive value $200,000 ($230,000 / 1.15) and offer on the contract $200,000 plus GST (if any).  As the developer will be GST registered, the sale is then Zero Rated, so you would pay $200,000 but can’t claim back the GST, and the vendor would receive $200,000 but have no GST to pay to IRD.

Following the example above, some recent mistakes I have heard of are the contract being written at $230,000 inclusive of GST.  This sale would still be Zero Rated, and Zero Rated at the $230,000.  So the purchaser would effectively be paying $230,000 + GST, or $264,500.  This would be a $30,000 mistake and this can often be the difference between a good , profitable trade and a bad one.

Therefore it is very important to ensure you know whether a vendor is GST registered or not when you are buying trading properties.  I recommend that you talk to your lawyer about inserting a clause in the sale and purchase agreement to ensure that the vendor is unable to change their GST status once the contract is signed.  Many traders and educators use a standard clause that your lawyer should be able to provide you.

Second hand goods claim – If you are buying from a vendor who is not GST registered (this will often be the case, as they are just personal house owners), then as a GST registered trader you will be able to make a second hand goods claim.  You can only do this on the payments basis for GST (i.e. claim the GST once you pay for it).  The property trader would then claim the GST back in the next GST period and get the GST back as a refund.  This is the purchase price divided by 23 * 3, so for example if a trader purchased a property for $230,000, they would get $30,000 GST back.  IRD will generally audit large GST refunds, so we often get clients to just claim the land/building purchase in that GST period, to keep the GST return very simple for the IRD audit.

GST on rental income if trading properties

We have taken on a client in the past whose old accountant has returned GST on rental income for the last 6 years.  The client owes or has paid around $12,000 in GST per year, totaling $70,000 approximately over the 6 years.

If you are trading properties and registered for GST, you should not be returning GST on rental income!  For properties purchased before 1/04/11 it is best practice to use Lundy adjustments.  For the client above, using the Lundy adjustments reduced the GST adjustment down to approximately $2,000 per year or $12,000 for the 6 years.  Overall we hope to save at least $50,000 and are in the process of reassessing the old GST returns with IRD.  Again, if you are involved in property transactions, it is essential that you use a specialist property accountant who is fully aware of property tips and tricks.

If the property was purchased after 1/04/11, new rules have come in that generally require more GST to be paid back to IRD.  But the first adjustment required is not until 31 March of the year after.  For example, if you purchased a section, built a house in May 2013 and tried to sell it, then couldn’t, so rented it out, the first adjustment period would be for May 2013 to 31/03/15, with the GST adjustment due in the 31/03/15 period.

Profit on Trading Property

There are a lot of people looking at going full time into property trading to make a living and gain wealth.

My first comment is be very careful about quitting your day job.- This job brings you day to day cash flow, which enables you and your family to live.

- Banks love a steady, solid income.   So without one, you might find lending difficult.

Secondly, do the figures really stack up?  In today’s market it is easy to buy, easy to renovate but the problem lies with selling.   This can result in additional holding costs and also with a lower than expected selling price.

Here is an example of a Property Trade that I have heard an investor talk about.

Example:

Purchased for $275,000
Renovations cost $5,000
Could sell for $300,000
From a quick glance, a lot of people think “that’s not too bad” and it’s $20,000 profit.   But, unfortunately, that is not the case.   Below are the likely expenses and I have included commission because in today’s market, many sellers are needing to use an agent to get a good price.

 

      Incl GST   Excl GST
INCOME          
           
Sale of Property  

300,000

   
Less GST – Divide by 23 * 3

39,130

   
         

260,870

           
EXPENSES        
Purchase    

275,000

   
Commission on sale  

10,350

   
Legal – $1,000 to buy and $1,000 to sell

2,000

   
Accounting  

500

   
Advertising – Agent or other

1,500

   
Insurance for 3 months

200

   
Rates – 3 Months  

500

   
Renovations  

5,000

   
Telephone    

25

   
Travel – 86 cents per km * 300

260

   
           
Subtotal Expenses  

295,335

   
Less GST    

38,522

   
           
Subtotal Excluding GST    

256,813

           
Less Loan Fee – NO GST    

1,000

Less Interest 3 months @ 6%    

3,750

           
TAXABLE PROFIT      

-693

 

So based on the expenses included, the Trade would make a loss of $693.   If commission is excluded the profit would be $8,307 before tax, or around $6,000 after tax at average tax rates.

This example shows how quickly a perceived profit can disappear.   If the property was held for longer, then it is likely to make more of a loss.

There are a number of property investors getting tutored about property trading and my understanding is that there are around 90 such students targeting areas in South Auckland.

In my opinion this is too many traders concentrating in the one area. I would suggest being very careful about trying to trade in this area as it is likely there are too many other traders competing to sell their properties.

$50,000 rule

I always think that you need a $50,000 gap between the purchase and sale, with limited renovation expenses.   So for example, buy at $250,000, spend $5,000 on renovations and sell for $300,000.   Based on the same kind of expenses including commission, the profit before tax would be approximately $20,000.

This level of profit gives the trader some room to move with either the selling price, or to hold the property for longer and to still make some kind of profit.

Overall

Property Trading is not easy and you need to ensure you have a market in which to sell your finished product.   With Trading you need to keep your properties moving, so the idea is to do them as quickly as possible and then move onto the next one.   Historically where I have seen Traders come undone is where they take too long or where they get too big too quick (i.e. have 2-3 or more on the go at once).

If you are thinking about trading properties, I suggest you organise a meeting with me to discuss the structures used and the implications of tainting.  Ring Mareese on 839 2801 to organise a meeting or email This email address is being protected from spambots. You need JavaScript enabled to view it..  There would be a charge for this meeting, depending on the work and information required.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Don’t get carried away with the property market!

2nd September 2013

The market isn’t booming yet and it’s still essential to do the basics right.  Buy a good property, in a good area and ideally with a twist that gives reasonable cashflow.

5% gross yield

Unfortunately this is what most investors buy as a rental property. For example, a $300,000 rental property renting for $300 per week has a 5% gross yield.

At the moment interest rates are around 5%, so if you are borrowing all or the majority of the money, the rental income of 5% is only just going to cover the interest.  So what about the rates, insurance, repairs and other costs?

I have done example figures on a $300,000 property giving $300 per week rent, interest at 5.5% and the cost per year is $7,500 approximately before tax.  If you are a high income earner and can offset the loss against your income, then the cost reduces to $5,000 per year or $100 per week of true, cash cost.

  • What happens if IRD or the Government change the rules, so that the tax refund isn’t available? The cost then increases to the $7,500 or around $150 per week.
  • What happens if you lose your job or business income decreases?
  • What happens if interest rates go up? Interest rates in NZ over the long term average around 7.5% to 8%.  Using 7.5% interest into my earlier example increases the cost to $13,000 or $9,000 after tax refund at 33%.  So that is either $250 or $170 per week cost.  That is becoming a large cost, which is difficult to sustain in the long run.

Property values

Looking at www.reinz.co.nz gives information on what has happened to house prices.  Looking at the whole of NZ, the median house sold in November 2007 was $352,000.  In November 2012, 5 years later, the median is $383,250.

So over the last 5 years the property market has been very flat.  Comparing to historic data, this would hint that a period of property growth should be coming.  But there are no guarantees, and currently there are new and changing factors affecting NZ and its property market.

SO WHAT SHOULD YOU BE DOING?

There is no one perfect solution for everyone.

Investors with high, secure incomes, could look at lower cashflow properties which have a large potential to increase in value, such as beach property.  But this is higher risk and effectively you would be gambling on capital gains and using your other cashflow to prop this gamble up.

