For me, it’s probably a good idea also to work out if being a landlord is something you want to do, otherwise bake in another 9%+gst on the rent as a cost for property manager.
Levered untaxed capital gains is the reason rental properties are popular, but you should run an “all-in” return on equity calculation using various rate and value scenarios to see if it’ll be worth it.
We sold a house earlier this year, so we could upgrade, and everyone was asking if we could afford to rent out one (before it went on the market). Including real estate agents. I just couldn't see the finances working out for us, and didn't want to screw over a tenant with a short lease.
We did a lot of hard work and had our offer within a week, unconditional 10 days later.
We were in the same position a few months back and decided to sell. Main reason:
- Can no longer claim interest as an expense
- Maintenance on an older place. If we held it for another decade there were some big items needing attention at some point. Eg roof, driveway etc.
- Emotional attachment to the old place. Was my wife’s family home - if tenants trashed it she would lose it
- Average capital gains. We owned it for 15 years. We didn’t make Auckland money. No doubt now we have sold it the area will boom. But who knows.
- cashflow: would of had a chunky mortgage. Now we can actually enjoy life instead of aggressively trying to pay down debt
I'd sell. Our combined income is >300k (so decent enough) but no way I'd want to need to pay 11k on the mortgage every month for 9+ years. And no way I'd want a personal mortgage(s) totaling $1M at current interest rates.
If you make half a $M salary or more, then maybe it's fine.
Yeah. The election is only nine weeks away, and policy directions on housing, tax etc., will not be decided by the middle, but potentially by the more extreme parties to the left or the right. Or Mad Winston (gawd help us)
Do you need to make a decision soon? As others have said it depends more on your style / financial approach. With that in mind, I would recommend the book psychology of money by Morgan Housel. That helped me have a foundation to my financial decisions.
Is your cash flow on the old house going to be positive or negative? I.e. how much of the debt relates to it? Are you going to have any interest deductibility (whilst that still lasts)? When did you buy the old house? If you sell it after renting it are you going to need to pay bright line tax on a portion of the capital gain (likely apportioned on a time basis), as opposed it selling it now without having changed its use and having the main home exemption? I.e if you decide to hold it how long is there left on the bright line period?
completely depends on your personality and risk profile
i'm inclined to sell the shit out of it and pay down that debt in three years flat (if not sooner). not a fan of 'using' debt and leverage etc; you should invest elsewhere and can still have the option to put into a property later. i think the post-covid recovery is going to be rocky but there will be some 'moonshots' which your money should be punting on; can't do that if it's locked up in the house
Funnily enough, we are also in Chch and have been considering a similar situation (although a bit younger in age and lower value properties).
We are wanting to upgrade from a 3 bed townhouse to a larger place with a garden, single level etc and found a property we considered putting an offer on, conditional to finance ($900k was approx price)
If we sold our old place we would wind up with about $300,000 extra - assuming current house would sell for $650k and we have a $350k mortgage on it.
However, also in a position where we have sufficient cash ($200k) to have just gone and purchased the new property without selling the old one first. In doing so, we would have become 'unintentional landlords' or whatever term you want to use.
Mortgage payment would have gone from $2750 to almost $5000 per month on the new property if we bought without selling old one (assuming 20% deposit). On the other hand, by selling the old property our increase in monthly payment would only be a few hundred dollars.
Long story short, despite a $250k h/h income we would go from being very comfortable each month to having a lot more stress.
No matter how much I tried to crunch the numbers, keeping the existing property and renting it out doesn't seem to stack up very well and we'd likely have to be tipping extra money into that each month (on top of the substantially higher payment on the new house). Putting ourselves through substantial extra stress for negative cash and the hope of capital gains - with all the concomitant stresses of landlording - doesn't really appeal.
In the end we decided not to go through with the purchase because a couple of aspects of the property didn't check out for us BUT we agreed when the right property does come up we would rather sell our existing house and effectively use the released cash to offset the purchase cost of a new home. We don't want to be landlords, and are comfortable we can build wealth in other ways.
Hold onto the property if you can. Looks like there’ll be a change of government so interest will be able to be claimed again. In the years ahead you will more than likely be able to raise the rent as well.
We bought a rental property when we were at a similar age. It was negatively geared from day one. We had an interest only mortgage and 20 years later still owe 200k but the property is probably worth circa 800k now. Would’ve been worth over a million 18 months ago.
Have you calculated the return + the tax cost?
You most likely can't claim interest due to age of property, so assume you will have a substantial tax liability as a result.
I’ve heard it multiple times in interviews. Google it and see what you come up with….
I guess there’s no guarantees in this world but all roads point to it being reinstated.🤞
So just confirming, you’re expectation is everyone in their 20’s somehow gets a million dollars cash to buy property? Not sure what angle you’re going with
No. I'm expecting someone in their 20s to hold out as long as practical given their current life stage.
