I am Gerard Boerlage, a tax accountant specializing in real estate. As a property investor myself, I am passionate about the financial possibilities property can provide. The correct way of Property investing with clever accounting and asset protection strategies can give you a lot of benefits. Please enjoy the text below to give you an insight of the possibilities. If you are an existing or beginning property investor I will be happy to discuss with you how I can assist.
Rental Property Investment – January 2018
Are you contemplating for the first time buying a rental or investment property?
- Perhaps you consider to buy a newly build home and would like to explore the possibility of keeping your current home as a rental or investment?
- You could be a seasoned real estate investor with a portfolio properties and thinking about your next investment ?
In any of these situations a tax accountant specializing in real estate can assist.
We at citywide accountants are long term property investors ourselves and experienced property accountants.
We specialise in Real Estate Accounting, Auckland and New Zealand wide. Call us now on 09 299 1000 for a personal consult!
We have personal experience as well as many years of accounting experience. We would be happy to have a discussion with you to identify how we can help you achieve your property investment goals.
We have access to several mortgage brokers for rental properties. After we know your personal circumstances, we can steer you to the right person.
In this next section, read about the principles of property investing, some basic tax information and my own story of property investment.
The Principles of Property Investing
On of the basic expectations is that property values and rents increase over the years, while your debt stays the same (or, ideally, reduces). Over the long term you will build up an asset base that is worth considerably more than you originally paid. That is what property stats tell us: it has happened over the last 100 years!
If you are borrowing a large amount to buy a rental property, chances are that, in the early years, the rental income will not totally cover the outgoings, such as your mortgage payment, house insurance, council rates and maintenance costs. Therefore you will need to fund the shortfall from your personal cash flow. A tax accountant specializing in real estate can assist with structuring this in a way you can use a shortfall as a tax deduction.
So, in effect, you have the tenant helping to pay off, along with yourself, your appreciating asset.
Property investment is in one of the long term strategies for creating wealth in New Zealand and many other parts of the world, including Australia, USA and the UK.
A formula for growth
If the value of your own home goes up and the mortgage on it stays constant (or reduces), your equity, – or ‘net worth’ – increases.
The bank allows you to borrow against that equity to fund the purchase price of a rental property. The levels of lending are around 70% depending on your personal circumstances. We can put in you in touch with an independent mortgage broker who can assess lending from many banks and lending institutions.
When, the value of your own home and the rental property goes up and the mortgages on them stay constant (or reduce), your equity has increased again, and you can use that equity to buy another rental property…. and so on.
Call Gurpreet to discuss your personal situation on 09 299 1000
Tax Changes 2017 – 2018 also applicable on real estate accounting
Our new Government, as of November 2017, have indicated that the present tax laws will be changing. The previous rulings of allowing negative gearing look like they will be stopped.
Previously if an LTC (Look Through Company) or and individual made a loss, the underlying taxpayer could claim a loss and deduct it against their other taxable income. This sometimes resulted in a tax refund.
The exact wording of these law changes will be detailed by the Government at the appropriate time. You will have to watch this space as we do not know the finer detail and will advise in due course.
Establishing the correct ownership and borrowing structure is extremely important, as this ensures that both flexibility and tax benefits can be maximized.
The most common ownership structures today have been a Look through Company (LTC), Family Trust, or individual ownership.
We can liaise with yourself and solicitor to determine the most effective ownership structure for your personal circumstances.
What about Tax?
All expenses “incurred in gaining assessable income” are tax deductible, so it pays to keep good records of all expenses incurred in your rental property business.
If the rent does not fully cover the interest payments plus expenses, current legislation permits you to claim this loss against your income from other sources (i.e. employment) provided your intention is to eventually earn income from your rental property.
At present, if you earn more than $70,000, your top tax rate is currently 33%. Therefore, any deductions you can make will be “saving” you tax at the top tax rate. The tax benefits may be that you only need to contribute a modest from your own pocket towards the ongoing costs of your rental property.
As mentioned above, this is likely to change over the next few years, so it is not good to rely on the tax refunds to fund the property.
In some cases, you may apply for a special tax code which allows property investors to obtain tax deductions throughout the year rather than having to wait for year-end to obtain tax deductions.
Contact us if you need help with your real estate taxes: Call 09 299 1000
Tax deduct-ability for property investors: our accounting specialty.
Tax deductibility mainly falls into two categories, capital costs and revenue costs.