Most investors do not have really high incomes and cannot afford to gamble on capital gains.  In the last 5 years, a lot of investors who did gamble on capital gains are now regretting it and many have been forced to sell at a loss.

So if you are a normal investor looking to buy more property, I would suggest:

1) Take your time.  If you rush, often you get sucked in by the moment.

2) Make sure any potential property purchase has good future capital gain potential, as this is where property investors make their long term gains.

3) Don’t expect or require large short term growth, as this is unlikely to occur (even though we all hope it does). Instead have a 5 and 10 year simple plan and ensure this includes interest rates, and perhaps fixing some loans for 5 years at below 6%.

4) Make sure any potential property investment has good cashflow and can pay for itself. My earlier example of a $300,000 property getting $300 per week, is NOT good cashflow and will cost at least $100 per week.  So you need to find investments with a twist, such as:

  • Multiple dwellings on one site.  Have a talk to Vaughan Heslop from Lodge (021 400515or (07) 838 0042) for some examples.
  • Renovations or repairs to improve rent.  Having a good looking, warm and dry house can improve rent and tenant appeal.
  • Minor dwelling.
  • Turn garage into sleep-out.
  • Turn a living area into an extra bedroom.
  • Room by room rental – note: this is quite hard work.

A smart investment model is to have 3 or 4 high cashflow properties that support one high potential capital growth property.  But try to buy the cashflow properties first, otherwise the high capital gain property will suck your cash and ruin your borrowing potential.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Saved $25,000 in tax on UK pension transfer

23rd September 2013

Do you have an entitlement to a pension, but are not actually receiving it yet?  Or do you have friends, colleagues or family who have entitlements?

There are considerable changes coming up before 31/3/14, and you really need to act now.  Otherwise, if not done before Christmas (slower processing times), you might miss out.

Luke McKenzie of Move My Pension (www.movemypension.co.nz) specialises in UK pension transfers and can help you through the changes and ensure you get the best outcome for your investment and with the minimum tax.  When I was last talking to Luke, he mentioned a person paying $25,000 in tax using the exemption before 31/3/14, vs having to pay $50,400 in tax if they wait until after 31/3/14.  $25,000 tax saving isn’t bad!

If you have a UK pension of over £100,000, then it is very worthwhile contacting Luke on 0800 485 736 or This email address is being protected from spambots. You need JavaScript enabled to view it..

Further about tax changes

Under the proposed changes, the foreign investment fund rules will no longer apply to foreign superannuation schemes.  Instead, lump sums from foreign superannuation schemes will be taxed when they are withdrawn or transferred to a New Zealand or Australian scheme.

The amount of tax will depend on how long a taxpayer has been New Zealand resident, using one of two calculation options.

Periodic pensions will not be taxed under either of these methods, but will be taxed in full on receipt, as most periodic pensions currently are.

In addition, those who have made a lump-sum withdrawal or a transfer to another superannuation scheme between 1 January 2000 and 31 March 2014, but did not comply with their tax obligations at the time, will have an option to pay tax on only 15 percent of the lump sum amount.

The proposed changes to the tax treatment of foreign superannuation are to come into effect from 1 April 2014.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Is the 3 year rate good at 6.5%? Is the 5 year rate good at 7.10%?

30th September 2013

Obviously no one has a crystal ball, so there is no perfect answer. But here is a comparison using ANZ interest rates advertised on interest.co.nz.

Short term vs 3 Year

Option 1) 3 Year rate

6.5% per year is $6,500 on $100,000.  Over 3 years total interest is $19,500

Option 2)  Short term based on estimates of interest rates

Year 1 – $100,000 at 5.4% for 1 year = $5,400
Year 2 – Interest rate possibly increase to 6% for 1 year = $6,000
Year 3 – Interest rate possibly increase to 7% for 1 year = $7,000

Total interest over 3 years is $18,400.  Average per year is $6,133 or 6.1%

Outcome: Based on the estimates, staying with 1 year rates would save $1,100 over the 3 years.

The interest rates in Year 2 would need to be 6.5% and in Year 3, 7.5% for the two options to basically be the same.

Do you expect the 1 year rate in the second year to be more or less than 6.5%, and the third year to be more or less than 7.5%? If less, then you should stay with 1 year rates.  If more, then you should go with the 3 year rate.

The 3 year rate will give some stability.

Short term vs 5 Year

Option 1) 5 Year rate

7.1% per year is $7,100 on $100,000.  Over 5 years total interest is $35,500

Option 2)  Short term based on estimates of interest rates

Year 1 – $100,000 at 5.4% for 1 year = $5,400
Year 2 – Interest rate possibly increase to 6% for 1 year = $6,000
Year 3 – Interest rate possibly increase to 7% for 1 year = $7,000
Year 4 – Interest rate possibly increase to 7.5% for 1 year = $7,500
Year 5 – Interest rate possibly increase to 8% for 1 year = $8,000

Total interest over 5 years is $33,900.  Average per year is $6,780 or 6.8%

OutcomeBased on the estimates, staying with 1 year rates would save $1,600 over the 5 years.

The interest rates in Year 4 would need to be 8% and in Year 3, 9% for the two options to basically be the same.

Do you expect the 1 year rates to be more or less than the guesses above?  If less, then you should stay with 1 year rates.  If more, then you should go with the 5 year rate.

The 5 year rate will give long term stability.

Please note: The future 1 year interest rates are quick guesses of what future interest rates could be.  These are not fact, and the actual future interest rates could be quite different from these.  Therefore do not rely on these future 1 year interest rates when making your decisions.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

You're missing out if you haven't had a chattels valuation done!

8th October 2013

Did you know that you can still depreciate carpet, curtains, stoves, heatpumps, dishwashers and other chattels?  From 1/04/11 there is no building depreciation, so depreciating chattels has become even more important.  For commercial property owners there are even more deductions available!

I’ve looked back at a few clients who had chattels valuations done by Valuit a few years ago:

  • Client 1: Owned three properties for a number of years.  $79,001 total chattels depreciation claimed = approximately $26,000 tax saved.  Cost around $400 *3, so $1,200 total cost to save $26,000.  2167% return on investment.
  • Client 2: owned one property for a number of years and recently sold.
    - $30,969 chattels depreciation claimed, saving $10,219.77 in tax.
    - Equivalent building depreciation would have been approximately $7,000, but this would have been recovered on sale, where as the chattels have actually reduced in value, so no recovery.
  • Client 3: Very simple commercial building fit out.  $52,102 chattels depreciation claimed = approximately $17,000 tax saved.

Over the last few years I’ve noticed a lot of property investors haven’t had these done and have missed out on thousands in tax refunds.  For new purchases, you need to get a valuation done before the first tax return is filed and ideally at the start.  If you have already filed, it gets a bit trickier:

  • IRD don’t like investors changing from just building to chattels split out but that doesn’t mean they are right.
  • If it has just been one year, maybe two, then it is possible to get a valuation that reflects the purchase values, then to calculate the opening book values and start depreciating.  You will have some ‘black hole’ depreciation but at least you get some going forward.
  • Over two years, you can swear and curse at your old advisers but that’s about it.

Cost vs Benefit

Valuit charge $400 + disbursements +GST to complete a chattels valuation for a Single Tenancy Dwelling.

The benefit of the valuation depends a lot on the property you own.  If it is a brand new property, then there will be a large amount of chattels and it will make sense to get a valuation completed.

But if the property is old, run down and only with a small number of low value chattels, then it probably won’t be worth getting a valuation done.

In the middle is the grey area, where it really depends on the specific property.  If you are unsure, we suggest you either give me a ring, view Valuit’s website or talk to Valuit.