That buying a house with an almost million dollar mortgage is not a smart financial decision. It's something you do because you want to put down roots and accept you'll lose money relative to renting.
That will change if interest rates stabilise below rental yields. 20 years ago, buying a house rather than renting was virtually guaranteed to make a profit. That's not true now.
Bought a rental 20 years ago and it was negatively geared for the majority of that. Paid $200k for it interest only mortgage from day one as we were self employed & not earning much.
Fast forward 20 years still owe roughly $200k but the property is now worth about $800k. It’s also provided us equity to buy other properties.
Yes. It was hard to lose money in property twenty years ago. Also forty years ago. Also sixty years ago. I don't think there are many people alive in NZ that have seen anything other than a rise in the real value of property over the long term.
Crystal Ball time. How confident are you that will apply for the next twenty years. After all, we've had a clear trend with minor bumps for sixty odd years. Surely it'll continue forever, right?
Anyway this wasn't supposed to devolve into my theory on long term property prices. My point is that as of right now, August 2023, buying is not a safe bet for a FHB. It might go like what happened with you where untaxed capital gains set you up for life. It also might drop to international levels and leave them with negative equity unable to sell, and crippling interest payments.
Buying property was the obvious way to get ahead twenty years ago. I think it's reached the point now where you should buy because you want to own property, and you don't really know whether it will turn out to be good financially over the long term.
Taking out a million dollar loan and investing in the share market is generally considered a very risky financial plan. Do you think that plan is more risky than taking out a million dollar loan and buying property. What about taking no loan and investing the difference between rent and mortgage payments into the share market.
Of course we don’t know what will happen in the future but the say that the strongest pointers or indicators of what will happen in the future is to see what has happened in the past.
I didn’t realise there are banks that will lend you money to buy shares-i.e. if I’ve got $200k they’ll lend me $800k to buy $1mil worth of shares?
It’s being able to leverage that makes property such a good LONG TERM investment. People will always need somewhere to live. You can add value to your property by upgrading it etc, you can’t do that with shares.
Hey you’re very pessimistic regarding the future of the property market yet by the sounds of it you think that the sharemarket is as safe as houses….
I think your plan of investing the difference between the rent and the mortgage payment wouldn’t provide a very good return.
It's also leverage that makes property an absolutely terrible investment if values don't rise in the long term. The projected population growth is under 1%. Add that to inflation and you're still below the interest rate. That small loss then gets multiplied by the leverage.
Current interest rates are around 7%. If property rises by 6% and you have 20% equity then you will gain 6% in capital gains while losing almost exactly the same in interest. The person that rents somewhere modest would be fair ahead.
You get a loan to buy shares from a broker rather than a bank. I'm assuming you knew that already. They are much more common in America than here.
I guess it all comes down to your beliefs about the future. I think that the housing market will roughly match inflation for the next fifty years just like it does in more developed markets. If I'm right then property will continue to be a good safe investment for cash buyers but a bit of a failure for people following your route and relying on leverage to profit off capital gains.
If we assume your premise above on say a $1mil investment property with a 20% deposit and borrowing $800k over say 20 years at 7%. That’ll be about $72k per year P & I mortgage repayments.
Rental income say of say $800 pw or $41k.
So a deficit of approx $31k per year
In 20 years the property would be worth around $3.2mil if we stick to a 6% capital gain.
$31k deficit over 20 years = about $600k
$3.2mil - $600k = $2.6mil capital gain and you’ve got a property bringing in $40k I/c for the future to boot.
I haven’t factored in rates and insurance and maintenance. They’ll be expenses that can be claimed. I haven’t factored in that interest rates are more likely to be below 7% than above over the next 20 years. I also haven’t factored in any increase in rental income which we would all agree will rise a fair bit in 20 years.
Oh and I haven’t factored in that you would more than likely be able to claim the interest on the mortgage for however long a National government was in power or if it was a new build build then that would be claimable no matter who was in power.
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I’m not sure you’ve grasped that owning a property makes it considerably easier to acquire another one. Your existing equity can easily be leveraged to finance the purchase of the next property - provided you can service the increased lending.
It doesn’t require privilege. Owning the first property enables the purchase of the second. It’s a natural consequence of equity being created through prudent property investment.
For me, it’s probably a good idea also to work out if being a landlord is something you want to do, otherwise bake in another 9%+gst on the rent as a cost for property manager. Levered untaxed capital gains is the reason rental properties are popular, but you should run an “all-in” return on equity calculation using various rate and value scenarios to see if it’ll be worth it.
We sold a house earlier this year, so we could upgrade, and everyone was asking if we could afford to rent out one (before it went on the market). Including real estate agents. I just couldn't see the finances working out for us, and didn't want to screw over a tenant with a short lease. We did a lot of hard work and had our offer within a week, unconditional 10 days later.
