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Rent or Sell?

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  • Rent or Sell?

    Hi all,

    My partner and I took the plunge and purchased our first home in May this year.

    We bought a stand alone, 2 bedroom 50's cottage 70sqm with a stand alone garage on a cross lease of 400ish sqm in Orewa. Walk to the primary school, shops, beach all under 10mins.
    We have spent about 50k renovating. The house is like new inside, landscaped and fenced, and will soon be painted outside too. Would only leave a bit of hard landscaping to do (decks) if we wanted to finish it for sale. Though we are not far off finishing, we are both busy juggling our 4 month old baby and work.

    Our payments are currently $615 a fortnight fixed for two years. I have not had a proper rental appraisal but I would anticipate $400 a week as the minimum. Once we take income tax in to account on this it would require topping up. I haven't spoken to an accountant yet about the tax benefits/write offs though which could make a difference.

    To any experienced persons out there, does the above look viable for rental investment? Or should we be looking to capitalise on the substantial renovation we have done. Are there any other options that come to mind?

    Advice appreciated.

  • #2
    You don't say if the 'payments' are principal and interest or interest only?

    Realize that if you rent it out the mortgage interest, rates, insurance and any maintenance are all legally deductable off the rental income before any tax is assessed.

    By my reckoning, on the figures you supply, you would come out with around $1000pa surplus after costs, and if the mortgage is interest only, the tax on this would just be a few hunderd.

    Given your situation, in light of this, I would say hang on to the property.

    Conceivably you could run the risk, if you sell, of being taxed on any profit made from the deal given the short time-frame. This could also taint any future property investment activity.


    • #3
      How much did you pay? How much would it sell for?

      Take off 3-4% for real estate fees and 30% capital gains tax, how much would you nett?

      Unless you have to, or bought a lemon, or property investing is not your thing... don't sell. Use the equity for your next investment/home if you have the serviceability.


      • #4
        Hello flyernz, Thanks for taking the time to reply. Of the fortnightly repayments, 479 is interest. I think from the responses so far I will get in touch with an accountant to better understand the practicalities of owning a rental from a tax point of view. Probably would be a good time in my life to start dealing with an accountant as well!


        • #5
          Hello reepr, we paid 376, it would sell somewhere north of 450 I would imagine. I wouldn't expect more than 500. So I think your logic is right, once you factor in agents fees and capital gains tax it wouldn't really be worth the effort to sell.


          • #6
            I take it that you are living in this house currently. If so, you don't need to worry about "capital gains tax" (income tax based on sale/purchase+reno difference).


            • #7
              With another 10% capital appreciation expected in 2014 for the Auckland region why would you sell? You didn't mention the reason you are considering selling or renting it. I would hold it and rent it if you really want to move.

              Another option if you are looking to move your investing head...would be to get a new valuation done once all the work is done (you mentioned painting and decks) and then go to the bank and see if they will allow you to buy another property with the increased equity. Remember you will have to keep your LVR at 80% or better across the 2 properties.



              • #8
                FWIW....I'd keep it



                • #9
                  Expected Rental Return -
                  House Value $426,000
                  Less Deposit $210,000
                  Total Borrowed $216,000
                  Rent - 50 weeks at $400 per week 20000
                  As a % of total house 4.69%
                  Less Expenses:
                  Accounting 1200
                  Bank fees 50
                  Body Corporate 0 If interest goes up
                  Insurance 1000
                  Interest - at 5.75% 12,454 7.50% $16,200.00
                  Property Management at 7.5% plus GST 1,725
                  Rates 1500
                  Repairs and Maintenance 750
                  Seminars 100
                  Subscriptions 300
                  Travel 86
                  Total Expenses 19165.00 $22,911.00
                  NET CASH SURPLUS (DEFICIT) 835.00 -$2,911.00
                  Less Depreciation Building 0.00
                  chattels 2000.00 2000
                  NET TAXABLE PROFIT (LOSS) -$1,165.00 -$4,911.00
                  Tax refund at 33% $384.45 $1,620.63
                  Overall Cash surplus =Taxation refund less cash deficit $1,219.45 -$1,290.37
                  Weekly cash $23.45 -$24.81
                  Cash Return on Investment 0.58% after tax
                  Capital gain at inflation rate of 3% $12,780.00
                  Cash & Possible Capital Gain Return on Investment 6.67% after tax
                  Book a free chat here
                  Ross Barnett - Property Accountant


                  • #10

                    You seem to have around a $216k mortgage if you are paying 5.75% interest, which means you must have put in around $200k of equity.

                    Where are you personally going to be living? If you are buying another personal house, then you would want to look at restructuring this, to legally move the equity to your new personal house, and move the loan with associated interest to the rental.

                    The Gross Yield at 4.69% is quite low. Your property is slightly cashflow postive at low interest rates as you have put so much cash into it. With a 100% mortgage you would be losing around $11,000 before tax benefits or $7,000 after, which is very negative with interest rates how they are.

                    With the current money in the property, you are still relying on capital gain to give you any kind of return on your money invested. The spreadsheet shows 3% growth, and then you have a 6.67% return on your money after tax. If this was 10% as posted earlier in this thread, then you would be getting a great return on your money invested.

                    Book a free chat here
                    Ross Barnett - Property Accountant


                    • #11
                      2brm house in Orewa average rent $381 - get a rent appraisal so you are sure on the numbers you are dealing with.


                      • #12
                        Hello Rosco,

                        How come income is calculated as rent x 50 weeks as opposed to 52? Is this just a generally accepted practice to account for average vacancy?



                        • #13
                          Generally most landlords don't get 52 weeks rent every year. Therefore I use 50 to allow for missed rent or vacant periods, or for a period when you are doing it up.

                          Book a free chat here
                          Ross Barnett - Property Accountant