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Leveraging Off Equiry

How can a freehold house be best used to make a move into property investment?

By: NZ PROPERTY INVESTOR

1 May 2016

Q

I have a freehold house and I want to know how best to utilise it to invest in property in view of making a supplementary income for retirement.

A

You can look to leverage off the equity in the property to look to build an investment portfolio. Assuming this is a house you live in, and disregarding meeting bank servicing criteria, you could potentially be able to leverage up to 80% of the value of the property. This means that if you had a $500,000 house you could look to raise deposit funds of $400k. This could then be used as a 20% deposit (or if inside the Auckland council region it will be a 30% requirement through the main banks). In theory, this could leverage into $2,000,000 worth of additional property. However, you could potentially purchase more if you look to purchase at a discount, add value throughout the process or if you get capital gains. Also, going back to what I mentioned earlier, these numbers disregard the servicing part of the financing which also needs to be taken into consideration. I would recommend getting a good understanding of this before starting to buy as many investors don't understand this and end up hitting brick walls because of it. You also need to develop buying rules which fit into how long you have until retirement, as well as where and what you are wanting to purchase.

- Kris Pedersen

To LTC Or Not To LTC

Q

I'm buying a rental property and am wondering whether I should set up a Look Through Company (LTC). I would be the only shareholder. What advantage would an LTC offer me as an individual?

A

Probably the first thing to understand is that no extra deductions are available to you simply because you use the LTC. The same deductions would exist if you operate as an individual. An LTC may even be a disadvantage as it contains a loss limitation rule and administration costs are higher. An LTC is a company under company law so the owner does enjoy the benefit of limited liability. But the risks with investment are low which reduces the need for this form of protection. Because the LTC is a separate entity from yourself it might be easier to refinance equity you build in the company by refinancing your shareholder advances. But this will only be a factor if you choose to inject funds to reduce the debt. It might well be that personal ownership is entirely suitable.

- Mark Withers

Safety compliance

Q

I'm considering purchasing a property that was built in the 1960s and had a room added before 1992. This year it had a safe and sanitary report completed on the additional room which, according to what I can find on the internet, is all that is required. Is there a need for a code of acceptance or compliance required for builds/mods done prior to 1992? I’m assuming this is normal for older properties where they don't have COA/COC. Are there legal grounds for a tenant to refuse payment in lieu of these certificates?

A

Under the Residential Tenancies Act, a landlord has an obligation to comply with all legal requirements in respect of building, health and safety as they apply to a rented premises. To determine whether a property meets the relevant compliance requirements details can be checked with the local council. The council will also be able to provide details on current regulations, and what regulations were in place at the time the renovations were carried out. Where a landlord is not meeting their obligations under the Act and the appropriate certificates/requirements have not been obtained, the tenant does have an obligation to continue paying their rent. However, a tenant in this situation may seek a resolution through the Tenancy Tribunal which could include a “work order” (an order requiring the landlord to do any necessary work to remedy the breach); an order for “exemplary damages” (a monetary sum awarded to the tenant should it be deemed that an unlawful act has occurred), and an order for compensation if the tenant is able to demonstrate a loss has been suffered as a result of the breach. For further information regarding landlord and tenant rights and responsibilities, visit our website at www.tenancy.govt.nz. Information regarding a landlord’s responsibilities to provide a safe and healthy home is also available on the website.

- Allan Galloway

Rising Damp

Q

What can I do about an issue that keeps arising because of a “smell” related problem? We have a guest house at the back where the little building is situated on a slight slope and when it rains the water surrounds it. This in turn causes the carpet inside to become moist and damp which then leads to the damp smell. The agent of the property has also accused me of smoking indoors because of this smell.

A

You appear to have a problem with “rising damp” which occurs when water seeps through the foundations and into the floor or walls of a house. This can be a significant health hazard. You should bring it to your landlord’s attention when the carpet is damp, and ask him to fix it. (In this case the agent can be regarded as the landlord.) If he refuses you can issue a 14-day notice to the landlord, requiring that the damp be addressed. If that doesn’t get any action you can apply to the Tenancy Tribunal for an order requiring the landlord to fix the damp problem.

- Bernard Parker

Policy Confusion

Q

We have a rental property that was badly damaged in the Christchurch earthquakes. The tenants moved out to the sleepout and we claimed the full loss of rent for a year. We had a lump sum policy that rolled over between the two earthquakes. There was major confusion with our policy and two years ago EQC and our insurer still believed that we were only entitled to one event claim, and their SOW's reporting show major complicity. Our house is a two-storey 1940 villa that is not economical to repair. However, EQC say they can pay $240,000 one cap payment for September, then only $45,000 for February. Even though our insurer knows they have further liability they say they can’t help unless EQC bring February up to cap. As our policy rolled over and was increased we can, hopefully, claim the full amount again, as the house will be written off. My question is: do we have a claim for continued loss of rent because of this EQC/insurer debacle? Can we claim loss of interest also?

A

I am sorry to hear of your situation, particularly given it is now over five years since the two major earthquake events. Unfortunately, my experience is that we are still seeing new claims every month where EQC concede that claims are "over cap" and private insurers are able to become involved. In situations where EQC maintain that a claim is under cap and you believe otherwise, the best option is to ask your insurer for a "joint review". This is where EQC and your insurer scope and price the work. These will often be considerably different and can provide a way forward for policy holders.

- Myles Noble

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