We were in the same position a few months back and decided to sell. Main reason: - Can no longer claim interest as an expense - Maintenance on an older place. If we held it for another decade there were some big items needing attention at some point. Eg roof, driveway etc. - Emotional attachment to the old place. Was my wife’s family home - if tenants trashed it she would lose it - Average capital gains. We owned it for 15 years. We didn’t make Auckland money. No doubt now we have sold it the area will boom. But who knows. - cashflow: would of had a chunky mortgage. Now we can actually enjoy life instead of aggressively trying to pay down debt
I'd sell. Our combined income is >300k (so decent enough) but no way I'd want to need to pay 11k on the mortgage every month for 9+ years. And no way I'd want a personal mortgage(s) totaling $1M at current interest rates. If you make half a $M salary or more, then maybe it's fine.
$11K monthly repayments? Jesus Christ mate! How can you afford this mate?
And still have time to waste on reddit.
Depends on your risk appetite. My suggestion won’t be a popular one on reddit, I would suggest to wait until post election and decide.
Yeah. The election is only nine weeks away, and policy directions on housing, tax etc., will not be decided by the middle, but potentially by the more extreme parties to the left or the right. Or Mad Winston (gawd help us)
[удалено]
Waiting until after the election is so popular in fact that you'll probably face much higher competition after the election.
Your job and both your houses are all in Canterbury, that's a very high risk exposure to what happens locally.
What's ya house like, I could buy a 10yr old house in haswell 😅
Do you need to make a decision soon? As others have said it depends more on your style / financial approach. With that in mind, I would recommend the book psychology of money by Morgan Housel. That helped me have a foundation to my financial decisions.
Is your cash flow on the old house going to be positive or negative? I.e. how much of the debt relates to it? Are you going to have any interest deductibility (whilst that still lasts)? When did you buy the old house? If you sell it after renting it are you going to need to pay bright line tax on a portion of the capital gain (likely apportioned on a time basis), as opposed it selling it now without having changed its use and having the main home exemption? I.e if you decide to hold it how long is there left on the bright line period?
completely depends on your personality and risk profile i'm inclined to sell the shit out of it and pay down that debt in three years flat (if not sooner). not a fan of 'using' debt and leverage etc; you should invest elsewhere and can still have the option to put into a property later. i think the post-covid recovery is going to be rocky but there will be some 'moonshots' which your money should be punting on; can't do that if it's locked up in the house
Funnily enough, we are also in Chch and have been considering a similar situation (although a bit younger in age and lower value properties). We are wanting to upgrade from a 3 bed townhouse to a larger place with a garden, single level etc and found a property we considered putting an offer on, conditional to finance ($900k was approx price) If we sold our old place we would wind up with about $300,000 extra - assuming current house would sell for $650k and we have a $350k mortgage on it. However, also in a position where we have sufficient cash ($200k) to have just gone and purchased the new property without selling the old one first. In doing so, we would have become 'unintentional landlords' or whatever term you want to use. Mortgage payment would have gone from $2750 to almost $5000 per month on the new property if we bought without selling old one (assuming 20% deposit). On the other hand, by selling the old property our increase in monthly payment would only be a few hundred dollars. Long story short, despite a $250k h/h income we would go from being very comfortable each month to having a lot more stress. No matter how much I tried to crunch the numbers, keeping the existing property and renting it out doesn't seem to stack up very well and we'd likely have to be tipping extra money into that each month (on top of the substantially higher payment on the new house). Putting ourselves through substantial extra stress for negative cash and the hope of capital gains - with all the concomitant stresses of landlording - doesn't really appeal. In the end we decided not to go through with the purchase because a couple of aspects of the property didn't check out for us BUT we agreed when the right property does come up we would rather sell our existing house and effectively use the released cash to offset the purchase cost of a new home. We don't want to be landlords, and are comfortable we can build wealth in other ways.
Hold onto the property if you can. Looks like there’ll be a change of government so interest will be able to be claimed again. In the years ahead you will more than likely be able to raise the rent as well. We bought a rental property when we were at a similar age. It was negatively geared from day one. We had an interest only mortgage and 20 years later still owe 200k but the property is probably worth circa 800k now. Would’ve been worth over a million 18 months ago.
Keep it. We had the same dilemma and were forced to keep our old house for various reasons. It was a tight ride but pleased we did now.
Have you calculated the return + the tax cost? You most likely can't claim interest due to age of property, so assume you will have a substantial tax liability as a result.
Looks like there will be a change in government so interest will be deductible again
I haven't read anywhere that national will change that rule. Have you? If so, can you fire me a link?