For example $10,000 of carpet:

- If there is no chattels valuation (or separate cost), then it is included in building with no depreciation.

- If there is a chattels valuation, then it is depreciable at 25% which is $2,500 per year.  In the first year this would give a $750 tax saving if the owner is on the 30% tax rate.  This would easily pay for itself in the first year!

Terry le Grove is the Waikato representative for Valuit.  He will let you know, at no cost to you, if it is not worthwhile doing a valuation. So it is worth discussing this with him.  His contact details are:

Terry le Grove, Chattels Valuer
Valuit

Freephone: 0508 482 583
Mobile: 027 296 0827
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: www.valuit.co.nz.

If you haven’t depreciated your chattels, give me a ring on (07) 839 2801 or click here to email us to see if there is something we can do for you.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Are you new to property and need some help?

4th December 2013

If you are new to investing in property, often you will find that you just want someone to talk to and/or to run the numbers past to make sure you are doing the right thing.  For example, does this rental pay for itself and is therefore cashflow positive?

Or you might want to know if you should fix or float your loans?

We have a special offer for property investors that we think would be ideal for you:



PROPERTY INVESTORS FIXED FEE DEAL
FOR A 12 MONTH PERIOD

  • Free email questions answered relating to property investment or trading
  • Free phone call advice for any property questions you may have
  • 1 x 30 minute meeting at a point you choose during the year

$350 + GST*

*Invoiced at the start of the 12 month period and payable by credit card.



If you would like to take us up on this offer, please This email address is being protected from spambots. You need JavaScript enabled to view it. 

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Immigration and possible housing boom?

10th December 2013

One major factor that affects New Zealand property prices is immigration.

Back in 2002/03 New Zealand net immigration peaked at just under 40,000 coming into New Zealand. This also corresponded to the start of the property boom. I have attached a graph on immigration from 1992 to 2009, as well as a graph from REINZ of Median NZ House sale prices for approximately the same period.

We are starting to get high immigration again, with forecasts that it will peak next year at over 30,000 into New Zealand.  Basic economics states that if demand increases (more people into New Zealand that need houses), then prices should also increase.  Obviously property prices are affected by a number of other factors, and there is no guarantee that the property market will boom over the next few years, but this article still provides some interesting reading.

 Immigration Graph

 

 

 

 

 

 

 

 

 

Median Price Graph

 

 

 

 

 

 

 

 

 

http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11161500

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Pushing it too far

21st January 2014

We all hate tax and, unfortunately, sometimes we can convince ourselves, and even our advisors, that we have legitimate reasons for doing what we have done.

Here is a recent case that shows when buying and selling a personal house is taxable.  In my opinion, it is obvious that this situation should be taxable and liable for GST due to the sheer volume of buying, building, and selling in a short time frame (approximately one every year).

Facts

B Trust bought and sold 11 properties over a 12 year period.  Ten of the properties were purchased as sections and then the Trust built a house on 9 of the 10 sections.

Mr and Mrs B lived in each of the houses for between 2 and 10 months before selling, except for the 10th property, which they occupied for two and a half years.

Click here to read more.  Download the Tax Information Bulletin Volume 25, No 11 Dec 2013, and refer to page 30.

Their Tax Position

As they lived in the houses as their personal home, they tried to use the personal home exemption.

B Trust also tried to argue that the activities of buying, building, and selling were a series of “one–off” transactions and not a continuous activity or business.

Court Findings

The Taxation Review Authority (TRA) held that the “residential exemption” in section CD 1(3) of the Income Tax Act would only apply if a dwelling was used “primarily and principally” as a residence, and only if the taxpayer is not engaged in a regular pattern of acquiring and disposing of properties.

In this case it was found that CD 1(3) did not apply due to the large number of transactions, and the pattern of buying, building, and selling.  Therefore the profits were taxable.

The TRA found that the Trust was engaged in the business of erecting houses and this was a continuous taxable activity.  Therefore GST was liable on the sale of the properties (expenses would also be claimable for GST).

What you can do to protect your position?

  • Sometimes you need to take a step back and look at your situation from the outside without bias.
  • Company or Trust minutes to evidence why the property was purchased and that it is a long term residential investment.
  • Talk to mortgage brokers, lawyers and accountants and ensure they take notes on your intention.
  • Always try to hold your long term holds forever or for at least five or more years.  Then if you are forced to sell one, it doesn’t look like you have a pattern of buying and selling.
  • Talk to me about your history of selling or trading, if you are worried that you may be establishing a pattern and it is more than just your personal homes.  Call Ross on 07 839 2801 or click here to email us.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

What accounting package should you be using? Banklink vs Xero

3rd February 2014

Accounting is continuously changing and it’s a great time to review your accounting package before 31/03/14.

Banklink

For a lot of clients we still use Banklink as it is extremely simple and easy.

  • OK for cash based business (motels for example) and rental properties
  • Can complete payments basis GST returns
  • Doesn’t provide invoicing, debtors, creditors, so doesn’t work perfectly for non cash businesses
  • $10 + GST per month cost for us to send monthly information to you
  • Simple cash reporting, graphs and can compare well to budgets
  • Coombe Smith can provide Banklink training, and we have training notes to help
  • For a lot of rental clients, we use Banklink in-house to reduce our processing time
  • Most of our staff are really familiar with Banklink.

Disadvantage: Banklink hasn’t changed in the last 10 years and it is not a cloud based product.  We need to manually email you the months file, then you have to email it back when finished.

 

XERO

 

Xero is a cloud based accounting system that started around seven years ago, so it is no longer the ‘new kid on the block’.

For non cash businesses, it is a full accounting system that can do your invoicing, debtor management, creditor management and full accrual profit and loss.  As a business owner it is essential that you know and understand your monthly profit.

  • Most reasonable sized businesses will have to go on to the Standard plan, which is $50 + GST per month.
  • Under the More options on www.xero.co.nz, there are weekly free training webinars and also email support.
  • Xero has a number of add-ons that can provide further services or information for your business such as job management program and payroll.
  • If you cease your business, Xero keeps your information for 7 years, and they can restore this if necessary.  Note:  there is a cost involved.
  • Slightly easier to set up new bank accounts and can put on more credit card options than Banklink.
  • By using either Xero GST cashbook or Xero Cashbook, you have access to the file storage facility in Xero and to the Add-ons.
  • We have an expert available for Xero training.  Joanne runs her own business, Onsite XT  – www.oxt.co.nz
  • Joanne works with Coombe Smith and can set up Xero for your business, or provide training if required.
  • Joanne provides expert training for $80 per hour, which is much more cost effective than Coombe Smith providing the training.

Other Options with Xero

As a Xero partner, we can offer you some extra packages not readily available to the public:

  • GST cashbook for $19 per month + GST
  • Quite similar to using Banklink for a cash business, but cloud based with more up to date transactions.
  • NO invoicing, debtors or creditors.
  • But can still process cash transactions and complete GST returns.
  • Easy to upgrade to Standard package at a later date.
  • Cashbook for $10 per month + GST
  • Ideal for rental property clients.  Quite similar to Banklink for rental properties but cloud based with more up to date transactions.
  • NO invoicing, debtors or creditors.
  • Can process cash transactions and give reporting on each rental.
  • Can link to Pocket Rocket Add-on to gain access to property management software.  Pocket Rocket is free for one property.

