THE REAL COST OF A RENTAL PROPERTY

WHAT’S THE REAL COST OF A RENTAL PROPERTY?

Specifically, what’s the real cost of rental property compared to money in the bank or other investments? What what return will you get? They are both good questions. Let’s do some math:

Let’s say you own a rental investment property that rents for $600 per week. That’s $31,200 per annum rent. Now let’s assume you have $600K debt on this investment property. At an interest rate of 6.0%, your cost for interest per annum would be $36K. Let’s also add in other costs like rates, insurance, property management, and maintenance of $8K. Under the new rules (phased in incrementally over 4 years), you’d no longer be able to fully offset that $36K interest cost against your rent of $31,200.^ This does depend on the date of acquisition; see here for more info. You will still be allowed to offset the other costs of $8K.

Taking the cost/loss of $8K away from the profit of $31,200 is $23,200. If you were on a tax bracket of 33%, you would have $7,656 of tax to pay on that $23,200. Or, $147 per week.

If your property was cash-flow positive (i.e. income is more than expenses), you could offset this against the $147 per week tax bill. Note that most of our clients’ new properties at present are paying them on average about $100 per week. So, in this ‘dummy’ scenario, you’d be looking at a top-up of $47 per week

SOME PERSPECTIVE

Let’s put some perspective on this: Property in New Zealand over the last 50 years has done very close to 10% per annum, year-on-year capital gain. Using the above scenario – and purely working on historic averages – the sample $600K property above would likely increase to $660K over 10 years. But, let’s be conservative, and chop that capital gain in half: Now, it’s $630K.

Would you invest into something that cost you $47 per week, or $2,444 per annum, to receive a capital gain of $30K?

Yes! You definitely would!

Now, the above obviously would change if interest rates dramatically went up,* but, we would wager that for most, it would still make sense: economically, financially and from a retirement planning and investment point of view.

Can you now see why Tony Alexander’s final wrap-up comment in his ‘take’ on the 2021 property taxation changes was:

“What do you do now if you are contemplating saving and investing for your retirement? I strongly advise taking some time to calm down, then engaging an Authorised Financial Advisor (I am not one) to discuss your long-term wealth growing options. It will not at all be certain that your optimal route is to sell your existing rental property, or to refrain from purchasing one.“

If you fail to plan, you plan to fail – Seek advice from the right people – stay the course – and heed the advice given…

Special thanks to Daniel Carney from Goodlife Financial Advice for the scenario and calculations.

*we believe that further rises can’t be ruled out, but that they will likely top out in the 6-7% p.a. range

^interest deductibility on rental properties that were not new builds or community housing was gradually phased out from 2021 onwards, but is being phased back in again over the 2025 and 2026 financial years