Capital costs are these not directly deductible against rental income, but are capitalised (i.e. added to the capital cost of the property) and then depreciated. Examples of capital costs include:-
- Purchase Costs (e.g. legal fees, registration of title etc)
- Improvement Costs – there is a difference between improvements and repairs. For example, if you bought a house which needed immediate painting and re-roofing before you rented it out, these costs would likely be considered as improvements. On the other hand, if you bought a property in good condition and re-roofed it some years later, due to wear and tear, these costs would most likely be considered as repairs and directly tax deductible.
- Sale costs (e.g. real estate commission on the sale of a rental property).
Revenue costs can be directly deducted against all other income. Examples of revenue costs include:-
- Interest on borrowings
- Borrowing costs (loan application fees, valuation fees, lenders mortgage insurance, search fees etc)
- Property Manager’s commission
- Repairs (check the distinction between repairs and improvements with your accountant if unsure in a specific situation)
- Gardening and Lawn Mowing
- Accounting fees and bank charges
- Body Corporate fees
- Car (If you travel to inspect your property or to under-take rental property activities (e.g. obtain quotes or purchase property-associated items), you may claim mileage. Rates are set by Inland Revenue –refer to ird.govt.nz).
My Own Story of Property Investment and how I became a tax accountant specializing in real estate.
A few months before I bought my first property investment, a successful property investor friend introduced me to a book on property investment by an Australian author Jan Somers and New Zealand author Dolf de Roos. He made me promise to read the book.
I read the book and it set out the basic principles of property investing for the long-term, and inspired me to take action.
I looked at the lot of properties and then arranged a meeting with a couple of real estate agents. One of them had a property to be sold from a deceased estate. The agent gave me an honest appraisal of the situation and said that we were in a multi offer situation and to put in the best offer we could. The Public Trust accepted our “clean” and fair offer.
The property needed to return a good market rental to make the numbers work. 6 weeks later, we were the proud owners of a three bedroom house. We had acquired our first rental house in Papatoetoe, Auckland, having borrowed 100% against another Auckland property we owned. We learned a lot over the years.
Twenty years later, my wife and I have several houses, changed cities and changed careers, and had children.
The point is that property investment is a flexible pursuit. While it is important to start as soon as you can, take your time adding to your property portfolio – there is no race. As the saying goes, the best time to plant a tree was yesterday.
Contact Gerard to start your own property investment story in New Zealand
Principal & Interest, or Interest-Only for Rental Properties?
Only the interest portion of your investment loan is tax deductible, not the principal portion.
Originally, we set up all our investment loans on an interest-only basis to preserve cash-flow.
It is always good to pay off your own mortgage along the way.
Our rents have increased over time, and as the terms came up we have gradually changed the investment loans over to a principal and interest basis.
What sort of Properties to Buy as a sophisticated property investor?
Personally, I subscribe to the view that land appreciates and buildings depreciate. With that in mind, I try to stick to houses or townhouses that have a reasonable land component as I believe they are easier to rent and have long term growth.
However, we have clients who invest in units and apartments who are very happy with the results of their property investments.
Others buy sub divisible sections and take advantage of the Unitary plan. Secondary dwellings may be able to be placed on a site and do help to increase income.
The advantage of property investment is that you can employ a strategy that suits you.
It is worthwhile to read books written by successful NZ, Australian n and USA property investors.
Also there are many property tutors out there that can help you. Education from experienced mentors is valuable and should not be overlooked.
Membership of your local property Investor Association can be useful. They have regular meetings and discuss and assist fellow landlords with property queries and information.
Selecting and managing tenants
These days we both use a property manager and also manage our properties ourselves.
We realise that prospect can be of managing properties can be off-putting for many new property investors!
We had some interesting experiences and some trouble over the years –Nothing too serious. However in recent years our tenants are well-mannered and pay their rent on time.
It is important to monitor the rent going into your bank account. Be aware of the date rent is due, and check your bank account online on the day it is due. If the rent is not there, on time, contact the tenant immediately.
Tenants respect the fact that you are paying attention to the situation, and will be less likely to get into arrears if they know it isn’t going to take you weeks to notice that they are behind in their rent!
If managing tenants is not for you, hire a reputable property manager to manage your rental property for you. It is advisable to ask around among other property investors for a referral. We can give you some good contacts of managers who may be near you.
Some people may complain about the weekly cost of having their properties managed. However, remember to keep the big picture in mind – it is a small amount of money in comparison to the value of the property , which is a deductible expense. It is also important to work on the principle of fair exchange and reward those doing good work for you. Your properties are a valuable asset.
Property managers do important work. It is vital to choose great tenants and look after them. Tenants are also an important part of the business.
We are happy to consult on anything property management, call 09 299 1000 for an appointment