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Year Of The Yield?

Negatively geared properties are going to lose a lot of their appeal when new ring-fencing rules are introduced, writes Aaron Tunstall.

By: Aaron Tunstall

1 February 2019

Negative cashflow property has some major benefits. If you’re on a high income and you want a low-maintenance direct investment, you can buy a nice house, rent it to a reliable tenant, and use the additional payments required as an enforced savings and investment scheme. Over time, property prices traditionally rise, leaving you with potentially massive gains on a highly leveraged investment.

It’s a sound scheme for anyone with the money to spend, and it’s long been made even more attractive by taxation that lets you offset your high income against your rental property losses. In April this year, that benefit disappears. Inland Revenue has come up with some estimates about the current situation for investors:

  • 40% of taxpayers with rental properties are reporting tax losses each year.
  • On average, these investors get a tax benefit of $2,000 each year.
  • The total cost to investors of the law change will be $190 million a year.

In spite of these numbers, IR says it has a “low” degree of confidence in the ruling achieving what the Government is aiming for: increasing rates of home ownership and making it easier for first-home buyers to compete with investors.

How much difference do I think it will make to the New Zealand market? Not an enormous one, because it’s going to have the biggest impact on new investors and those who are aiming to push their borrowing to its limits. Right now lenders are taking an extremely close, line-by-line look at borrowers’ spending habits, and crunching every number carefully. Taking $2,000 of tax breaks out of the equation could be the difference between a ‘Yes’ and a ‘No’ result in a bank’s calculator.

‘As New Zealand becomes more firmly entrenched as a buyer’s market, this is the time to look for positive cashflow’

As New Zealand becomes more firmly entrenched as a buyer’s market, this is the time to look for positive cashflow. You’ll often hear of properties divided up into either “cashflow” or “capital gains”, but there’s no hard and fast line. Most positive cashflow properties will eventually see good capital gains, especially if you buy well. (Just like most “capital gains” properties will ultimately rent for more than it costs to own them.) Apartments are one of the few cashflow positive property types in Auckland and they are very affordable right now – they’ve always been lumped into the “cashflow not capital gains” category, yet between 2010 and 2016, the bulk of the apartments we manage at least doubled in value.

There’s nothing to be sniffed at about a property that pays you to own it. Positive cashflow properties give you more borrowing power, too: they can balance out your portfolio so you can afford to buy a flashier cashflow negative property without it draining your day-to-day expenses. In my experience, most career landlords wouldn’t dream of buying negatively geared properties. Those who do, only buy one when they have sufficient positive cashflow from all their other rentals.

In 2019, I think we can expect to see some fantastic deals. Pick up a bargain this year and you can anticipate strong capital gains over the next decade, even if you buy it for the purposes of generating an income rather than as an enforced savings scheme. You can buy cashflow neutral or positive property with careful research, possibly some renovation, and a little decisiveness. Our sales manager, Mike, has just calculated some figures on an apartment we’re selling. It’s selling for $280,000 and rents out for $650 per week (furnished), giving a gross yield of 12%. Taking off the outgoings (including body corp levies, our property management fee, insurance etc) this property is cashflow positive and can return a weekly income of between $60 to $75 depending what mortgage rate you can get.

Negatively geared property still makes sense for those with high incomes. For the rest of New Zealand, however, this is an ideal time to build up a portfolio that pays you – and in the future, gives you more options in terms of lending, buying and expanding.

Aaron Tunstall is the general manager of award-winning Impression Real Estate, which specialises in property management and sales and manages over 1,750 Auckland apartments.

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