Claim for everything you’re eligible for

The expenses you can still deduct from your rental income are:

Dan Hellyer, Partner, Deloitte Private, says if you look at an investment property as an income-generating asset not much has changed. “Although being able to claim the funding costs is being phased out, you can still claim ordinary operating expenses. These are the costs that are incurred in generating rental income.”

Sharon Cullwick, executive officer, New Zealand Property Investors’ Federation, says sometimes people don’t bother claiming for small expenses, like vehicle costs when they travel to their rental property. “But it all adds up, so claim for everything you’re able to.”

Expenses you can claim for include:

• repairs and maintenance (but not renovations that substantially improve the value of the property)
• professional services fees, like accountants, lawyers or property managers
• rates and insurance
• mortgage repayment insurance
• vehicle and travel expenses when you travel to inspect your property or do repairs
• depreciation on capital expenses, like whiteware, appliances or heat pumps
• legal fees involved in buying a rental property, as long as the expense is $10,000 or less.

If you’ve taken out a loan for a business purpose, eg to buy a new business asset, and the loan is secured against a residential rental property, you’ll still be able to claim the interest as an expense.

Take a close look at your portfolio

Hellyer says rental properties still make sense as an investment for many people.  “New Zealand needs rental housing stock as much as ever. From a diversified portfolio point of view, it’s still a great step for people to consider and will remain a feature of investment portfolios for middle New Zealand.”

He says now is a good time to take a good look at your portfolio, so you’re really clear about the costs associated with each property you own and to make sure you’re meeting compliance requirements for each of them. Get professional advice to see what would makes the most sense for your circumstances.

Cullwick says it’s important to consider what costs could be in the next few years rather than just concentrate on what they are now. “If you bought your property before 27 March this year, the ability to claim your interest as an expense may be phased out over the next few years. So your costs may rise over that time. Interest rates are also at historic lows and could rise in the next few years.”

Things to consider include:

• a property’s ability to generate an income
• how much your costs will rise as interest deductibility is phased out
• what your current interest rates are and how long you’ve fixed them for
• if maintenance and repairs are up to date
• if your properties meet healthy homes requirements

Buy for yield rather than capital gains

In the past few years, some investors have been chasing capital gains, and have been willing to run their rentals at a loss in the expectation that house prices will rise, says Cullwick.

She says this can be a risky strategy as property prices won’t keep rising forever and suggests investors should focus on getting a good yield on their property. You can assess yield by calculating how much income the property generates (after paying the mortgage and other expenses) and dividing this number by the value of the property. This figure – usually around 5% – will help you understand the value of the investment, compared with other rental properties or investment opportunities.

“Make sure your property can pay for itself,” says Cullwick. “Don’t have a property that you need to dip into your own pocket for and pay $50 or $100 a week for the next 25 years.”

Consider new builds

If you’re looking to add to your property portfolio, but you’re not sure how long you intend to hold a property for, then consider new builds. Not only will maintenance and repair costs be lower, but it’s been proposed that the bright-line test will remain at five years for new builds.

Again, Cullwick says it’s important to consider yield when buying a new build. “The numbers have to make sense and the property has to pay for itself.”

Consultation is ongoing about the exact definition of what a new build is. “You might buy an old house, demolish it and build a new one in its place,” says Hellyer. “While you and your bank would probably consider that a new build, Inland Revenue is still consulting to determine how the new legislation will deal with such a situation.”