Choosing yeild over location?

[whitt]

Propoholic
Yes I agree that many investors need to look hard at hgow they calculate there numbers. An older house or rougher suburb may well mean a higher manintenance allowance should be used when doing the numbers.

An example is a renatal i have in Taupo which last year had only $59.65 for repairs and maintenance. Place has great tenant and was purchased new a few years ago. VS My older Auckland rentals which seem to always need things and costs range from $200 to $1500 PA ( Although I am now on a maintenance campaign to get everything sorted, painting etc so I can ride out the slump in style)

[spurner]

Can't agree more with the maintenance aspect.

I thought it would be interesting to list some items that often need replacing in an average house:

Carpet $3000 lifespan 10 years $300pa
Curtains $1000 lifespan 10 years $100pa
Hot Water $1200 lifespan 30 years $40pa
Int Paint $2000 lifespan 10 years $200pa
Ext Paint $10000 lifespan 10 years $1000pa
Kitchen $6000 lifespan 20 years $300pa
Bathroom $8000 lifespan 20 years $400pa
Roof $12000 lifespan 40 years $300pa
Appliances $3000 lifespan 10 years $300pa

So even if there is never any random maintenance like burts pipes, blocked drains, sticky doors, window catches, or lawnmowing to do. Then over the longhaul maintenence will be at _least_ $3,000pa and in all likelihood more. Obviously for a newer place you wouldn't need to worry about most of these things for 10-15 years though until they started getting grubby.

It would be interesting to get some firm figures from say a property management company as to how much they spend per year on average. Although really you'd need many years or decades of records to get a true figure.

I had one place I spent only $400 on in 4 years. Then the sewerage and stormwater were found to be broken which was $8k in one hit.

Real maintenance allowances are likely to be in the order of $3,000.00 - $4,000.00 per annum (and rising)

[tricky]

There is a fundamental flaw in many peoples purchases though, and the basis on which seminars are run, which is that if the ultimate goal is cashflow and passive income so you can stop working, then once you stop working what income do you write off your loss against?

Hi spurner,
Having trouble understanding your point.
Wouldn't you write off your tax loss against the passive income which allows you to retire?
Or have I eaten too much chocolate tonight?
cheers
tricky

[kolzee]

Tricky - I suspect what spurner was referring to is the loss in an LAQC (after costs have already being offset against passive rental income in the company) being offset against other income returned by the shareholder.....usually in the form of wages/salary.

This is assuming a before tax loss is being made in the rentals.

Spurner is meaning that if you have stopped working then you do not have any other income to offset this loss against.

[spurner]

Hi Tricky

Well, if the property is losing money there's no profit or taxable income to write off the loss against.

I have never claimed a tax rebate or paid rental income tax so someone please correct me if I'm wrong with my overly-simple example:

Mr N. Gear earns $100k in a salaried position. He wants financial freedom so purchases 10 properties losing $100k pa. He offsets this loss against his personal income tax and receives $39k p.a. back from the IRD. He thinks this $39k is great and can live off it so quits his job. Next year the properties lose $100k but he gets nothing from the IRD.

Over-simplified I know but lots of people pushing their products misuse the word "cashflow". A reduction in the tax you pay personally is miles away from "cashflow from property investment" which is what it's often dressed up as by people with ulterior motives. While you are working it's okay but the whole point is to retire and live the life of riley on your investment cashflow, which in this case would cease upon retirement.

If you did have a taxable income on your property rental income then there's no taxable loss with which to use. You can only either make a profit or a loss.

Hope you enjoyed the chocs!

Hi spurner,
Having trouble understanding your point.
Wouldn't you write off your tax loss against the passive income which allows you to retire?
Or have I eaten too much chocolate tonight?
cheers
tricky

- Thanks kolzee I have no experience with LAQC before but it sounds right!

[kolzee]

I guess though the benefit should come at some stage later as, assuming the company activities will make a profit in the future, you should be able to carry forward losses incurred now and offset them in the future against these profits...

