Paper trail leads to sound investing

By ANNE GIBSON

A satisfying residential property investment will not only make you money in terms of cash flow from the rent and capital gains from value rises, but should also be relatively easy to manage.

But only if you put the right systems in place.

Kay Rogers, a residential investor for 15 years and principal lecturer in management at Auckland University of Technology's faculty of business, runs courses for residential investors.

Her courses are for those who are thinking of taking the leap into the great unknown of investing in housing as well as for those already in the sector.

Rogers, who owns a central city apartment in the Quay West tower, a property at Gulf Harbour north of Auckland and various rental properties, has hands-on experience which she is imparting to those on her course.

The course focuses on record keeping as a tool to help investors run a tight ship, but the detailed list of what investors must keep track of illustrates just how time-consuming a residential investment can be.

"What is daunting is that investors are told what rentals they are going to get but they are not told about all the problems," says Rogers.

"You have to do the research, you have to have market intelligence and be prepared to weather the storms in the market.

"I can see a storm coming in about a year when supply will exceed demand and we start to go through another dip in rents. People have to know how they can get through this.

"In the United States, it's called feeding the properties, which are like hungry dogs. It takes a lot of tenacity and stickability to get you through the difficult situations when it comes to residential investment."

Rogers says at the beginning of her checklist for investors that she is listing the important documents and records they should keep but in no particular order, and she notes that not all the information will apply to all investors.

"But the list should ensure you keep essential information relating to your investment property," she says - and certainly not overlook the need to keep documents so that tax deductions can be claimed.

As the number one point, Rogers lists the written rental or tenancy agreement as the most important piece of information to keep on file. What is stipulated there is important for both parties.

Next up should be your records of mortgage payments - "you will need to separate interest from principal repayments" - so you can keep track of exactly how much money goes out to keep your name on the title of that property.

Rogers also urges investors to keep a visual record of how the property looked before the tenant has moved in.

That will save arguments later before the Tenancy Tribunal as to exactly how many stains were on the carpet, whether the fridge worked and if a window was broken.

"Keep a record of any improvements the tenant does to the property," she says.

"Sometimes it is a good idea to take a photograph or even a video of the property before tenants move in, especially if they want to be paid for improvements they do to your property."

Days on which the house or flat do not produce rent cost you money.

"Keep a log of how many days a property is rented, how many it is used for personal purposes and how many days it is vacant," says Rogers.

"You need to say on your tax return how long the property was available for renting."

Retain any receipts for repairs or improvements, she says.

"You need these in case there is confusion over what is revenue expenditure and what is capital expenditure."

Rogers also recommends that investors keep a log of travel expenses; a schedule of depreciable assets; details of bank charges, valuation fees, disbursements and legal fees; insurance details relating to buildings and chattels; and accounting fees, tax consultation and other professional services fees such as management fees if your house or flat is being taken care of by an agent or a property management company.

With these files should be the contract you signed to buy the property, the valuation report you commissioned and rates and valuation notices from the local authority.

"This is required sometimes to work out how much of the purchase price relates to the land and how much can be depreciated as buildings.

"Also, legal fees on the purchase of the property need to be capitalised and added to the building figure and depreciated."

Rogers advises investors to establish a separate bank account for a rental property and to keep records of all transactions.

Don't forget to take account of your home office, stamps, stationery, photocopying, telephone, post office box, fax machine and computer. Depending on the extent of your rental business, you might be able to claim expenses in the form of a tax deduction.

Auckland University of Technology