Recommendations

  1. If you have a non cash business where you invoice customers, then you need more than Banklink.  You need a full accounting system such as Xero.  There are a number of other options such as Saasu, MYOB live, Quickbooks, etc.
  2. If you are a cash based business (make a sale and receive the proceeds straight away), then either Banklink or Xero GST cashbook would be fine.  The decision comes down to whether you prefer the slightly cheaper Banklink, or the convenience of online through Xero.
  3. If you own rental properties, for one or two properties, we can still use cashbooks or just narrated bank statements.  As you get more rentals it becomes easier to use an accounting package.  Either Banklink or Xero Cashbook would be fine, and it depends if you prefer the online program.  I find Banklink to be a little simpler.

Timing and changeover

If you were thinking of changing accounting package, now is the perfect time so that it is all set up and running before 31/03/14.

If you would like to discuss your options for an accounting package, please give me a call on (07) 839 2801 or click here to email us.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

 

Increasing rent and return – minor dwellings

18th February 2014

Average property investments receive around a 5% Gross Yield.  This is not a great return as the interest costs alone are normally above 5%.  You are probably having to put in money for rates, insurance and other costs, so this means you are losing money.

If you have a large section, an option to improve cashflow might be to build a minor dwelling.

What is a minor dwelling?

Different councils have different rules on the size a minor dwelling can be but this is generally around 60m² excluding any garage.

The Minor dwelling is on the same land as the main house, so you have two houses on one section.  The properties are not subdivided or unit titled, so they must be sold together.

Minor dwellings are often 2 bedrooms, but some investors do manage to squeeze in 3 bedrooms.

The Numbers

A minor dwelling typically costs around $145,000 (GJ Gardner have options for around $145,000 including council fees, carpets, tiles and appliances).

These will often receive $330 per week or more, depending on your location.

The Gross yield based on 50 weeks is, $330 *50 / $145,000 = 11.4% Gross Yield.

This return is obviously a lot better than a standard rental returning 5%!

If the original house cost $300,000 and was rented for $300 per week, that would be an initial Gross Yield of 5%.

Adding on the minor dwelling, the total cost is $445,000 and returning $630 per week.  The Gross Yield overall would be 7.1%, which would be close to break even when interest rates are low.

Cashflow

Based on simple numbers the original house is losing $5,000 after tax benefits per year.

By adding the minor dwelling, the cash position after tax has changed to a loss of $220 per year.  So after tax benefits, the addition of the minor dwelling would save $5,000 cash per year, or save you $100 per week.

Capital gain downside

A possible downside with minor dwellings is how well they will gain in value over the long term.  This topic is often debated by property professionals and there are differing views on this.

By having two houses on one section, you are limiting your potential buyers to investors or large families.  Also the sale price will be higher, further limiting the number of buyers.  Having less buyers could impact on the price achieved if you wanted to sell.

If you are building the minor dwelling yourself, you should be able to do this for a reasonable overall cost and therefore leave room for future growth.  But if you buy this as an existing property, be very careful that the property is not overvalued.

Due to the amount of work required to see if these plans can work on individual sites, GJ Gardner usually charge a small fee ($800) to conduct a site appraisal and to measure and produce a custom design to work for the sites.  As a special offer exclusive to Coombe Smith clients, they are happy to offer a site appraisal and produce a custom designed plan for your consideration at no cost.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Tips for a New Financial Year

13th April 2014

As we have just rolled past the 31st of March for another year, it’s a great chance to review these items for your rentals and your business.

1. Is your shareholding right?

Many property investors use a Look Through Company (LTC) to enable the profit or loss to flow through to the shareholders.

Has your situation changed?

  • Are your rentals starting to make a profit rather than a loss?
  • Have you just won Lotto, inherited some money, received a redundancy payout, or otherwise have a large amount of extra cash that you are going to use to reduce your rental’s mortgage?  If so, this is likely to reduce the losses, and in some cases result in a profit instead.
  • Have you added extra dwellings or income streams that will now give an overall profit?
  • Has your or your partner’s income changed?  For example, if the husband was the higher income earner but has now lost his job or gone back to study, then having the losses of the rental still going to him might not be appropriate anymore.
  • Have your interest costs increased and changed your profit to a loss?

All these situations are examples of where it may be appropriate to change the shareholding in your LTC.  If there is a large loss, we want the shareholding, and therefore loss, going to the highest income earner.  If there is a profit, then we want the shareholding going to the lowest income earner (and therefore lowest tax rate), or we might look at a Trust for asset protection and long term flexibility with allocating profit to beneficiaries.

We recommend reviewing your situation and if you think your overall result has changed (profit to loss, or loss to profit) we recommend giving Ross a call on (07) 839 2801, or email us here.

For business owners, often an LTC is used with a Trust being the shareholder, so that the business profit flows through to the Trust, and then the Trust is able to distribute the profits to the beneficiaries.  If you have a business operating through an LTC, it is important to consider if this structure is still working correctly for you.  If you were expecting large losses or you still have individuals owning the shares, then it would be a good time to review your structure.

2. Who is director or has the right to become a director?

For many Companies there is only one director (maybe the husband who operates the building business for example).  What happens if this person dies, or becomes incapacitated, or if there is a relationship breakdown?

If you are not a director and own 50% or less of the shares in the Company, then under standard rules you have no control and cannot appoint yourself as a director.

Obviously you could go through the courts to have yourself appointed as a director but this may be time consuming or expensive.

Another option is to have a simple shareholders’ agreement, whereby the minority shareholder (maybe the wife in the building company that owns 1%) has the right to appoint themselves as a director.  This means in a worst case scenario such as death, the minority shareholder can become a director and then operate the Company.  In a relationship break up, this means at least both parties would be directors and have some level of control and say.

If you are currently a director but have a minority shareholding, then you need to be careful that the other shareholder could remove you as a director.  So having a simple shareholders’ agreement giving you the right to be a director could still be important!

3. WIP and Income in advance for businesses and especially builders

As at 31/03/14 we need to know the amount of Work In Progress (WIP) and Income in Advance for businesses.  This is especially important for Tradespeople and Builders as often they will have done work that is not billed, or received deposits for work they haven’t started as at 31/03/14.

If you think you have WIP or Income in Advance but are not sure how to calculate this, please contact me on (07) 839 2801 or here and I can help you with this.

4. Chattels Depreciation

If you have purchased a new investment property since the last financial year, it is a great time to review if you should get a chattels valuation done.  Have a look at www.valuit.co.nz.

A chattels valuation gives the value of the chattels so that we can then depreciate them.  We have done some articles on this in the past (www.cswaikato.co.nz/blog) so I will keep this quite short.  The chattels depreciation is then an expense for tax purposes so will either increase your refund or reduce your tax to pay.

A chattels valuation costs around $400 and for a new property is extremely worthwhile.  For older properties, it will be less worthwhile and the key items to consider are:

  • Carpets
  • Curtains
  • Dishwasher
  • Stove
  • Heat pumps or heating.

If the value of these is $5,000 or more, then it would make sense to get one done.  If you are not sure, it is best to ring Terry le Grove at Valuit and he can discuss this with you further.  There are lots of smaller items that also depreciate, or large items like driveways that depreciate over a long time.  All these little bits do add up, and a few months ago we put some examples in a newsletter of clients saving over $10,000 from chattels depreciation.

5. Personal debt to deductible debt

Do you have a large personal debt but either:

  • Some equity in your rentals?
  • Or a large shareholders’ current account?

If so, it might be possible to restructure some of the personal debt to make it tax deductible.  If you let me know that you have read this article, I’m happy to speak to you for 10 minutes for Free to see if it is worth exploring this further.

6. Do you just own 1% of a Company and your partner the other 99%?

Often for tax purposes we have the lower income earning partner owning 1% of the LTC, so that the majority of the losses go against the higher income earner’s tax.  But what happens if you have relationship issues or your partner dies?

