It is best to realise that there is a difference between buying a place to live and buying a place to rent out.  

The home purchase is an emotional one - you need the house to fulfill certain criteria that suits your lifestyle and future plans. Investing in property is a business, there should be no emotion but an understanding of how the business operates from what income it generates, to what expenses it incurs, to what are the potential risks. The following is a basic summary about residential investment property.

Some definitions:

1.    Positive cash flow - Means the rental income is covering all the costs of the property.

2.    Negative gearing - Is negative cash flow, the rental income does not cover the costs of the property. But you could be in a positive position once your tax refund is taken into account.

There are two key parts to the numbers;

3.    Your cash position = Cash income less cash expenses
4.    Your tax position = Total income less cash expenses less non cash expenses

The non cash expense is Depreciation, it is a paper expense, this means it is recorded but you do not physically have to pay for it.
Depreciation - this means the asset of the building and chattels can be written off over the life of the asset. This means it is expected that you will at some point in the future need to replace these items. As the life span of each item is different there are different depreciation rates.
The best plan is to purchase an 'Asset schedule' by an experienced valuer at the time of purchase. This will give you the schedule of items and rates of depreciation which you can give to your accountant.

Example:
Purchase Price    $300,000
Loan (assume purchase costs)    $303,000
Interest Rate    8.5%
Rent return*    7%

*The rent return is the rent you receive in terms of the % of the value (7% of $300,000 = $1,750 per month)

Cash Position:
Cash Expenses        Income   
Interest    $2,145    Rent    $1,750
Rates        $120       
Insurance    $50       
Maintenance    $150       
           
Total        $2,465        $1,750
           
Cash Loss    $715 per mth       

Note - In the current market, with interest rates being high in most cases finding a rental property that has positive cash flow is difficult, therefore I have used an example where the figures create a cash loss.

Tax Position:
Non Cash Exp           
Depreciation    $1,000       
           
Total Expenses    $3,465    Total Income    $1,750
           
Tax Loss    $1,715 per mth       
           
Tax rate     33%        39%   
Refund        $566 per mth    $669 per mth   


End Position:          33%             39%
Cash loss         = ($715)        = ($715)
Tax Refund      = $566            = $669
Total               = ($149)        = ($46)     per mth

Initially you may decide that the rental is not a good purchase, but with the tax refund it could end up being very affordable.
At Connect Mortgages, we have many clients who want to invest, but feel that do not have the know-how to follow through, we have a team of experienced brokers to help work out your affordability, PLUS an experienced property mentor who can teach you all you need to know about property investing.

For further information please contact Connect Mortgages on:

0508 more than mortgages
(09) 337 11 11
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www.connectmortgages.co.nz

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