Years of weekend work to buy a property portfolio and now the owner faces a loss
I have purchased three rental properties (all in good areas) over the past three years. In each case I put in a 25 per cent cash deposit (saved by working weekends as long as I can remember) and borrowed the balance. The mortgages were amortised over 15 years.
Over this same period I have worked almost every weekend improving the properties (hopefully increasing values and rents) and working part-time (on top of my regular job) to pay for renovations and improvements.
Unfortunately these tough times mean rents have progressively been reducing, and my tenants are getting further and further behind on the rents.
I have been through mediation with each and every one of my current tenants as well as several who have since moved on. It usually takes two months, and in every case my tenants have been instructed to catch up on the rent by paying $10 to $15 extra a week. Often the tenants move out shortly after this.
With part-time work drying up and tenants failing to pay rent (as well as doing considerable damage to my properties), I have decided to sell. Agents tell me (and advertising confirms this) the properties are now worth 15 per cent less than my mortgages. So what now?
I am in arrears with the mortgages and can't sell the properties. I accept the loss of my deposits ($427,000), but the shortfall on sale will be another $200,000 or so, and I don't have that.
And now the Government - and public opinion - think I have had it too good and should be punished.
What a nightmare. But there are a couple of rays of hope. Firstly, it seems unlikely you will be directly harmed by any government changes.
If depreciation of rental property is no longer permitted, I assume the Government will make some allowance for those whose buildings have depreciated when it comes time to sell, and it sounds as if you would qualify. Or maybe you'll be able to claim capital losses. Talk to an accountant.
You could, of course, be affected by falling house prices as a result of the government changes. But not necessarily. More on that in the next Q&A.
And you may be able to wriggle out of your plight by extending your mortgage term.
Your average deposit was about $142,000. If that is 25 per cent, your average house price was $568,000, with a mortgage of $426,000.
Let's say the mortgage is at 6 per cent. With a 15-year term, monthly payments are $3595, according to the mortgage repayment calculator on www.sorted.org, nz. If you changed to a 30-year term, the payments would be $2554. Or if you changed to interest-only, they would be $2130 - much more manageable.
It's worth discussing this with your lender. While interest-only or 30-year mortgages are not good ideas over the long term, they could get you through the crisis until house prices grow again - which they always do in the end.
Speaking of house prices, your expectations seem extremely pessimistic. Your numbers suggest your average house is now worth $362,100 - lower if we allow for some repayment of mortgage principal. That's more than a third below the purchase price. Has that really happened? If so, your "good areas" are clearly far from good.
Which leads me, I'm afraid, to a few lessons you and others might learn from this:
* It's lower-risk to own rental properties in a range of neighbourhoods.
* You bought all three houses over a relatively short period, at what turned out to be the top of the market. It's far better to spread purchases over many years. Then at least some of the purchases will end up being in good buying years.
* To paraphrase Oscar Wilde in The Importance of Being Earnest, to lose rent from one tenant may be regarded as a misfortune; to lose it from all your tenants looks like carelessness. Some tenants have also damaged your properties. Clearly you should have been fussier about tenants.
To give you credit, you paid 25 per cent deposits, which is much higher than many landlords and should have given you a good buffer.
Do talk to your lender about ways to keep at least one or two of your rentals. And good luck. After all your hard work, you deserve a break.
You have got it so wrong, it's not funny. Why are you so prejudiced towards KiwiSaver and against property investors??
The IRD have said that property investors do not have an advantage over any other sector. Why do you persist in pushing this fallacy???
If there were no private property investors, who would provide the houses that Housing New Zealand can lease for its tenants??? Tenants that even HNZ is now kicking out because they cause so many problems. And where do those tenants go when HNZ will no longer house them?? TO THE PRIVATE SECTOR!!!
Take away the incentives to be private landlords and there will be an absolute shortage of rentals - for everyone across the spectrum of society.
I'm sort of hoping the Government will do something stupid with the Budget re property investments. You know why?? It is going to cause a HUGE tidal wave of problems, and then the Government will realise that it needs us private landlords.