We recommend for relationship property that you check this with your lawyer.  Another option is to draw up a share option, so that you have the right to buy 49% of the shares for a set price at a future date if you want to.

If your partner dies, your partner’s Will should say who the shares go to!  But do you have up to date Wills?  This would be a good time to discuss this with your lawyer and just to check that your Wills are up to date and that the shares would transfer to the right place upon death.

Year End Questionaires

You should have already received your annual financial statement checklists so that you can start to put together your financial information for us to complete your 2014 financial statements and tax returns.  If you have a standard 31st March balance date and you haven’t received your questionnaires, please let us know here.

Cambridge Office

Did you know we have an office in Cambridge which is open Tuesdays to Thursdays from 8am to 4pm?  If it is easier for you, you can drop your year-end records into Jenny at our Cambridge office.  Also Ross is available for meetings in Cambridge on Tuesdays.

Contact details are:

Beban Associates
Unit 5a, 53 Alpha Street
Cambridge
Ph: (07) 827 7244

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Wondering how your rental is going, thinking of selling?

1st May 2014

Thinking about selling your rental?  Or are you wondering whether it is working out for you?

Click here to watch a simple video about the main points to consider.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

$200,000 tax shock!

15th May 2014

shock

A security guard worked in the Iraq and didn’t pay tax in NZ as he was a non-resident.   IRD recent TRA case 10/2013 went against the tax payer and he was deemed to be a tax resident in NZ and therefore liable for NZ tax of around $200,000 on his Middle East income!   The tax payer is appealing this case to the High Court in July, but it does highlight the importance of getting residency correct.

If you, your family, or friends live overseas or work overseas, I suggest you keep reading as IRD’s view on Tax Residency has changed over the last few months.   If you are a client of Coombe Smith and non-resident, we will be looking at your situation further and sending you some more detailed information.

It is likely that your old Tax Residency status applies to 31/3/14.  However, from 1/4/14, there could be a change, and therefore NZ tax could be payable.

Tax Residency

If you are a Tax Resident in NZ, then you are taxable on your worldwide income in NZ.   So if you earned $50,000 in Iraq as wages for six months, then this would firstly be taxable in Iraq.  Then, in NZ you would also return the $50,000 income (in NZD) and be able to claim a tax credit for Iraq tax paid.  Obviously if no tax was paid in Iraq, then you would pay full NZ tax at your marginal tax rate.

To be a non-resident, you must meet the timeframe tests:

  • Have been out of NZ for more than 325 days in total in a 12 month period.
  • Not have been in NZ for more than 183 days in total in a 12 month period since satisfying the 325-day rule; and
  • Not be absent from NZ in the service of the Government of NZ.

Plus not have a ‘permanent place of abode’ in NZ.

What is a ‘permanent place of abode’ has been tested in the TRA case 10/2013 and also clarified by IRD in IS 14/01(Interpretation statement):

  • Need to have a NZ dwelling to have a ‘permanent place of abode’ – Will include properties that you control through a Trust.
  • Most likely an investment property wouldn’t be a person’s permanent place of abode, but it still could be:
  • Rental properties that have always been rented as rentals, shouldn’t be.
  • If you rent your personal house, this could be, especially if you then move back into the property when you come back to NZ.
  • Lasting or enduring place where they usually live.
  • In a locality with which they have a durable connection and that is a current focal point of their living – So if all your family is in Hamilton, and if you returned to NZ to live you would live in Hamilton, having an old personal house in Dunedin would not have a durable connection or current focal point, so wouldn’t be a ‘permanent place of abode’.

In some cases you can have permanent place of abode’ in two countries, and a Double Tax Agreement (DTA) can then determine where tax is due.  In some cases this can provide a favourable outcome.

Main Risk Areas

  • The main risk area is if you work in a country where you are not liable for tax such as Jersey Islands, Iraq or Cayman Islands.  IRD are most interested in these, as you are paying no tax.  (If you work in a country and pay a reasonable level of tax such as Australia or UK, then IRD are not so interested as you are likely to be paying close to the correct amount of tax), and
  • You have a property in NZ that is rented but used to be your family home; and
  • Short term away.  Old IRD guidance was under 3 years.  However, this statement has been overridden by IS 14/01 which doesn’t specify a time period.   So one tax experts opinion was that needed to be 5-6 years

Things that could help you with Tax residency

  • I like to fill out the IRD residency form and provide as much information as possible to IRD, so that IRD can give their opinion on your residency.  This isn’t binding, so IRD could still challenge later, but often it brings issues to a head at the start, rather than creating a huge issue later.
  • Keep as much evidence as possible that you plan to live overseas long term:
  • Employment contracts for long term, and also discussions with employers.
  • Notes to lawyer/accountant.
  • Bank accounts – If you are moving overseas permanently, then you should be able to close most NZ bank accounts and credit cards.
  • Furniture, cars and other assets – If you are moving overseas permanently, then you would most likely sell these.
  • If you do move back to NZ, don’t move back into the old family home, if you kept this as a rental.  IRD could then argue that it was always a “permanent place of abode’ available to you, and therefore you were a NZ tax resident.
  • Don’t try to cheat the system.  If you are a true non-resident, then you should be able to be classified as one.  But if your spouse/family is still based in NZ with a house and other ties, then you are always going to be a NZ tax resident.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Do you have a large amount of loans floating?

10th June 2014

If so, you should consider this before Thursday morning!

The Reserve Bank will be reviewing interest rates again on Thursday and many bankers are expecting the OCR to go up to 3.25%.  This follows the increase in March and April of 0.25%, which moved the OCR from 2.5% (where it had been since January 2011) up to the current 3%.

Before this OCR announcement, it is a great time to review your interest rate strategy and consider your options.  I recommend that you talk to your banker or mortgage broker, but here is some basic information from www.interest.co.nz

Most standard floating rates are 6.24% – most likely if the OCR rises, then these rates will increase.

1 year – most of the banks seem to have one year rates of 5.85%.

2 year – the best rates are 5.85% for 80% LVR’s or better.

3 year – quite a few of the banks have 6.25% available.

5 year – 6.85% seems around the lowest.

So the 1 and 2 year standard rates are below the standard floating rate.  If you are not getting a great discount on the floating rate, then why would you stay floating?

  • All the talk is still about interest rates slowly going up and the OCR continuing to go up.  It is difficult to predict interest rates long term, but it doesn’t appear that the floating rates will drop below 6% again for the next few years at least.
  • If you are thinking of selling or restricting, then talk to your banker or mortgage broker about possible break costs.  If you have fixed for a low interest rate, and interest rates go up, the break fee is likely to be small, but it is worth checking!

My preference is always to spread your loans over different periods to reduce the risks of major increases at any time.  So ideally say 1/3rd short term (Floating or 1 year), 1/3rd medium term (2-3 years) and 1/3rd long term (5 years).  But it depends on what rates are available to you and your personal situation.  The 5 year rate does seem a bit high compared to the 3 year rate at the moment, so I personally would look to more 3 year term for long term stability at the moment.

But no one has a crystal ball, and if interest rates continue to rise, the 6.85% 5 year rate might not look too bad in a year or two.  The old saying goes ‘don’t put all your eggs in one basket’, and reflecting further, if you have high loans, I would still seriously consider at least putting some onto 5 year rates.  You could go less than the 1/3 mentioned above but it is nice to have some long term protection.

If I was borrowing $1 million today and had no other borrowing, I would:

  • Float $50,000 – aim to pay off over the next 2 years until my first fixed loan comes off.  If you were going for a one year fix, for other loans, then you might reduce this to $25,000 or $30,000.
  • Fix $350,000 for 2 years at 5.85%
  • Fix $400,000 for 3 years at 6.25%
  • Fix $200,000 for 5 years at 6.85% – this costs $1,200 more per year than 3 years but gives some longer term protection.  Interest rates in 3 years time could be 9%, and I could be grateful of the 6.85%!

