Need advice...yes I have used the search function :)

[pulsta]

Hi Guys,

Great forum!! found just in the nick of time me reckons!

Anyways heres the deal:

House: Own home (actually apartment), bought in 2000 for 220k...valued Jan '06 for 347k

Particulars: 1 brm with mezzanine study which can be converted into another room for about 3k (which could potientially add $30-$50 p/wk in rent, and pay for itself after 1yr or so)

Mortgage: 190k

Market rent: approx. $400 p/wk could go as high as $450 if extra room built. (figures from 2 property managers appraisals)

Income: $0 (just been made redundant and not looking to get back into the job market anytime soon...at least another 6-12 months!)

Savings: 20k

Total cost p/mth: $1700

Situation: Due to the outlay p/mth and me not having an income to cover it Im wanting to rent out my home via a property manager (as I dont want to be a landlord!). The sums suggest that Im likely to be out of pocket by approx. $100 p/mth after market rent + expenses (rates etc), have been taken out.

To add to this Im going to OZ for 3 weeks in early March '06 (another good reason for a property manager), therefore I will be moving into a flatting situation for $320 p/mth (which I have already arranged...hmm student living here I come...lol), and would want my Apartment ticking over before I leave NZ.

Goal:

1) To put my Home into a structure (trust/laqc etc), that would give me the best advantage $$ wise in my situation

and

2) use the equity in this property to eventually buy a cash+ rental within 6 months

Any and all advice is much appreciated

Cheers

Kerry

[xris]

Hello Kerry,

Have you considered selling, taking your profit and starting again? If not, why not?

xris

[pulsta]

Hello Kerry,

Have you considered selling, taking your profit and starting again? If not, why not?

xris

Hey Xris,

Good point...Yes I have considered selling but would prefer to hang onto it at this stage mainly for sentimental reasons I guess, and besides it's a really great apartment with a lot going for it (unike most shoeboxes out there!), and so should be easy to rent out in the future.

But nothings set in stone so I may go down this road if need be.

Cheers

Kerry

[whitt]

apartment with a lot going for it (unlike most shoe boxes out there!), and so should be easy to rent out in the future.

I notice you mentioned apartment. Is it in Auckland? If so have you read the report by Kieran Trass on the CBD market at present.
What are the long term prospects for growth in your apartment?

[xris]

Hello Kerry,

I say sell up for two or three reasons.

First, put simply, if you rent out the place now you will not be able to claim any of the costs as tax-deductible. Although you currently pay no tax, any losses can be carried over to future years. Tax deductibility of expenses is one of the main benefits of owning rental properties and can add considerably to the financial viability of any rental business.

Second, although there may be slightly more complex ways of doing it (and others may advise on this), merely to transfer ownership to another entity so as to claim the expenses – if that is your reasoning – is unlikely to work either. It oozes tax evasion (or words to that effect) and the IRD will not allow it.

Third, sentimentality as a reason for owning a rental property always makes me raise an eyebrow. Sentimentality often leads to poor business decisions which in tern lead to a loss of money.

Fourth, although I do not know the property, or even where it is (I guess Auckland), I am quite comfortable saying that you may be limiting your potential rental market by only being able to provide one bedroom. This may cause problems.

The figures you quote give a fairly low return. By cashing up you may be able to get a much better return by reinvesting that money elsewhere.

Anyway, they are some of my thoughts.

xris

[CJ]

Second, although there may be slightly more complex ways of doing it (and others may advise on this), merely to transfer ownership to another entity so as to claim the expenses – if that is your reasoning – is unlikely to work either. It oozes tax evasion (or words to that effect) and the IRD will not allow it.

I don't think it oozes tax evasion. You are setting up a new structure for a new venture - therefore best to do before you rent it out. You will only be able to claim depn on original purchase price as your an associated person to the LAQC/trust you sell it to.

Fourth, although I do not know the property, or even where it is (I guess Auckland), I am quite comfortable saying that you may be limiting your potential rental market by only being able to provide one bedroom. This may cause problems.

One bedrooms are actually the predominate apartment size rented in Auckland and what most professional couples (who would want a one + study) would yes.

Xris - your posts are hard to quote as you seem to use a different font - do you post in from word??

[xris]

Hello CJ,

Yes, you are quite right, I use word.

The reason is, when before I have started writing direct onto the web-site, too often it has not gone through (I think because I have been disconnected) and I have lost what I wrote. I am probably doing something obviously wrong, but rather than run the risk of having all my ramblings lost in eternity, I just use word, save, copy, paste.

xris

[tricky]

Hi Pulsta,
You seem to have done very well with this apartment - do you mind saying which building it is in? I'd like to keep an eye on it.
My initial thought on your situation is your mortgage sounds like P&I. Is it? Switch to interest only and the $400 pw rent should cover all your expenses. If your apartment can pay it's own way then enjoy your year off.

[pulsta]

Hi Guys,

Thanks for all your replies so far...its good stuff!!

Now I should have stated this in my first post...my apartment is in Wellington...doh! sorry for leaving this vital info. out of the picture...if this changes things for better or worse then please speak up.

First, put simply, if you rent out the place now you will not be able to claim any of the costs as tax-deductible. Although you currently pay no tax, any losses can be carried over to future years. Tax deductibility of expenses is one of the main benefits of owning rental properties and can add considerably to the financial viability of any rental business.

