Q

Our tenant has approached us asking if we would enter into a rent-to-buy agreement. Are these common and are there any fish hooks?

A

Rent-to-buy (or rent-to-own) agreements have been gaining popularity in recent years. There are some scheme providers who offer them, but private arrangements are less common. As the property owner there are several things you should watch out for. In rent-to-buy arrangements, the tenant usually pays a deposit and then pays rent which includes some proportionate amount which will be applied towards the purchase price. Some rent-to-buy agreements provide that, if the tenant is unable to complete the purchase at the end of the specified period, any money paid in rent and towards the purchase is not refundable. This is a clear benefit to the landlord but will not commonly crystallise if tenants are advised properly and they are confident they will be able to complete the purchase before entering into it.

The parties usually agree to the sale price at the agreement outset. They also agree on how long the arrangement will last, which is usually about five years. The risk with this is that the market’s volatility over five years can be hard to predict. If property values go down, you come out a winner, but if they go up you can lose out on the increase in value. These agreements can include provisions which set regular increases to the purchase price, but they are usually below the expected market increase.

Entering a rent-to-buy agreement gives the tenant an exclusive option to purchase. If the tenant decides to exercise that option, you are obliged to complete the sale. This can be helpful as you do not have to find a buyer, but you are possibly losing out on getting a higher price for the property in a competitive market with multiple interested buyers. Rent-to-buy schemes normally lock in tenants for multiple years before they exercise the option to purchase, so it can be difficult to know
what the market will be like when the scheme ends. Along with locking you in to sell the property to the tenant, it also locks you in to selling the property full stop. If you want to replace the property in your portfolio and the market is in a boom, this can be a costly exercise.

Rent-to-buy agreements can be beneficial if you are intending to sell the property in the next few years and you are having, or expect to have, trouble finding a buyer. These arrangements can be a doorway into the property market for people who have trouble securing traditional financing, so it can provide for a larger pool of buyers. However, these schemes last a long time and things can always go wrong. Finally, these arrangements are usually a form of credit contract, so they are likely to be regulated by the Credit Contracts and Consumer Finance Act 2003. You would be subject to regulatory requirements, including disclosure obligations which set out information you would have to provide, and possible changes because of unforeseen hardship, among others. If you are considering entering a rent-to-buy agreement you should get legal advice. - Shane Campbell

Q

Bearing in mind the different types of ownership (company and trust) for a rental, is it worth keeping it in my own name as my usual tax rate is less than 33 per cent?

A

The question of ownership structure generally needs to be looked at from several angles, including risk and asset protection rather than just applicable tax rate when settling on a decision. Step one is to budget the profit/loss outcome bearing in mind the interest deductibility changes and tax loss ring-fencing. That said, personal ownership is a perfectly acceptable option and has the benefit of simplicity. This may be entirely suitable if you are in a lower tax bracket and don’t have asset protection concerns. Remember also that a trust can make income distributions to beneficiaries that would also allow you to make the most of lower tax thresholds at the personal level. Trusts also offer an advantage for individuals earning over $180,000 that are now paying 39 per cent tax as the maximum trust tax rate is still 33 per cent. - Mark Withers

Q

I am interested in extending my mortgage for renovations to my own home in an attempt to add value for leverage to purchase more investment properties. The LVR on my current home is about 50 per cent on a home worth $1.4 million. How much do you think the bank would be prepared to lend me? Our household income is around $250,000.

A

Note that a lot more information is required to accurately ascertain how much borrowing can be achieved here. As an example, while you mention the household income is $250,000, the net income received could be quite different if that is based on one income or split over two. Also, other costs such as children, living costs
and other debt obligations such as credit cards would need to be taken into consideration. The return you achieve on the investment properties will have an effect on what your loan affordability looks like. You should be able to leverage your personal residence to 80 per cent, which means you have circa $420,000 of equity which can be used for deposits. If we look at bank lending this means you are limited to $1.05 million for existing property or up to $2.1 million on new builds. Roughly when looking at the loan affordability side I would say you may be able to purchase an investment property for circa $1 million. - Kris Pedersen

Q

I am thinking of purchasing a property and using it for short-term rental accommodation. Are you able to explain what the tax requirements are for properties of this kind?

A

The tax consequences of buying a property and renting it out short-term are:
i. Any rent you receive is taxable.
ii. Expenses you incur holding the property and operating the short-term stay activity are deductible, subject to some qualifications. First, the interest limitation rules that apply to residential rental properties also apply to short-term rentals. This means unless the property is classified as a “new build”, interest expenses on money borrowed to buy the property will not be deductible (under current law). Second, some costs may need to be depreciated. For example, if you spend more than $1,000 on any chattels, such as carpet, curtains etc, then you claim depreciation on these items rather than a deduction.
iii. GST can also apply, but if gross income from the short-term stay activity is less than $60,000 per annum (and provided you are not carrying on another activity
that is subject to GST) then you can elect not to be registered. All things being equal, it is preferable to stay out of the GST net. If turnover from the property is
more than $60,000 per annum that will not be possible.
iv. Further issues arise if the property is also used by you privately.

Given the potential for GST to be relevant here, you are best to seek specific tax advice. - Matthew Gilligan

Q

If tenants did not pay a bond when moving in is their rental agreement legally binding? We acquired a property with existing tenants who did not pay a bond. What
are the implications?

A

Part of the process of settling on a rental property, that has an existing tenancy in place, is having your conveying solicitor update the bond record. During this process it should have become apparent the bond hadn’t been paid. Non-payment of a bond, in itself, does not render a tenancy invalid, but it can mean the tenants are in breach of the tenancy agreement. Depending on the tenancy agreement there may be two scenarios to consider. If a bond was payable under the tenancy agreement start by contacting your tenants to find a solution that works for both parties. Be prepared to offer some flexibility around payment; perhaps it
could be collected in instalments. Remember, it is a requirement to forward even partial bond payments to the Tenancy Services within 23 working days. If the tenants decline to pay the bond, you can issue them with a notice to remedy. If the breach remains unremedied you can apply to the Tenancy Tribunal to resolve the dispute. If no bond was required under the tenancy agreement your only avenue for redress is to negotiate with the tenants for a voluntary bond payment. This would be considered a variation to the tenancy agreement. Any variation to a tenancy agreement needs to be recorded in writing and state what the change is (such as introducing a bond). The document should also indicate when the change takes effect. Once signed by all parties, provide a copy to the tenant before change takes effect. If the tenants refuse to pay a bond voluntarily, there is only one option available with limited effect. According to section 18(2) of the RTA, a landlord may collect a bond top-up when the rent is increased. However, this top-up is limited to four weeks’ worth of the net amount of the rent increase.

In order to avoid situations where tenants fail to pay the bond, it is best practice for landlords to include a bond clause in the tenancy agreement. This clause should state the agreement is conditional on the tenant paying the bond amount as stated in the agreement on or before a specified date. And, if the tenant fails to pay the full bond amount, the agreement shall be deemed to have never become unconditional, and neither party shall have a claim against the other. - Ryan Weir