I always prefer to deal through mortgage brokers, and I would try to get a further discount on all of these rates.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11270128

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Rental property owners do pay tax! So why are we always picked on?

4th July 2014

This information is from NZPIF and of great interest to rental property owners and the wider community.  It often annoys me that property investors are picked on, and from the information below, it is very unfair for the Tax Working Group to have highlighted one of the two years out of 33 years where property didn’t pay tax.  Why not focus on some of the 31 years out of 33 years where property investors did pay tax!



 

Rental property owners confirmed as tax payers

Official Information shows that the perception that rental property owners don’t pay tax is wrong.

Inland Revenue has confirmed that in the year ended March 2013, rental property owners paid nearly half a billion dollars in tax on their rental income.

This discredits a widely held perception that rental property owners have a tax advantage and don’t pay tax. The new information has just become available as a result of an Official Information Act request made by the NZ Property Investors’ Federation (NZPIF).

The perception was first promoted by the Tax Working Group in 2009. It claimed that rental property should be taxed more as it took money out of the tax system rather than paying into it. However only Inland Revenue data from one year, 2008, was used to back their claim.

Based on the Tax Working Group’s claims, Government withdrew the ability of rental property owners to claim depreciation, a benefit available to other investments. This has increased the cost of providing rental homes to tenants by $700m a year, or $33.65 per week, per rental property.

The newly acquired Inland Revenue data shows than over the last 33 years, there have only been two years when rental property owners did not pay tax on rental income. This was in 2007 and 2008 when mortgage interest rates were high.

“This Inland Revenue information confirms that rental property owners are tax payers and contributors to the New Zealand economy” says NZPIF Executive Officer, Andrew King. “It is also a warning to rental property owners that rental prices need to rise now if they are to have any chance of even partially offsetting the current round of interest rate rises”.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Good news for landlords

14th July 2014

This is a great article from Adam Thompson from My Mortgage about the proposed lending changes for investors with five or more rentals.  Adam can be contacted on 0800MyMortgage or This email address is being protected from spambots. You need JavaScript enabled to view it.

It didn’t make the headlines but there was some good news for property investors last week.  The Reserve Bank have “delayed” the introduction of a new rule which would force banks to charge property investors with 5 or more rental properties a higher interest rate.

For most the mere suggestion of this may come as a surprise since it went largely unnoticed when it was first reported earlier in the year.

As with many ideas that have been suggested to reduce the risk of a housing bubble the detail of this one had not been entirely thought out.  After all there are a number of questions which must be raised… Who would decide whether a property was a rental or not?  Does your bach which is occasionally rented count?  What about a rental property that family is living in?  And then we have to consider how the trading bank’s would report this to the Reserve Bank and whether one Bank may view this differently to another… which brings me to my next point.

Those of you with three or more rental properties may be aware that banks already treat investors with multiple properties differently to standard private customers or those with just one or two properties.  Some of the common restrictions that I see banks imposing are…LVR restrictions for subsequent properties (sometimes to as low as 50% LVR)

  • Being assigned a Business Banking Manager to more thoroughly cover the bank’s lending position
  • Loan application fees being charged
  • A reduction in interest rate discounts and cash back offers

As a Mortgage Broker I ensure that all clients are getting the best deal for them, not just for the bank they are borrowing from.  Sometimes this will mean that an investor with multiple properties may be best to split their lending between more than one lender.  This is especially relevant if there are different classes of property, such as apartments and town houses along with standard residential dwellings.

I am pleased that the Reserve Bank have decided not to impose these restrictions at this time and I hope that they do not try to restrict landlords in the future.  However if these rules are imposed later in the year or next year then it will be more important than ever to have a specialist in Home Loan’s ensuring that you are getting the best deal to suit your situation… it could save you thousands.

See an article covering some of the detail on stuff.co.nz

As always, if you would like professional advice tailored to your situation, send us an email.

Adam Thompson
www.mymortgage.co.nz

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Getting started on the property ladder

28th July 2014

Are you looking to get ahead on the property ladder?

You might have some equity in your personal home, or already have an existing rental property, and you want to buy further rentals over the next 10 years to help to create financial freedom or a better retirement.

We can’t give you the magic answer to make you millions from property as there isn’t a magic/secret solution.  But we can give you simple information to help your investing and help you start looking  at the right kind of properties to assist you to get ahead.  Unfortunately many investors buy extremely negative properties that drag the investors down.  So having a good understanding of the numbers and how they work is extremely important.

This seminar is designed to help beginners and less experienced property investors. It will demonstrate the importance of having a plan and how it really does work!

If you are already an experienced investor, do you have friends or family who would benefit from starting to educate themselves about property investment?  This seminar has no sales pitch, and no hype, so just a great opportunity for your friends or family to learn about property and how it could work for them.

THURSDAY, 31 JULY 2014, 5.45 – 7.30 pm
LODGE AUCTION ROOMS, 931 VICTORIA STREET, HAMILTON
To register, click here

 

 

 

Lodge Rentals (David Kneebone), Priority Home Loans (Justin Mogford), Coombe Smith Property Accountants (Ross Barnett),
and Lodge Real Estate (Jo Harris) are working together to help property investors.

“My pet hate is seeing investors buy a property that costs thousands per year when they don’t have the cash flow to sustain this”
- Ross Barnett

 

 

 

 

 

 

This seminar is designed to help new investors understand more about property investment, so that they can buy the right property for themselves.

Hope to see you there.

Kind regards
Ross

Why I don't like Capital Gains Tax

5th September 2014

It is already evident that the property and business markets are holding their breath and waiting for an election result.  Many investors are waiting for some clarity on future taxes and policies before committing.   I’m personally sick of the elections and can’t wait for 20th September to be over.

There are some important tax, property and business issues to consider.  Let’s start with Capital Gains Tax.

The main issue I have with the Labour Party is the Capital Gains Tax (CGT), the confusion around the policies, plus it seems that many of the details haven’t been worked out.  From my point of view, a lot of the detail is going to get quite messy, and then it encourages tax payers to avoid it or to manipulate the system.  Dealing with CGT is going to be a large extra compliance cost for property investors, business owners and maybe even personal house owners.

Some of the questions I have are:

  • How are properties physically going to be valued at the start of the policy?  Is this going to be an extra cost to property investors to get their properties all revalued?  Or are the rates values going to be used, which we all know can be extremely inaccurate!
  • Worse still, how are the opening values of businesses going to be determined?  Full business valuations are very expensive and I know of SME’s paying $10,000 to get a business valuation at the moment for other purposes!  CGT on businesses is going to add a huge burden and cost to small businesses to establish the opening value of the business, so that only future gains are taxed.
  • Family home is exempt?  But what if you have three boarders?  Or are using a part of your home for an office or business?  Would this then make a portion of your family home subject to CGT?  How much of your home would have to be rented or used for business for it not to get a family home exemption?
  • Room to manipulate:
    - Valuations are subjective.  Will it be possible to get high valuations done at the start of the policy, so that when the property or business is sold (short term), a loss is made?  From my experience, this situation will be quite likely to be abused.
    - What happens if you have a rental for 10 years, then move into it for six months as a family home?  Is all the capital gains then exempt?    This is a possible loophole that a lot of property investors will look to use.
    - Or the opposite could be very bad?  What happens if you live in a family home, then it becomes a rental?
  • Farms, lifestyle blocks and toy farms – All of these often include the family home, but how will the capital gain be worked out on the family home, so that it can be excluded?  Will a 5000sqm property be excluded, but a 10 acre toy farm have to pay full capital gain?  From Labour policy notes, the main farm residence and surrounding land used for domestic purposes will be exempt – again this just gives room for valuers to manipulate.
  • Transferring assets to a Trust – From Labour policy notes, “Gifting an asset will be considered a CGT event”.  So very careful consideration would be needed before transferring a property to a Trust once CGT is implemented.  If you are considering a Trust and transferring business/ property to a Trust, then most likely it would make sense to do this before any CGT.
  • LTC and companies – It is likely that a sale of shares would also be a CGT event. So careful consideration would be needed about the long term ownership of companies and LTC’s before CGT is implemented.  Transfer of shares from husband and wife may be excluded, but transfer to Trusts is a CGT event.

