While we are living & working overseas (currently in Canada) we are renting out our home back in New Zealand so as to at least cover the interest on our mortgage.

With tax return time approaching in NZ - the New Zealand tax year runs from 1st April to 31st March of the following year, and returns must be filed by 7th July - one of the additional calculations this year will be to account for the extra rental income. I already do the returns for our investment property myself so this was supposed to be easy. But the other day I read an article in the NZ Herald - “Traps in renting out your house“. There was a paragraph that caught my eye:

“First, you’ll have to pay tax on any profit on renting out your house, after deducting expenses such as rates, insurance, routine maintenance and depreciation of chattels.
And you won’t be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.”

Whooaa! This would mean that any mortgage interest we’d paid while renting out our home would not be deductible leaving us to pay tax on the full rental income received! That would have been 000’s of dollars in our case - Screwed! We expected the rental income to cover our interest expenses while away.

This didn’t sound right so I asked about it on Propertytalk.com. Surely enough the readers pointed out that the article was incorrect. In short:

“The test for deductibility is, is the expense incurred, while deriving taxable income.

The rental income is taxable, the expense of the mortgage is incurred while deriving that taxable income, therefore the mortgage expenses are deductible.“

Naturally you cannot claim the interest if you’re still living in the house but for all you going overseas and thinking of renting out your house - breathe a sigh of relief, and never trust a journalist.

What’s the deal with people getting into property they cannot afford? Surely if you are making such a big financial commitment you calculate and double-check and triple-check the numbers to make sure you can afford it but are also able to take care of your family in your first instance - even with fluctuations of the interest rates.

This leads me to my pet peeve - first home owners - especially Kiwis - ignoring the apartment market for the sake of the “quarter acre dream”. What’s wrong with the first home being a flat or a unit? Considering how cheap they are in Auckland at the moment buying an apartment or a unit is an affordable first step to full home ownership. Here in Vancouver the majority of first and even second-home buyers do start in the apartment market as a stepping stone.

There is a nice thread on this topic at PropertyTalk.com. I had to add my 2c worth

Our Avondale Blockhouse Bay Road property was on a 12-month fixed term rental agreement ending December 2007. Into the 13th month of the tenancy, Latu - our first long-term tenant - gave notice to move out. They have BOUGHT A HOUSE and him and his family are moving into their own home! We congratulate him sincerely as this is a huge event in anyone’s life - and not an easy step with the high house prices in Auckland.

This left us looking for a tenant. Quite difficult really when you’re on the other side of the world. Fortunately several things were on our side:

1. We have *AWESOME* property managers - Greg and Helen who have been looking after Blockhouse Bay Rd for us. Thanks guys!

2. It’s summer in New Zealand - the BEST time to be putting a property up for rent (or be selling a house). Especially at the beginning of the year. People have time, days are long and everybody is generally in a good mood because of the sun!

3. The unit is actually a very nice unit. Even though it’s quite small it’s newly renovated and is tidy and very cosy.

4. The unit is great value. Everybody that looks at it always tells us that it’s a fantastic unit in comparison to similar ones in the area. This is always great to hear as we have put quite a bit of blood and sweat into it!

In line with my thoughts on the state of the rental market in Auckland a few months back we raised the rent by just over 6%. I also did some research on Trademe to make sure that the new rent was similar but also competitive for similar properties in the area.

So, as usual, up went the ad on Trademe:

The response was unbelievable:

In a single day there were over 1000!! hits and Greg had over 30 people come through to have a look during the open-home. It seems like there is some serious shortage of good-value rental properties in the Auckland area and we were wondering whether we have put the rent to low.. I wonder how one could deal with this next time. Considering we have listed the asking rent on the ad I don’t see how we can raise it once people start responding to it..

The property was rented out the following day (TTR = 1 day) for another 12-month term breaking our previous TTR (Time To Rent) record of 4 days. This one’s going to be hard to beat!

Being an investment property owner I like to compare the current worth of properties similar to ours in the same area. This is easy to do with Trademe Property. They have over 50,000 properties listed so whether buying, selling or renting out the site can be a good indicator of current market values, rents etc. as there are bound to be comparable properties in almost any area in New Zealand. (And their search functionality is great - especially the “search surrounding suburbs option”). I haven’t found anything like this yet here in Vancouver.

Looking through Trademe today I stumbled on the following “For Sale” ad. In case it sells and gets pulled off the site here is the most important detail:

This unit is in the SAME block of units on Blockhouse Bay Rd (Avondale, Auckland) as our one so it’s perfect for comparison.

It’s about the same size and it’s also a downstairs unit like ours - this one has a bit more deck space and is probably a bit more sunny as ours is a corner unit. On the other hand it is in original condition inside (1960’s cupboards, old kitchen & bathroom, old wiring, bare concrete block walls etc.) whereas our unit is completely renovated and modernised.

Given all of the above it is nice to see the asking price being upwards of $175,000. Although this doesn’t mean that it will sell for that much it is encouraging to see the price keeps moving in a positive direction considering what’s going on in the market at the moment. At the end of last year these units were being listed for $159K - $165K and so this is over a $10K jump - almost a 10% increase over the year - in line with long-term averages. And this is during a time where we are constantly reminded that property investment is on the downturn and growth is flattening off - well, certainly not in Avondale.

Based on the above asking price the capital value of our property investment has risen well over 20% since we acquired it 2 years ago.

Avondale as an area has always shown positive growth with the proximity to the city and with much expansion and upgrades happening around Avondale central the area seems to still be going strong. I wish we could’ve bought more of those units back then

The last few weeks The NZ Herald has been full of stories how the recent interest rate rises are affecting over-extended homeowners and investors and some are definitely bailing out of the market. We have experienced this first-hand last week when we put up our house for rental.

We put and ad up on Trademe (as you do) for a 2-bedroom house in Mt Albert. Within half a day we had several phone calls and managed to organise a couple of open homes for the people to come through and have a look. This surprised us quite a bit as we have rented another place the winter before and the phone calls for it where few and spread over several days. But this time, we literally had a rush of people wanting to move in asap. We weren’t prepared for this and although we did  manage to raise the rent a bit from the asking price I’m absolutely certain that we could have rented it for much more than the original rent we asked for. The house was rented in a day!

The interesting part - we heard the same story from several couples that came through: their landlord sold their rental property from under them to a first-home owner / occupier because of the interest rate rise and forced them to look for a new place. I’m not surprised there. As the interest-only loans came up for renewal on rates that were about 1-1.5 percent higher than their previous mortgage the property investment suddenly wasn’t only slightly cashflow-negative but it became completely unsustainable financially so they sell. Because of the high interest rates the only buyers around at the moment are people entering the housing market for the first time - buying for themselves. This leaves less properties for renters - simple supply and demand economics will dictate that rents must go up. From my experience  last week - this is going to be happening very soon.

Our second investment property is coming off its 12-month lease in December. This time we’ll be prepared for the rush - cannot wait to put the rents up!