Investing in Property(2).jpg)
New Zealander's love affair with property makes having an investment property a retirement strategy for approximately 200,000 people. Many have their properties owned under an LAQC (Loss Attributing Qualifying Company) structure.
If you have at least 10% equity in your home and solid income you may be able to afford to purchase a rental property. Perhaps you want to live and rent close to the CBD and buy a home in the suburbs as a rental property?
You may want to just buy one property and pay it off in the years leading up to retirement. You may want to buy some land with a view to building and living on it when you come to retire. Perhaps you may want to buy an investment property to make the most of the tax breaks available to property investors. Is having a positive cashflow important or are you happy with a negative gearing set up?
Either way you need to clearly define your goals in terms of a long term hold or short term capital gain profit. It's important to seek professional advice as if you are blatantly buying and selling within short time frames without genuine reason you could be liable for paying tax on the capital gain.
Property Investing is a popular choice for Kiwis as there is no capital gains tax in NZ and it’s a tangible investment. There is also tax advantages to owning an investment property and many investors set up an LAQC (Loss Attributing Qualifying company) to own their property(s). The key things to getting into investment property are having enough cash flow to cover any possible shortfalls in mortgage payments and rental income (commonly known as Negative Gearing) and having equity in your own home (or cash deposit). However if you do have a strong income you may be able to buy an investment property with no deposit or equity.
If you have equity in your current home you can leverage off that equity and use it as security (deposit) to buy an investment property. For example if you home is worth $400,000 and you owe $250,000, you have $150,000 in equity available to help buy a rental property on 100% finance. The bank or lender would take a mortgage over both the properties you own. In some circumstances you can borrow up to 95% of the value across both properties. This percentage will drop as you add more properties to your portfolio. Sometimes we will coordinate a relationship with more than one bank or lender so that no one bank has security over all your properties.
Another way that leveraging works well with rental properties is that you can use any gain in the property value to purchase more properties. For example, you purchase a property for $100,000 and that property increases by 10% to $110,000. You then have an additional $10,000 of equity in the property - you can use this equity to purchase another rental property without putting up any additional funds - the lender simply 'cross-collateralises' the loan meaning they have the two properties as security.
Even better, if you can find a property that is undervalued in the first place then you can instantly create equity in your rental property. Because the property market is not as efficient as the share market (i.e. information is priced into share prices much faster so there generally isn't as many bargains to be found due to the large numbers of buyers and sellers) - this means you can find a property where the vendor (seller) may be desperate to sell the property for $100,000 whereas it's real value is actually $110,000. You don't need to wait until the market picks up you know you've found a property that has additional equity in it already. Banks will normally only allow you to use this additional equity after six months has passed.
A loss attributing qualifying company (LAQC) is simply a normal company that has elected to be an LAQC. LAQC stands for loss attributing qualifying company, which means that the losses your rental property makes are allocated to the individual shareholders to offset against their personal income, thus resulting in a lower provisional liability or a refund of PAYE paid.
With a normal company, if the company were to make a loss, losses can only be offset against future profits. For example, if you make a loss of $10,000 then you must wait until the company has a profit of $10,000 and then you will pay no tax on the $10,000 profit. This can be problematic for rental property investors because, if the property is geared to the maximum and making the full depreciation claims, it may be many years before the company is profitable and can then make use of the tax losses that it has to carry forward.
With an LAQC the larger income earner can own all the shares and have all the losses claimed at the higher tax rate, which may amount to many thousands of dollars in tax refunds. Furthermore, you can sell the shares to a family trust without depreciation clawback (and you don't have the legal fees to change the title of the house).
Investing in Property
New Zealander's love affair with property makes having an investment property a retirement strategy for approximately 200,000 people. Many have their properties owned under an LAQC (Loss Attributing Qualifying Company) structure.
If you have at least 10% equity in your home and solid income you may be able to afford to purchase a rental property. Perhaps you want to live and rent close to the CBD and buy a home in the suburbs as a rental property?
You may want to just buy one property and pay it off in the years leading up to retirement. You may want to buy some land with a view to building and living on it when you come to retire. Perhaps you may want to buy an investment property to make the most of the tax breaks available to property investors. Is having a positive cashflow important or are you happy with a negative gearing set up?
Either way you need to clearly define your goals in terms of a long term hold or short term capital gain profit. It's important to seek professional advice as if you are blatantly buying and selling within short time frames without genuine reason you could be liable for paying tax on the capital gain.
Property Investing is a popular choice for Kiwis as there is no capital gains tax in NZ and it’s a tangible investment. There is also tax advantages to owning an investment property and many investors set up an LAQC (Loss Attributing Qualifying company) to own their property(s). The key things to getting into investment property are having enough cash flow to cover any possible shortfalls in mortgage payments and rental income (commonly known as Negative Gearing) and having equity in your own home (or cash deposit). However if you do have a strong income you may be able to buy an investment property with no deposit or equity.
If you have equity in your current home you can leverage off that equity and use it as security (deposit) to buy an investment property. For example if you home is worth $400,000 and you owe $250,000, you have $150,000 in equity available to help buy a rental property on 100% finance. The bank or lender would take a mortgage over both the properties you own. In some circumstances you can borrow up to 95% of the value across both properties. This percentage will drop as you add more properties to your portfolio. Sometimes we will coordinate a relationship with more than one bank or lender so that no one bank has security over all your properties.
Another way that leveraging works well with rental properties is that you can use any gain in the property value to purchase more properties. For example, you purchase a property for $100,000 and that property increases by 10% to $110,000. You then have an additional $10,000 of equity in the property - you can use this equity to purchase another rental property without putting up any additional funds - the lender simply 'cross-collateralises' the loan meaning they have the two properties as security.
Even better, if you can find a property that is undervalued in the first place then you can instantly create equity in your rental property. Because the property market is not as efficient as the share market (i.e. information is priced into share prices much faster so there generally isn't as many bargains to be found due to the large numbers of buyers and sellers) - this means you can find a property where the vendor (seller) may be desperate to sell the property for $100,000 whereas it's real value is actually $110,000. You don't need to wait until the market picks up you know you've found a property that has additional equity in it already. Banks will normally only allow you to use this additional equity after six months has passed.
A loss attributing qualifying company (LAQC) is simply a normal company that has elected to be an LAQC. LAQC stands for loss attributing qualifying company, which means that the losses your rental property makes are allocated to the individual shareholders to offset against their personal income, thus resulting in a lower provisional liability or a refund of PAYE paid.
With a normal company, if the company were to make a loss, losses can only be offset against future profits. For example, if you make a loss of $10,000 then you must wait until the company has a profit of $10,000 and then you will pay no tax on the $10,000 profit. This can be problematic for rental property investors because, if the property is geared to the maximum and making the full depreciation claims, it may be many years before the company is profitable and can then make use of the tax losses that it has to carry forward.
With an LAQC the larger income earner can own all the shares and have all the losses claimed at the higher tax rate, which may amount to many thousands of dollars in tax refunds. Furthermore, you can sell the shares to a family trust without depreciation clawback (and you don't have the legal fees to change the title of the house).