There are a lot of “ifs and buts” at this stage, and I see it being a huge cost of the Government to implement this (IRD doesn’t have enough resources as it is!).  I think CGT, as it is being imposed, creates a disparity between different kinds of investments.  It would encourage New Zealanders to invest further in a personal home as this is CGT free, or to invest in Kiwisaver over other kinds of investments.  In my opinion, if CGT is brought in, then it should be over all assets.

Losses

Unfortunately, these would be carried forward and could only offset against future capital gains and not against other income.

Property and Share Traders

Profit from share or property trading will still be a business and taxed at Company, Trust or individual tax rates.  So the same old avoidance issues will continue, but will still have confusion over what property sales are fully taxable or just CGT taxable at 15%.

Overall, I think the main items forgotten about Capital Gains Tax are:

  • CGT is only due if you sell.  So long term property investors shouldn’t really be affected by this.
  • 15% tax isn’t that bad, and it isn’t a reason to stop investing.  Say a business or property increased by $100,000 and is then sold.  The investor is still $85,000 better off after the CGT.
  • For other countries, the introduction of CGT didn’t stop property prices increasing.


Next week I’ll discuss other issues such as the Top Tax Bracket, Trust tax rates, and Minimum Wage.

How could some of the tax/election proposals affect you?

10th September 2014

Here are some more important tax, property, and business issues to consider before the impending election.

Top Tax Bracket

At the moment the top individual tax rate is 33% and this is aligned with the Trust tax rate.  Labour plans to increase the top individual tax rate to 36% on income over $150,000.

This is likely to affect just 2% of tax payers.  From a tax planning perspective, this is just going to encourage high income earners to look at options to get around this tax or to shelter their incomes in companies.

It is also interesting that this 2% of tax payers already pay 22% of New Zealand’s income tax.

The Greens are looking at a 40% top tax bracket for individuals earning over $140,000!

Trust Tax Rate

The current Trust tax rate is 33%.  I’m hugely disappointed to see that Labour plan to increase this to 36%.

Many business people and property investors have established Trusts to protect their assets and hold their assets/savings for retirement.  Putting in place a higher Trust tax rate is going to penalise these people for planning ahead.  It will also cause:

  • Higher compliance costs for the Trusts through having more income distributions to beneficiaries to avoid the 36%.
  • Higher compliance costs for IRD, as more Trusts will be trying to avoid this 36%.
  • Goes against the whole concept of protecting assets through a Trust, as Trusts will be encouraged to distribute more earnings to beneficiaries.

The Greens would increase the Trust tax rate to 40%!

Minimum Wage

The current minimum wage for adults is $14.25 per hour.  The Labour Party is proposing increasing this to $16.25 per hour.
While this sounds great for low income earners, it could also make some low income jobs uneconomic and reduce the number of jobs available!  The National Party’s comment was that 6,000 people could lose their jobs as a result of this policy.

I hope this gives you something to think about before the 20th.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Are you thinking of selling an investment property?

12th October 2014

Main thing to consider from a tax perspective is depreciation recovery.  If you have previously depreciated buildings (this stopped from 1/4/11), then when you sell a rental there is a chance you will have to recover some of this depreciation and pay tax on the recovery.  If the building has increased substantially in value, then you will recover all the previous building depreciation claimed and there isn’t too much we can do about it.

But if your building value has dropped or is around the same, there might be an opportunity for us.  So the best thing to do is talk to me before selling and we can look at putting a clause in the Sale and Purchase Agreement.

But if you haven’t talked to me beforehand, don’t just assume all the building depreciation will be recovered.  We just had a great example today where, based on the rating values, there would be $24,000 building depreciation to recovery.  But we checked with the client and they had a recent registered valuation completed, so these values for land and building are more correct.  Using the correct recent valuation values, resulted in no building depreciation recovery and saved the client around $7,500 in tax!

Second major consideration from a tax perspective is, does the sale attract tax?

For most buy and hold investors, there will be no capital gain tax.  But if you are a builder, property trader or developer, or associated to any of these, then there could be capital gains tax and it is best to discuss with me.  If you have subdivided and sold a property, the starting position is that the capital gain is taxable, but there are many exemptions that can mean tax is not payable.

Also, if you have purchased and sold properties within a short term, especially if there is a pattern of buy, do up and sell within a short period, then there is a risk that IRD could consider this “trading properties” and subject to Income Tax and GST.  If you are in this situation, please discuss with me, as I can often set your mind at rest or plan around the tax consequences.

Recent seminar and information available for clients

We held a seminar last month on Fine Tuning your Rental Portfolio which especially focused on identifying under-performing properties.  We can provide Coombe Smith clients with slides from the event and also a worksheet that can be used to rank your properties and help to identify the under-performing ones.

Free Seminar from Waikato Property Investors Association – 14October

I’ll be speaking at “Getting a Leg Up on the Property Ladder” on Tuesday night.  For more information click here.

New to property investment or considering investing for your future?  This practical (1.5x hour) workshop will cover proven investment strategies and success tactics (from experienced investors and professionals).

Topics to be covered:

- Buy & Hold
- Minor Dwellings
- Renovating
- New Builds
- Trading
- Rental Options
- Provincial Investments

Kind regards
Ross Barnett

New properties vs older ones

28th October 2014

I recently spoke at a Waikato Property Investor Association (http://www.waikatopia.org.nz/ben.php) seminar about new builds.  I was quite surprised with some of the comparisons between a new build and an older property, so I thought I would share these with you.

I looked at a new property purchased in May 2009.  It is an average new house in Rototuna, 4 bedroom, 2 bathroom, internal garage.  It was purchased for an average price at the time and wasn’t an amazing deal.

Hamilton Average House

The Hamilton median sale price in May 2009 was $330,500.  The median as at August 2014 is $346,500.

So over 5 years approximately, the average house in Hamilton has increased $16,000.  This is 1% per year capital gain, in simple terms.

New Property

Our Rototuna example cost $431,000 in May 2009.

A real estate agent has estimated the price between $480,000 and $515,000.  So say $500,000.

So over 5 years approximately, this Rototuna property has increased approximately $70,000.  This is 3% per year capital gain!
So the new property has out-performed the average Hamilton property by a considerable margin in the last five years.  To get information about the Hamilton median house price, I go to: http://www.lodge.co.nz/Residential/Residential-Property-Overview

Repairs & Maintenance

  • 2010 $0
  • 2011 $0
  • 2012 $0
  • 2013 $1,341
  • 2014 $914

Over five years, the Rototuna new property has only cost $2,255 in repairs.  This works out to be an average of $451 per year or 0.09% of the property value.  This property has a property manager, so all costs for repairs will be within this total.

