Bernard Hickey: Sell out country to cash in on tax perks
5:40 PM Saturday Nov 24, 2012
New Zealand Tax system incentives point to rental property investment. Photo / Mark Mitchell
I sold my house in Auckland this week to take advantage of the "heat" in the market. I'm looking to pay off my mortgage and buy a house, mortgage-free, in Wellington.
This is my deleveraging plan to reduce the risk of debt and give me more flexibility around work. But it's not what I "should" be doing, regarding the incentives thrown at me by our tax system.
Instead, I should be taking the equity out of my house, slicing it up into deposits and spreading it across rental properties in Auckland, with good dollops of 80 to 95 per cent loan-to-value ratio debt.
Let's say I have $600,000 of equity. Brokers tell me that banks are keen to lend and will allow me to buy a couple of rental properties with 5 per cent deposits. I could then buy another five with 10 per cent deposits, and the rest of the money could be used as 20 per cent deposits to buy three more. That would allow me to buy 10 investment properties at $500,000 each for a total of $5 million, including borrowings of $4.4 million. That's an average loan-to-value ratio of 88 per cent.
At current interest rates of about 4.9 per cent, that would mean I'm up for $215,600 a year in interest.
I'm told that if I am a clever investor who only buys three-bedroom brick-and-tile properties in cheaper suburbs in South and West Auckland, I can get a cash yield - after rent, rates, insurance and maintenance - of about 6 per cent, or $300,000, a year. That implies rents of more than $400 a week but I'm told that's possible, particularly if the Government will pay accommodation supplements.
At current interest rates I would already be profitable in cash terms, but factor in the tax-free capital gains and I would be in clover.
Currently there seems to be just one direction for house prices in Auckland. The Real Estate Institute's stratified measure of Auckland house prices showed they rose 14.4 per cent in the year to October.
If that happened again next year I would make implied capital gains of $700,000 on my 10 properties, adding to the $84,400 of cash profits from the rentals. That implies a return of 130 per cent on the $600,000 of equity I leveraged into rental property.
The big question is what will happen to property prices and interest rates. Markets are pricing in more cuts in interest rates. Auckland is building less than a third of the 15,000 houses a year it needs to keep up with population. The Reserve Bank governor just said he wouldn't limit loan-to-value ratios, even if he could. Why wouldn't house prices rise another 14 per cent in that environment?
All the incentives are telling me to buy rental property in an Auckland market with a chronic shortage of houses. They say I should borrow $4.4 million from foreign-funded banks to boost the value of existing property. They say I should increase our foreign debt to enrich myself while not employing any other New Zealanders, and not paying tax on it. So what am I waiting for? I've almost convinced myself I should do it.
If you buy with the intention of flipping the property and do so, you will be liable for income tax (usually higher than CGT) on the gains. So there is no tax free incentive really. CGT is proven to be ineffective in discouraging property investment so I dont understand why the Herald writers keep banging on about it.
Look at the BBC/UK papers on line. Same issues here about housing affordability and shortages (probably more so than NZ) inspite of having CGT AND stamp duty. There is no silver bullet to this problem. My suggestion is build commuter towns and invest in rail transport.
The problem we face is one of individualism. We all wake up in the morning, do our own thing all day and go to bed at night or some slight variation of that.
We are all here to do what we can for our own survival. Some lucky person (and good on them) won over $20mill last night in lotto. For the majority of us that isn't going to happen so we have to look at all other options for our survival and what is going to work best for us because that is how we are wired.
Practically speaking, there is nothing anyone of us is ever going to do individually that is going to do an ounce of good or bad for our country. Collectively though, it is a different story. Unfortunately we are not a collective species and because everyone else out there is trying to do their best for themselves (and their families) you have to do the same yourself.
That means, make your own decisions. If you can sleep at night with that amount of debt, so be it. Go for it.