Kiwis love property, and many of us are property investors. But do property investors really deserve the bad rap they often get? Andrew King of the NZ Property Investors’ Federation busts some common myths.
Property investors are all money-hungry
There are people of all types in society who are ‘money-hungry’, but rental property owners don't seem overly money-hungry to me.
Most rental property owners are very ordinary people from all walks of life who are looking to provide for their retirement by owning a rental property or two.
More than 90 per cent of rental property owners have just one or two properties.
Many are accidental investors, who either inherited the property, couldn’t sell their previous home when buying a new one, or have moved within New Zealand or overseas and rented out their old home.
Owning a home or rental property in New Zealand is expensive. Cash flows from rental property are not high, especially when you first buy them.
Due to this lack of cash flow, some rental owners scrimp on repairs and maintenance, so they may appear money-hungry.
But it’s a mistake to scrimp on maintenance and this is something that should always be budgeted for.
Property investors are reluctant to upgrade their rentals.
There’s a difference between ‘upgrading’ and ‘maintaining’ rental properties. Maintenance is essential, but upgrades are optional.
It’s difficult to upgrade rentals to make them into high-quality homes without a significant increase in the rental price.
Usually it’s the tenant who doesn’t want quality improvements, as they want to keep the rental cost as low as possible. They chose the property because it had the features and quality standards they wanted, at the right price.
But some tenants ask for improvements when applying for a property. For instance, some may ask for fencing, a car port or a heat pump, or want it painted with new modern colours.
A happy tenant stays in the property longer, so at the NZ Property Investors’ Federation we advise our members to look favourably on these improvement requests.
They may not necessarily cost much so they won’t add to the rental price.
Property investors are just looking to make a quick buck.
This is a common misconception about property investors. A property investor buys a property for long-term ownership, to provide a tenant with a home.
A property trader (sometimes called a speculator or a ‘flipper’) buys a property and then sells it again quickly, usually after improving it to add value.
A property trader makes their living by buying and selling homes, and pays income tax on the profit they make. This is similar to taxing their capital gains, but it is actually income tax.
A rental property investor holds the property long term, and pays tax on the rent they receive.
Property investors all live in flash houses.
Some will, but most won't. They live in ordinary houses and it would be very difficult to tell if your neighbour was a property investor, if you didn’t actually know.
There’s a perception that property investors drive around in Maseratis. That's more likely to be property developers, who often take on high-risk and high-reward strategies. Property investors often drive Toyota Corollas.
Property investors hog the market and leave no room for first-home buyers.
Property investors certainly compete with first-home buyers because they’re often looking for the same types of homes. There’s nothing wrong with this, because tenants need someone to buy and provide the properties they live in.
But it’s unfair to say they hog the market. However, they do buy differently. Property investors buy less on emotion and more on numbers. If the numbers don't stack up, they walk away, but first-home buyers tend to fall in love with a property and HAVE to have it.
Property investors say they’re often outbid by first-home buyers.
Some people believe that investors have an advantage over home-buyers because they can claim expenses as a tax deduction.
This isn’t true as the situations are completely different. Home owners get the benefit of accommodation, while investors get the benefit of rental income.
Investors can claim expenses against this rental income to work out how much tax they need to pay. Home-owners don’t have any rental income, so they have nothing to claim expenses from.
Property investors are mostly from overseas.
This is a rumour that has really been debunked. Only a small percentage of investors are non-residents. Many of them have bought property for children studying in New Zealand to live in, or as holiday homes for themselves.
Rental property is tax-advantaged.
This is repeated so often that it’s reasonable for most to assume it’s true, but it’s not.
Rental property is actually tax-disadvantaged, since depreciation is no longer allowed, and the Bright-line Test has been introduced.
It will be further disadvantaged if the government introduces plans to restrict property investors from claiming losses against other taxable income – a tax rule available to all other businesses.
People think that property is tax-advantaged because there isn’t a capital gains tax, but the same laws apply to all investments and businesses.
If you’re a property trader, you pay tax on the increased value of the property when you sell it. This is the same for shares as well.
But if you’re a property investor, providing rental accommodation, then you don’t have to pay tax if you sell the property for more than you paid for it.
This is the same as if you bought shares as a long-term hold, or if you bought a business, a farm or any other asset-based investment.
A recent study provided to the Tax Working Group claimed that rental property was under-taxed compared to other assets. But the study was disproved, and the Tax Working Group admitted that rental property was not under-taxed.
Even the IRD has said that rental property is not tax-advantaged compared to other assets. It simply isn't true.
First published 30 July, 2018
Story by Andrew King
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.