I’ve compared this to a $250,000 older property, that is managed by a really good Hamilton landlord.  He would have fixed and done a lot of the little things himself, so the real cost would be higher than shown below:

  • 2010 $3,067
  • 2011 $1,309
  • 2012 $1,000
  • 2013 $1,396
  • 2014 $3,370

Over five years, this older property cost $10,142 or $2,028 average per year.  This is 0.81% of the property value.

A general rule of thumb is that repairs over the long term are around 1% of the property value per year.  So the new property is obviously costing a lot less over the first 5 years.  A well managed property can also run a little under this rule of thumb.

Depreciation

There is obviously no more building depreciation.  Here is a comparison of the depreciation on the new Rototuna example versus the $250,000 older house used in the repairs example.

So over the five years, the new property was allowed $29,914 chattels depreciation, which at a 33% tax rate would save approximately $10,000 in tax.

The older property only had $1,625!

 

NEW BUILD

OLD

2010

11,460

167

2011

  8,298

727

2012

  5,596

380

2013

  2,760

201

2014

  1,800

150

 

 

 
TOTAL

29,914

1,625

 

 

 

 

 

 

 

 

 

 

Overall, capital gain, repairs and depreciation are three reasons to look at newer properties long term and to try to build them into your investment portfolio.  Another great reason is they often attract better tenants who cause fewer hassles and make landlording more enjoyable.  But the downside is that newer properties often have lower cash flow, and for them to really work you really need to get the debt down quickly!

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

Watch out for inflated returns and numbers, especially in Auckland!

5th November 2014

I recently received an email from a company selling investment properties.  From a glance, it ticked all the boxes:

At this stage it all looked really good.

I then looked a bit further into the detail.  It is renting for $1,100 pw ($57,200 pa) RBR or $600 pw Standard.

So what is RBR and what is the issue?

RBR is Rent By Room.  So rather than renting the whole property to one tenant, the landlord rents each room individually, and then provides some shared lounge, kitchen, bathrooms and laundry facilities.  The landlord also normally provides the power, internet, and some common amenities like a washing machine, fridge, couches , TV, etc.

I have a number of issues with RBR, and these don’t mean you can’t do it, but you need to be careful and fully aware of the issues.

1. The landlord will be paying the power, most likely the internet, and will have wear and tear on the furniture and appliances provided.

So quick figures: Power might be $350 per month average for five occupants, internet might be $100 per month, and wear and tear $150 per month.   Plus higher insurance and possibly a higher property management cost.

So this is an extra $7,200 in costs, which reduces the annual rent to $50,000 or 6.9% Gross Yield.

2. It is harder to rent and most likely you will have a higher vacancy.

So maybe you would allow for 45 weeks instead of 52?  It depends a lot on the location and demand for rooms.   If the property was close to a hospital, then you might find a higher occupancy as nurses/doctors often like this kind of accommodation.

So at 45 weeks, the $50,000 rent from point 1) becomes $43,269 or 6% Gross Yield.

3. Is the rent by room sustainable?

This is my main issue and possible risk for a landlord.  What happens if you can no longer rent by room, or you just can’t be bothered anymore?

This property gave the standard rent at $600 per week.   So based on say 50 weeks, the annual rent would be $30,000 or only a 4.17% Gross Yield. So as a standard rental the figures have changed hugely –  a potentially neutral cash flow property has become quite negative with a full mortgage.

Also, if you wanted to sell this property, would another investor want a Rent By Room, or would you be restricted to selling based on a standard weekly rent?

So overall Rent By Room can be a great way to increase cash flow from rental properties.  However, you need to be prepared to deal with the hassles of managing multiple tenants, and be aware of the costs. I personally would still make my buying decision based on standard rental, as long term the Rent By Room might not be sustainable.

Kind regards
Ross Barnett

How to save thousands by not floating!

9th December 2014

Do you currently have a large floating loan?

The standard floating rate advertised on interest.co.nz is 6.74%.

Whereas the standard 2 year rate is only 5.75%, a saving of 1%!

So, say you have a $200,000 floating loan:  Over the next year you will pay $2,000 more than if you had fixed at 2 years!

SO WHY ARE YOU FLOATING?

Generally I recommend that you have a small floating portion of normally $20,000 to $30,000, with the aim for you to pay this off over the next year or two until your next fixed portion comes up to re-fix.

Don’t put all your eggs in one basket

I always like spreading my risk, so normally suggest that you have some short term loans, some medium term, and some long term.

A great rate I have recently seen is 5.89% for four years.  It is well below the floating rate and also gives you protection for four years.

To get a great rate, either ask a mortgage broker for help or negotiate with your bank!

The banks are giving large cash incentives at the moment:  The client who received the 5.89% for 4 years also received $4,500 cash!

Kind regards,

Ross Barnett

Mistake in December 2014 issue of the NZ Property Investor Magazine

10th December 2014

Have you read page 35 and are a bit confused by Mark Withers’ comments?

His comment:

"One common trap is a GST registered property trader buying from an unregistered vendor incorrectly thinking they can claim GST"

IS WRONG!

Give me a ring or send me an email if you are a property trader and just want to make sure you have it right.

Cheers, Ross

Showhome or spec home opportunities

20th January 2015

I have just recently learned of a couple of potential showhome opportunities or spec home opportunities with established building companies.  These are a little different and not for the normal investor.

SHOWHOME FOR BUILDING COMPANY IN ST KILDA, CAMBRIDGE

This is an exclusive subdivision, with an average section size of 1600m2. http://www.stkildacambridge.co.nz/
The showhome has been architecturally designed.

Investing in a showhome is different to a normal investment for six main reasons:

  • The home is never lived in and is maintained in an “as new” condition.
  • Suppliers normally give discounts, which are passed on to the investor.
  • Some suppliers upgrade their products for no extra cost.  So the investor gets a higher spec’d house for the normal price.
  • Delayed land settlement is often available.
  • The builder leases the house back for a period of time.
  • Often the builder gets approached by potential buyers, so that investor can often sell easy without real estate commission.

This property will be top range, and the land and building, including landscaping will be over $900,000.

The rent will be $50,000 to $60,000 per year, with a lease in place for 1 year.   In this case, this is likely to be above market value, so an investor would need to consider their long term plan.

So as a Gross Yield this will be 6%, which won’t give great cash flow for a full mortgaged investor, but may suit more cashed up investors.

SPEC HOUSES, WORKING WITH A BUILDING COMPANY

The building company is based in Waikato and is a well known brand, with franchises nationwide.

The exact property and build is not set.  The building company would find a suitable section and building plan.

The investor would fund the land and building, and the investor and building company would split the profit (most likely 50/50).  The property would be a spec, so built and then sold at a profit.

The total cost is likely to be around $650k to $700k, but builders term on the section can mean the section is only paid for once the property is sold.  Or at least delay the cash cost.

SHOWHOME

With the building company doing the Spec houses, there could also be an opportunity to be an investor in their future showhomes and having the building company being a tenant.

If you feel you could be interested in any of these opportunities, give me a call on (07) 839 2801 or click here to email us, and we can discuss a little further before I pass on any details.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?

2014 accounts reminder

30th January 2015

Time is rapidly running out for those of you who have not yet sent in your information and/or signed quotes to get your 2014 Annual Accounts and tax returns completed.

We have recently sent reminders out again for oustanding work to come in.  If you missed this or realise you haven’t sent your information in to us yet, we urge you to do so by 10 February 2015.

The IRD will shortly be sending out L Letters to all those who have not yet filed a 2014 tax return, reminding them of the requirement to provide information in order for the tax return to be completed.

If you have any questions, please contact our Practice Manager, Karen, on (07) 839 2801 or email This email address is being protected from spambots. You need JavaScript enabled to view it.

 
 
 
 

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