I love property but damn this market is weird.
New Zealanders love property in general, we all buy a lot of it and we let heaps of people from overseas come in and buy our property too. PROPERTY FOR EVERYONE! However this has led to a shortage of property in our main city and heavily inflated prices.
There is no cashflow here in Auckland without a massive deposit and most landlords are banking on capital gains giving them returns and are willing to accept a meagre 1-3% rental return! Ouch!
So I’m starting out on a mission impossible… ummm make that mission improbable (please don’t sue me I can’t afford it.)
I’m going to find a property that is no money down, cash flow positive after all expenses paid.
I just heard half the country faint and most landlords laugh but I think it can be done.
First steps – Find the money!
I emailed my awesome mortgage broker (Megin) with a list of my assets, income and investments and asked her to give me a ball park figure of how much money the bank would lend me. Within a couple days I had a figure of $300,000. WOW, thanks bank. Its really important to know what you can borrow and therefore spend so having a great broker like Megin on your side from the start will make things go so much smoother.
Now this isn’t guaranteed so I will need to make all my purchase offers subject to finance from my preferred bank. I can work on getting pre approval for the finance so I have more certainty.
For great rental returns I have to look outside of Auckland. Long distance property management can be tricky so I’ll also be looking to hire a local property manager.
I’ll need to find a regional centre that is experiencing population growth, has a strong rental demand and isn’t dependent on one industry. Gang towns are also out! I’m not afraid of university towns as long as there are other things going on. I probably want to stick to the north island so I can visit the property if necessary but property management is the plan!
Going against the grain – Others set out to lose!
It may seem crazy to the rest of the world that a lot of investment property in New Zealand is negatively geared. Often the rent doesn’t cover all the expenses and the investor can be throwing hundreds to thousands of dollars a month on top of rent collected at the mortgage. In fact I have co-workers who are not even trying to have their property make a profit. Why? Well at the moment you can offset losses against your taxes. But the max you can claim is your tax rate, i.e if you fall in the top tax bracket you can get a refund of 33.33% of your loss. That may be well and good if your loss is on paper only, say from depreciation. However if thats a real cash loss you are still losing a lot of money every year. My co-workers see topping up the mortgage as “compulsory savings” and they are banking on capital gains (which are not taxed in NZ) to eventually make their profit.
The reliance on capital gains and tax refunds frightens me because the government is pretty pissed off with property speculators at the moment and the tax offset could be cut back or even eliminated all together, also tax on realised capital gains has already been introduced for properties owned for less than two years. There could be an across the board capital gains tax introduced at any time really. Its much better in my opinion to be making a profit from day one. I want to pay tax because it means I AM MAKING MONEY, I AM PROFITABLE.
Profits first bitches.