Which is why I want to put the property into a structure first...then rent it out.

Second, although there may be slightly more complex ways of doing it (and others may advise on this), merely to transfer ownership to another entity so as to claim the expenses – if that is your reasoning – is unlikely to work either. It oozes tax evasion (or words to that effect) and the IRD will not allow it.

Maybe...but if setup right from the start then surely this will not be the case

Third, sentimentality as a reason for owning a rental property always makes me raise an eyebrow. Sentimentality often leads to poor business decisions which in tern lead to a loss of money.

Good point...actually when I wrote that statement it didnt sit right for me and could see that I was leaving myself open for feedback

Fourth, although I do not know the property, or even where it is (I guess Auckland), I am quite comfortable saying that you may be limiting your potential rental market by only being able to provide one bedroom. This may cause problems.

This may well be the case but as I said in my first post the mezzanine can easily be turned into a 2nd brm for 2-3k therefore capturing the potential rental market.

The figures you quote give a fairly low return. By cashing up you may be able to get a much better return by reinvesting that money elsewhere.

Yes...this could well be the answer and am certainly erring towards selling after thinking it over lastnight. But with no equity (apart from cold hard $$$), and no income, wouldnt the banks give me the cold shoulder if I was to purchase a cash+ rental property in the near future??

Anyway, they are some of my thoughts.

Appreciated

One bedrooms are actually the predominate apartment size rented in Auckland and what most professional couples (who would want a one + study) would yes.

So converting the mezzanine into a brm could potentially be a bad idea??

My initial thought on your situation is your mortgage sounds like P&I. Is it? Switch to interest only and the $400 pw rent should cover all your expenses. If your apartment can pay it's own way then enjoy your year off.

Yup...P&I...and yes that a very good point which I will indeed consider...its probably the easiest thing I could do right now to become cash+ as my current situation would be cash- which is not good when the income is $0

But you know what guys...xris has really got me thinking about selling and putting my eggs into other cash+ baskets...something to think about...hmmmm.

Kerry

[Gerrard]

Kerry - if you're thinking about selling make sure you have a good reason for it.

It sounds like you have a good property that can provide a reasonably safe return for many years to come. It should at least cover it's own costs, and may even put cash in your pocket each week/month. Of course then there's the questions about spend the money or reinvest (e.g. pay mortgage down, use as deposit for anothe rplace, etc).

So whilst it's paying it's own way I would only think about selling it if you have an opportunity to make the money work in a better way for you.

Gerrard

[Perry]

Copy & Paste

Xris

When you save what you've typed in Word, use the Save as type:
and choose either "text only" or "text with line breaks." Get past
the warning, close, then re-open the file, then copy and paste that
into the forum.

That way avoids the problems mentioned: yours and CJs.

[Chemill]

If it's taking money out of your pocket, and you can't afford the money to be taken - get rid of it.

The only reason for holding onto a negatively geared property is for capital growth. So the questions that needs to be answered are - what are your realistic growth expectations for the apartment? Is there better growth opportunities elsewhere?


Because you are living in the property, selling to a different structure and then renting is perfectly legit from a tax point of view. I have done this on the advice of an accountant. You'll need an explanation of the price that you sell your house to the structure though - i.e your current valuation.

Basic lesson in investing: Think in terms of your wallet, and how to maximise what's in it (or what should be in it!).

Chemill

[pulsta]

Kerry - if you're thinking about selling make sure you have a good reason for it.

At the moment the only reason to sell would be from a $$ perspective as its $- at the moment...if I moved from P&I to I only then I would indeed have a $+ of around $80 p/mth...not exactly a loads of $$ but at least it is something. Also, my bank (Kiwibank), will only do this for a maximum of 3yrs!

Of course then there's the questions about spend the money or reinvest (e.g. pay mortgage down, use as deposit for anothe rplace, etc).

Reinvest...yes exactly.

So whilst it's paying it's own way I would only think about selling it if you have an opportunity to make the money work in a better way for you.

Nicely put

If it's taking money out of your pocket, and you can't afford the money to be taken - get rid of it.

Could well be doing this

The only reason for holding onto a negatively geared property is for capital growth. So the questions that needs to be answered are - what are your realistic growth expectations for the apartment? Is there better growth opportunities elsewhere?

The million dollar question...well in the 6yrs that Ive owned the aparment its RV has gone from 200k to 300k so an average annual increase of around 11%...therefore if the past is any indication (well its the only indication really), then Im assuming that I can expect more or less the same growth. Therefore its not really performing that much better than say a managed fund or similar type investment scheme (although I probably wont invest in something like this after reading Pay Zero Taxes!)

Because you are living in the property, selling to a different structure and then renting is perfectly legit from a tax point of view. I have done this on the advice of an accountant. You'll need an explanation of the price that you sell your house to the structure though - i.e your current valuation.

Excellant...so it can be done.

Basic lesson in investing: Think in terms of your wallet, and how to maximise what's in it (or what should be in it!).

Thanks for the tip

[tricky]

The only reason for holding onto a negatively geared property is for capital growth.
Chemill

Isn't it possible for the rent to increase and turn the cash -ve property into cash +ve?

[Chemill]

Isn't it possible for the rent to increase and turn the cash -ve property into cash +ve?

Correct....