Spend a day (or two) with a property manager, then you'll understand landlords who manage their own properties put up with a lot!!
Let's slow down on the punctuation and the capitals and look at this calmly. If property investors have no advantage, as you say, what are the incentives for private landlords that you fear will go? You seem to want it both ways.
As to whether landlords will sell out, if house prices fall new landlords will come in. At lower prices, the maths will work even if the Government disallows depreciation - or whatever it does. Also, at lower prices, some tenants will be able to buy homes, reducing the demand for rentals.
But before we go far down that track, the government changes might not affect house prices much. A RaboPlus survey found New Zealanders have recently lost confidence in investing in housing, so prices have probably already fallen - or risen more slowly - to take imminent changes into account. House prices might even rise if the changes are less than expected.
On KiwiSaver versus rental property, KiwiSaver is blatantly favoured by the Government, which pays thousands for people to be in the scheme. So it's hardly surprising it's generally a better investment. If you're not a member, get onboard.
If the Government follows the advice currently being given, there are consequences for New Zealand and our small and medium businesses that you all choose to ignore.
Most smaller businesses (which are the engine room in this country) are funded by using the collateral value of their properties. No bank that I know of will fund business without such.
Now if as you all would propose the values associated with those properties tanks, all those who use their properties as collateral have a major problem, as do the banks.
The result of this attack on property and its value will be to create a depression of a magnitude not seen since the 1930s, with bankruptcies and business closures all over the country. Be careful what you wish for.
If you really want to debate the tax issue and get to the real problem then you must attack the tax sheltering that's done through trusts.
Their original purpose was to protect assets, but the purpose has been usurped to provide income sheltering via the manipulation of tax rates.
But don't expect the Tax Working Group (TWG) - which incidentally didn't even get the housing figure right - nor any high-powered politician or accountant to agree to have their rorts exposed. Why would they when they can earn in the hundreds of thousands in a trust, have the use of the cash and still get Working for Families.
Hopefully this just might cause you and others to reconsider who the real tax villains are.
As I said above, talk of tanking property values - and now business closures and depressions as well - seems a bit extreme.
Let's wait and see.
On trusts, the very first recommendation of the TWG is that the top personal and trust tax rates should be aligned, to take away the incentive to use trusts for tax shelter. Members of the group have also spoken out strongly against people qualifying for Working for Families in less than legitimate ways.
True, the TWG's numbers have been challenged. According to the University of Auckland's Retirement Policy and Research Centre, "The actual amount invested by households in residential rental properties is probably less than half the $200 billion claimed by the Tax Working Group."
But that's not the main point here. Your last comments are far from fair.
There you go again . bashing the landlord.
"Landlords depreciate ..." and "Landlords claim mortgage interest ..." Are you trying to portray to your readership that owner-occupier business owners claim no such deductions? Are you saying that businesses with leased premises don't claim same for their plant and machinery? So Mary, is this purely incidental to landlords?
Please Mary, I would like you to go tell my tenant, a solo mother from Peru with two children, that her tenancy is to be wound up because Mary believes that offering her a house to rent is not a legitimate business.
PS: In the 1990s some of "us" responded to pleas by the Government and the media to plan for our retirement. Others sat on their butts, only to then complain about "us" in 2010.
Are you sure it was my column you read last week?
I pointed out that depreciated rental buildings usually rise in value. "Plant and machinery" doesn't. It really does depreciate.
On landlords claiming mortgage interest, I said, "That's fair - it's a genuine expense." However, I did point out that when a landlord suffers losses on their rental for many years, it's a bit hard to swallow that they didn't buy the property with the intention of selling at a gain. But they rarely pay tax on that gain, when the law says they should.
I said nothing to suggest landlording is not a legitimate business. Of course it is. And like most businesses, it does good. While I doubt if any landlord is motivated mainly by altruism, I'm quite happy to say, "Good on you" for housing those who can't afford their own homes.
Mary Holm is a part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