[spurner]

Yes sure you can keep a tax credit so in the future when there is a paper profit that can be offset against the previous paper losses.

My trust makes a cash profit but has accumulated losses of $250,000 after depreciation, and growing most years. I have no income to write it off against and so the loss will remain until the trust reports a profit in the future.

Unfortunately it doesn't accrue interest though!

I guess though the benefit should come at some stage later as, assuming the company activities will make a profit in the future, you should be able to carry forward losses incurred now and offset them in the future against these profits...

[cantthinkofanickname]

hi xris you bring up some vaild points in your post in this instance the property has been renovated by doing these items paint interior and exterior, new carpet and lino, replaced curtains and tracks new s/s sink bench . the hot water cyl was replaced 3mths ago by the previous owner,and the house is 20yrs old so i should be dead before the roof needs replacing so in that most of the maintance has been done i feel comfortable with my maintance figure baring any major problem for the next 5yrs
interest is fixed 5yrs
rent is already lowest in town average is now $225 per week if i had not had other vacancies i would have held out for $220 but as stated i wanted to rent it quick so droppng the rent is not going to happen

graham

[kolzee]

My trust makes a cash profit but has accumulated losses of $250,000 after depreciation, and growing most years. I have no income to write it off against and so the loss will remain until the trust reports a profit in the future.

That's a lot of profits to offset!!! I've got some income to offset against to help out!!!

[spurner]

I had thought about that before but it's in a trust and apparently can't be transferred out anyway.

That's a lot of profits to offset!!! I've got some income to offset against to help out!!!

[Paul34]

These repairs are however not restricted to high yeilding properties outside of the city. In a country like NZ where housing stds are not that hot there are more houses that are past their used by date than not. It is a nZ thing not a non city city thing.

[spurner]

relativity

Yes absolutely true. But it's not relative, so a $360,000 city property has similar maintenence issues to a $60,000 small town property. They both still have a roof to leak, walls to paint, carpet to replace, toilet to block, pipes to burst, doors to jam, chimney to sweep, and gardens/lawn to maintain. However from a property which is only rented for $110 a week you have alot less money from which to meet these expenses!

These repairs are however not restricted to high yeilding properties outside of the city. In a country like NZ where housing stds are not that hot there are more houses that are past their used by date than not. It is a nZ thing not a non city city thing.

[Propoholic]

Paul34 wrote:

These repairs are however not restricted to high yeilding properties outside of the city.

Totally agree but dont think that was being suggested (ie 'repairs being restricted to higher yielding properties'). It is the level of deterioration and damage (due to varying tenant pools) that will affect the repair and maintenance burden over ten years. Unfortunately some areas will have a higher incidence of damage and neglect than others. The life of an interior paint job or carpet installation will be roughly proportional to the tenant quality.

An extreme example of high yielding properties is the US cities of Rochester and Buffalo. In the last couple of years investing groups have been flocking to these areas because of the 30%, 50% and higher yields (more often than not being marketed through Aus., US and British websites) being touted. Yields like the above are often obtainable in ghetto areas where the neighbouring properties are bordered up and the local drug lord lives across the road. A number of investors frequenting propertyinvesting.com pulled out of these areas due to their investment only being tenanted for six months out of twelve and the maintenance/repair costs being extreme. A 30% yielding property would become negative cashflow pretty quickly and never with any possibility of capital appreciation. I thought this was a good example of the extremes of chasing yield/cashflow.

In a country like NZ where housing stds are not that hot there are more houses that are past their used by date than not. It is a nZ thing not a non city city thing.

I'm not sure I agree with that, you only need to have lived in or viewed homes on the Australian, British or US property web sites to see the examples of neglected homes, do ups and higher yielding properties. The 100 year old villas and bungalows in Australia, NZ or the US become equally run down when they havent been maintained. However, on housing standards, the NZ apartment issue is another problem, I understand Canada has been through a similar leaking building disaster to NZ.