Death and taxes I am told are the only sure things in life… and like you I am pretty darn keen to avoid both!

Exercise, a healthy diet and plenty of sleep are tools to aid longevity, but how do we keep our bank account similarly healthy? Apparently it’s all about good and bad debt. One entitles you to claim back a portion of what you pay in tax, the other, like unpaid credit card interest, just puts you further down the slippery slope.

While our 5+ a day of fruit and veggies is likely to always be the back bone of a healthy diet, the right mix of financial nutrients is a more difficult balance to maintain. This is due to variables such as taxation, income, interest rates and the demand and supply of housing. As it stands today though, Investment property is the ‘abdominiser’ of today’s financial exercise fanatic.

This is fuelled by three main factors
1..The internal migration of Kiwi’s and ‘wannabe Kiwi’s’ returning to New Zealand
2. The influx of international students learning English as a second language
3. Many New Zealanders choosing not to join the ranks of the highly mortgaged and they all have to live somewhere!

Bucking world trends, New Zealand isn’t suffering the general malaise of world markets. Our economy is reasonably buoyant and New Zealand is regarded as a safe haven far from many world tragedies. New Zealanders have also been quick to see the revenue opportunities in teaching English as a second language with many schools relying quite heavily on foreign student fees to supplement other grants.

New Zealand home ownership is at about 66% but has been on a steady decline for the last ten years. Many are choosing a renters lifestyle complete with overseas holidays and all the toys, over high mortgage payments during there 30’s and 40’s.

These three groups particularly are placing increasing demand on the rental accommodation market.

But isn’t it true that property investment showed poor capital gain to 2002?
Yes, over the last forty years, the amount you might expect to ‘make’ when selling a house dropped from 13.94% (1965 – 74) to 8.4% for houses sold from 1985 – 94. More significantly, for houses sold from 1995 to 2002, the value has only rose an average of 1.79%. This is less than the fee a real estate agent would charge to sell it. 2003-4 saw a massive % increase in property prices particularly in areas such as Nelson, Queenstown and Wanaka. Some properties changed hands very quickly with some owners laughing all the way to the bank. Not so good for first home buyers though with average house price in cities like Auckland over $300 000.

The difference in the investment property rationale of today vs. twenty years ago is that you are now buying for yield not just capital gain.
In layman’s terms, the amount you receive in rent, as a proportion of the money owed on the investment, is what matters. For example, if the investment property is worth 200 000 and you receive 20 000 a year ($385 per week) in rent, then you have a yield of 10%. If you are only being offered 6.5% interest from a lending institution, then this is a brilliant return.

In addition to the rent you receive, there are lots of other tax benefits in owning a rental property. You can claim depreciation on the building at a diminishing value of 4%. Chattels (oven, heat pump, alarm, lights, curtains) can be depreciated at 17.25% per annum. Mileage for inspection visits can be claimed at .62 cents per kilometre for the first 3000 km’s and 19 cents thereafter. You start to see the attraction of owning an investment property on the Gold Coast when you can claim two ‘inspection’ trips a year provided you meet with the interested parties like your property manager and accountant, while over there.

Of course property investment is not completely fail safe. There are the risks of not being able to find tenants or having them renege on the rent. We have all heard the horror stories of tenants who trashed the place and had to be evicted after months of non-rent payment.
Protect yourself, take out landlord insurance or appoint a property manager to deal with your tenancy matters. In general, most tenants want a house they can regard as their home and will care for it accordingly. Tidy homes seem to attract tidy tenants.

Now there are lots of clever ways to set up the repayments of your home and investment property, which allow you to save a bundle. You can claim against the accrued interest of your investment property while paying off your own home in less than five years. As you clear debt, you can leverage one investment property off another thus increasing your portfolio of rentals. Apparently you can use your company to buy a property and pay rent to the company allowing the company to claim depreciation and other costs. You can use these losses to reduce your personal tax. This is where you need the advice of a good financial expert who can make your money work for you. Remember you want to change bad debt into good debt.

In the meantime, keep your eye out for high quality, low maintenance properties in ‘good’ areas. Apparently there’s a plethora of renters wanting newish energy efficient homes, and very few available for rent. Happy shopping!