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11 March 2013

The Property Comeback

Filed under: Property investment - Tags: - @ 4:03 am

The Property Comeback

Property statistics are clearly showing the start of next property cycle, with particular hot spots in Auckland and Christchurch. This is prompting investors who have been sitting on the sidelines to dust off their calculators and take a good look at the opportunities in the market. Low interest rates are one of the driving forces, along with net migration, the Christchurch rebuild, and the lack of property stock due to low levels of construction activity. The danger is that novice investors, caught up in the frenzy of an up-cycle, will make poor investment decisions.

 Success in property investment comes from in-depth research and an understanding of what makes a good investment. The knowledge required takes time to acquire. Most seasoned investors will tell you they are still learning! If you are keen to have a go at property investing, here are some basic guidelines:

  • Read several good books on property investment
  • Attend property investment seminars
  • Join your local branch of the New Zealand Property Investors’ Federation
  • Talk to experienced property investors
  • Do your research to determine the best geographic area to buy in, based on population growth, economic growth, trends in property prices and rents, etc
  • Narrow down your choice to specific suburbs, based on demand for rental properties, proximity to conveniences such as transport, shops, schools etc
  • Decide what kind of property you want to buy – bungalow, apartment, unit, home and income etc
  • Research specific properties based on the rental yield (annual rent divided by purchase price), projected capital gain, projected cash flow (including repairs and maintenance) and opportunities to increase the value by undertaking improvements.

In the current low interest rate environment, property investment with a combination of rental income and capital gain is looking increasingly attractive.

 

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25 April 2011

Is Property Still a Good Investment?

Filed under: Property investment - Tags: , - @ 5:53 am

Property Investment

Tax changes for investment property came into force on 1 April this year, forcing many existing investors to review the ownership structures for their investments and the viability of retaining their properties. In a nutshell, the effect of the changes is that investors will no longer be able to claim depreciation on their buildings, and fewer investors will be able to claim losses against personal income. The backdrop to these changes is a depressed property market with little prospect of significant increases in property prices for some time to come. The question many are now asking is whether investing in property is still a good idea.

One of the most prevalent mistakes made by investors in all types of investment assets is to base investment decisions on tax benefits. As they say, ‘there are only two certainties in life: death and taxes’. To that should be added a third certainty, and that is, ‘tax rules change’. Sound investments are those that stack up in their own right, rather than because they have tax benefits. Many investors made the mistake of purchasing properties in the expectation that future capital gain would offset losses and that the tax benefits would help their cash flow in the short term. This was not a sound long term strategy. The impact of the new legislation is that those investments which were soundly based will continue to be so, and those which relied on the benefits of tax losses are unlikely to stack up.

Investors without good cash flow will no doubt sell off properties over the next two years. The result is likely to be higher rents, fewer investors (but with deeper pockets) and more soundly based investment portfolios. In the long term, the increased stability will be a good thing for both landlords and tenants.

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22 November 2010

Farewell to the LAQC

Filed under: Property investment - Tags: , , - @ 9:48 am

Property Investment

The property investment bubble that burst following the Global Financial Crisis came about partly due to the huge tax refunds many investors were able to claim from their properties. These refunds enabled investors to borrow heavily and buy more properties. In many cases, the interest on the money borrowed to buy the properties was more than the rent received, and the investors relied on property prices increasing to make the investment worthwhile.

Investors were able to claim the cost of depreciation of the building and chattels as an expense and this resulted in a refund of money that had not actually been spent, which helped to cover the losses on the properties.

Investors who wanted to be able to claim large tax losses on their investments but who also wanted the protection of a limited liability company often owned their investments through a Loss Attributing Qualifying Company or LAQC. One of the benefits of an LAQC was that the losses could be passed through to shareholders in the LAQC who could then offset the losses against personal income. Owning properties through an LAQC became a very popular form of investment.

However, all this is set to change. On 1 April, 2011, LAQC’s will cease to exist and depreciation on buildings will no longer be able to be claimed. Shareholders will be given a window of opportunity for six months following that date to change alter their company structure without  adverse tax implications. The LAQC can be converted to a standard company, a sole trader, a limited partnership, or a new kind of entity called a Look Through Company or LTC. Each of these options has advantages and disadvantages for different circumstances of investors and it will be very important to get expert advice so as to make the right decision.

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