I recall 20 years ago attending a seminar with some friends where the concept of residential investment property was pitched. It made sense. Put down a 10% deposit (at the time around $20,000), rent out the property at market rent and don’t worry if the rent didn’t cover the mortgage as you could save or offset that cost on your tax return.
After 20 years the property would be yours and by then it would have doubled in value; better still take some of the capital appreciation out of the first property after a year or so, and buy another rental property, then another and so on. It made complete sense and I know a lot of people jumped on the bandwagon. Private rental property investment subsequently mushroomed through the 90’s and into the new century.
I did not participate at that time nor since. To me the things that were not talked about were the things that troubled me most – maintenance of the property, continuity of tenancy and surety of payment. Also, I must admit offsetting the costs against your income tax is still a real cash cost. It is really only a benefit from an accounting perspective.
Offsetting expenses is about to be addressed head-on as part of proposed changes to the tax rules before parliament this year. This signalls the desire by the current government to close off the ability for private individuals to offset losses on property investment from their private income for tax purposes. A move that will impact all property investors who are heavily leveraged with some form of finance arrangement. It proposes bringing property investment in line with other forms of investment which have never been offered with the attraction of offsetting interest costs against personal tax.
This proposed change is not the first, nor is it likely to be the last legislative change to impact the residential property investment business. Over the past few years we have seen the mandatory requirement of smoke alarms and from mid this year insulation requirements in rental properties. Add to this the likely changes to tenancy rules including the ending of no-cause terminations, and the likely increase notice periods to terminate tenancies, as well the prospect of a Warrant of Fitness.
These changes are a reflection of an appreciation that tenants, and the ‘rental generation’ as it has been termed, cannot continue to be viewed as a subservient fuel to the engine of property investment. Tenants should expect to be provided with housing that meet basic levels of safety and liveability. In NZ, when we compare ourselves to many other countries, we have not been afforded an equitable balance that provides tenants with the surety and security of long-term occupancy. In many countries such occupancy can potentially be for life and valued by the tenants who are prepared to treat the property as their home. This rebalancing of this tenant / landlord equation is what these likely proposed changes to legislation will seek to achieve.
For private landlords these legislative changes will be seen as a burdensome and maybe to some, a bridge too far, that sees the appeal of residential property investment lessen. They may well cash-up, seeking new investment options which when compared to 20 years ago are certainly more plentiful.
Some investors will be attracted to the idea of shared ownership of investment property which offers the same principle of “bricks & mortar” investment in property but without the hassle. The property is fully managed and with no gearing there is no question as to mortgage lending issues. PropertyShares* in investment property allows for diversification, one of the core principles of sound investment. The classic principle of don’t put all your eggs in one basket principle which almost all private property investors fail to heed. The Property Crowd is an innovative solution for such prospective investors allowing for the partial ownership in PropertyShares in a single property with the potential for liquidity and transparency of these shares through a regulated trading market.
The fact is legislative changes are coming to the rental property market, they are whilst hinderance to landlords, do provide a safeguard for tenants. With well over 40% of the NZ population living in tenanted accommodation they are a core part of our community and need the legislative support, but just as importantly they need safe and secure accommodation. Accommodation that property investors want and need to provide. The change is most likely to come in the method of ownership to better reflect these changes.
PropertyShares*. Shares in a holding company that owns a residential investment property.
Latest posts by Alistair Helm
- Legislative changes and the impact on property investing - January 17, 2019