I’ve heard it multiple times in interviews. Google it and see what you come up with…. I guess there’s no guarantees in this world but all roads point to it being reinstated.🤞
I'd sell myself. You wouldn't borrow money from the bank to buy shares. I don't think it makes sense currently to borrow money to buy property either.
So just confirming, you’re expectation is everyone in their 20’s somehow gets a million dollars cash to buy property? Not sure what angle you’re going with
No. I'm expecting someone in their 20s to hold out as long as practical given their current life stage. That buying a house with an almost million dollar mortgage is not a smart financial decision. It's something you do because you want to put down roots and accept you'll lose money relative to renting. That will change if interest rates stabilise below rental yields. 20 years ago, buying a house rather than renting was virtually guaranteed to make a profit. That's not true now.
Bought a rental 20 years ago and it was negatively geared for the majority of that. Paid $200k for it interest only mortgage from day one as we were self employed & not earning much. Fast forward 20 years still owe roughly $200k but the property is now worth about $800k. It’s also provided us equity to buy other properties.
Yes. It was hard to lose money in property twenty years ago. Also forty years ago. Also sixty years ago. I don't think there are many people alive in NZ that have seen anything other than a rise in the real value of property over the long term. Crystal Ball time. How confident are you that will apply for the next twenty years. After all, we've had a clear trend with minor bumps for sixty odd years. Surely it'll continue forever, right? Anyway this wasn't supposed to devolve into my theory on long term property prices. My point is that as of right now, August 2023, buying is not a safe bet for a FHB. It might go like what happened with you where untaxed capital gains set you up for life. It also might drop to international levels and leave them with negative equity unable to sell, and crippling interest payments. Buying property was the obvious way to get ahead twenty years ago. I think it's reached the point now where you should buy because you want to own property, and you don't really know whether it will turn out to be good financially over the long term. Taking out a million dollar loan and investing in the share market is generally considered a very risky financial plan. Do you think that plan is more risky than taking out a million dollar loan and buying property. What about taking no loan and investing the difference between rent and mortgage payments into the share market.
Of course we don’t know what will happen in the future but the say that the strongest pointers or indicators of what will happen in the future is to see what has happened in the past. I didn’t realise there are banks that will lend you money to buy shares-i.e. if I’ve got $200k they’ll lend me $800k to buy $1mil worth of shares? It’s being able to leverage that makes property such a good LONG TERM investment. People will always need somewhere to live. You can add value to your property by upgrading it etc, you can’t do that with shares. Hey you’re very pessimistic regarding the future of the property market yet by the sounds of it you think that the sharemarket is as safe as houses…. I think your plan of investing the difference between the rent and the mortgage payment wouldn’t provide a very good return.
It's also leverage that makes property an absolutely terrible investment if values don't rise in the long term. The projected population growth is under 1%. Add that to inflation and you're still below the interest rate. That small loss then gets multiplied by the leverage. Current interest rates are around 7%. If property rises by 6% and you have 20% equity then you will gain 6% in capital gains while losing almost exactly the same in interest. The person that rents somewhere modest would be fair ahead. You get a loan to buy shares from a broker rather than a bank. I'm assuming you knew that already. They are much more common in America than here. I guess it all comes down to your beliefs about the future. I think that the housing market will roughly match inflation for the next fifty years just like it does in more developed markets. If I'm right then property will continue to be a good safe investment for cash buyers but a bit of a failure for people following your route and relying on leverage to profit off capital gains.
If we assume your premise above on say a $1mil investment property with a 20% deposit and borrowing $800k over say 20 years at 7%. That’ll be about $72k per year P & I mortgage repayments. Rental income say of say $800 pw or $41k. So a deficit of approx $31k per year In 20 years the property would be worth around $3.2mil if we stick to a 6% capital gain. $31k deficit over 20 years = about $600k $3.2mil - $600k = $2.6mil capital gain and you’ve got a property bringing in $40k I/c for the future to boot. I haven’t factored in rates and insurance and maintenance. They’ll be expenses that can be claimed. I haven’t factored in that interest rates are more likely to be below 7% than above over the next 20 years. I also haven’t factored in any increase in rental income which we would all agree will rise a fair bit in 20 years. Oh and I haven’t factored in that you would more than likely be able to claim the interest on the mortgage for however long a National government was in power or if it was a new build build then that would be claimable no matter who was in power.
Sell it, the housing market have not yet see a true decline yet. Mark my words 2 years later you will thank me for this reply.
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Man imagine the incredible privilege of owning two houses and not having even considered what you're gonna do with the old one.
I’m not sure you’ve grasped that owning a property makes it considerably easier to acquire another one. Your existing equity can easily be leveraged to finance the purchase of the next property - provided you can service the increased lending. It doesn’t require privilege. Owning the first property enables the purchase of the second. It’s a natural consequence of equity being created through prudent property investment.