Much to do before buying property
| Christchurch Earthquakes, The Rena Grounding, Global Economic Crisis – Is it really the right time to invest in a rental property? Many commentators are advising that there has never been a better time to purchase a rental property. House prices seem to be at an all-time low, as are interest rates, and it appears there is still a strong demand for rentals, particularly in the Auckland region. |
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Conversely, one would argue that there are no longer the tax breaks available with the change in depreciation laws, Loss Attributing Qualifying Company rules, and in such a volatile market, capital gains on property are no longer a certainty. As a result, strong rental cashflows are likely to be the key influence for rental property investment in the future. Hand-in-hand with this is ensuring that investors have sufficient equity or capital to make the investment in the first instance.
Bearing all this in mind a person looking to invest in property for the first time has a lot to consider. From the first decision to invest in real estate to actually buying your first rental property, there is a lot of work to be done. This task may be daunting for the first-time investor.
What Structure should I choose?
Along with cashflows you should also give consideration to the type of tax structure that you will run the investment property through. There are several different options:
- Sole Trader
- Partnership
- Trust
- Limited Liability Partnership
- Look Through Company
- Company
Which structure you choose will depend on your individual circumstances. At the outset you want to ensure the structure chosen will be robust enough to be tax efficient, while at the same time suit your changing needs in the future. Your accountant will be able to outline the pros and cons of each structure so you are able to make an informed decision.
Where should I Invest?
Here is where you need to ensure that you get alongside trusted people in the industry: Real Estate Agents, Registered Valuers, Bankers, Lawyers, Rental Managers, Friends and Family. The more advice and information you have, the better informed your choices will be. At the end of the day you want to ensure that you get the best value property for the money that you can afford. The better the area and house, the better the rental clientele you will attract. As renters do not have any personal investment in the property, to a certain degree they chose a property simply on the basis that it is the best that they can afford for the money they have, that best suits their needs. Many factors will influence this and you need to ensure you do your research before signing on the dotted line.
Can I afford it? – Eyes Wide Open!
Before you even begin looking for potential investment properties, or adding to your current portfolio, you should gather together all your personal financial information and sit down with an advisor to run through some numbers. From this you should be able to ascertain:
- What you can afford
- What the likely cashflows will be
- What equity payments you have available
- Whether you have sufficient external funding available should disaster strike (i.e. insurances, personal income, rental income in other areas)
- Whether you have the ability to financially endure the unexpected, such as missed rental payments, repairs and maintenance, vandalism, untenanted property.
Your accountant should have a good handle on expected rental cashflows, which will allow for the contingencies listed above. This will provide you with a good overview of what you're in for before you seriously start looking at the property investment market.
What should I look out for?
Leaky homes, earthquake proofing, slips, planning or zoning issues, other issues will require due diligence, due diligence, due diligence! Make sure that you do your research. Get the Valuers involved, along with Property Inspectors. A Lawyer is also a must! There are so many potential pitfalls when purchasing a property that there is never too much research that one can do on a place. Remember - beware the bargain, it might just cause more headaches than it's worth.
When should I seek funding?
Once you have covered off the nuts and bolts of the numbers and structures above, you should consider obtaining bank financing. Most banks will offer pre-approved funding subject to certain terms and conditions, which will allow you flexibility when hunting out the bargain. Bear in mind that when you are looking for a rental property investment there should be less personal attachment to the purchase in comparison to that of your own home.
Janine Hellyer is a Director with RHB Chartered Accountants Limited.
Disclaimer
This article is general in nature and should not be treated as professional advice. It is recommended that you consult your advisor. No liability is assumed by RHB Chartered Accountants Ltd for any losses suffered by any person relying directly or indirectly upon the article above.
Published in Tauranga Property Investor, Summer 2011
