Tag Archives | investment property

Investing in Your Home

MansionInvesting in Your Home

Let’s get it straight; your home is not an investment. While property appreciates in value over time, the best property to own from an investment point of view is a property that produces rental income as well as capital gain. Investment is something that should be done with objectivity and a focus purely on investment return and risk. Buying a home to live in is a process clouded with emotion and consideration of comfort and lifestyle. The best property to buy as in investment is unlikely to be the one you would choose to make your home.

From a strictly investment point of view, the home you live in should be the kind of house that would make a good rental property; that is, at the lower end of the market in a handy location. Instead of investing a large amount of money in one property to provide a lavish lifestyle, buy two cheaper properties; one to live in and one to rent.

Those who choose to live in expensive properties often argue that the money invested in their home is in effect their superannuation plan. The idea is that on retirement the property will be sold, a smaller property purchased and funds released for retirement. Such plans seldom succeed. Retirees generally desire a small, relatively new, low maintenance property. These are often close in value to a large home that has been lived in for some years. Living in a high value home creates an expectation of a certain standard of living which is hard to forego.

Committed renters who argue that it is cheaper to rent a home than buy one will find that paying rent in retirement can cause huge financial stress. Invest in at least one house in your lifetime but don’t make it your only investment.

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Budget Winners and Losers

The latest Government budget had something for everyone but while most households will be a few dollars a week better off, there are some clear winners and losers. In the winners’ corner are businesses, those on high incomes, and savers. The biggest losers are property investors who have built large portfolios financed partly by tax rebates.

Owners of investment property have been able to deduct depreciation from their rental income, thus reducing the amount of tax they pay on rental income and in many cases resulting in large tax rebates. These rebates were used to repay money borrowed for the purchase of the property. From April 2011, investors will no longer be able to claim depreciation on most properties. Some investors with large portfolios will find it difficult to make debt repayments without this tax break and may be forced to offload properties. Investors who tough it out and keep their properties will find they need to increase rents to get a decent return. There will be a shortage of rental properties which will ultimately put even more pressure on rents.

The other group of losers from this budget will therefore be those who are renting. On the plus side, the sell-off of investment properties will keep prices low for first-home buyers and it will become more attractive to buy rather than pay high rent.

While income tax rates have been lowered, GST has been increased and this creates an incentive for people to save so as to get the maximum benefit from tax cuts. Over 60% of eligible people have not yet joined KiwiSaver, and this should be a priority for savings. The minimum contribution for KiwiSaver is 2% of pay and tax cuts will be around 1.5%. The message is clear; save and you win, spend and you lose.

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