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.

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?  Send me an email  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 

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 

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.

Click here if you would like to request any of these.

Kind regards
Ross Barnett