Offsetting New Tax

by Nick Gentle on Jun 30, 2021
Article appears under: About Property Investment, Goal Setting, Investment Strategy

As an investor, we are taught to be counter-cyclical and buy when nobody is buying. What nobody mentions is that it can be scary in the moment. One investor compared it with feeling like he was playing a game of chicken vs an onrushing train … and I wouldn’t hold it against any property investor to feel particularly bruised by this current Government’s policies and rhetoric.

Here are some ideas that might help with investing when it starts to feel like the cards are stacked against you.

1. Remember the people who made something happen during previous downturns? They’re wealthy now.
2. There will be opportunities as would-be investors opt to stand on the sidelines.
3. When hearing opinions and advice, filter it by asking yourself if you would pay for it.
4. The number one rule is to stay in the game and keep your equity. If you feel like you are overextended or have assets that don’t really fit your strategic goal, possibly sell, otherwise stick with it.
5. A tried and true way to cover extra costs is to increase your income.
6. Only sell if it makes strategic sense and you have a better use for the money.
7. If you have a choice between giving up on your goals and adjusting your strategy, I would opt for the latter.
8. Be careful looking for easy, quick answers and “silver bullets” when change comes. Be measured in your approach.
9. Ultimately this game is about your portfolio. Surround yourself with people who understand this and help you work towards it.

WHAT THIS LOOKS LIKE IN THE REAL WORLD

Like most investors I am impacted by the new tax by way of removing interest deductibility from residential investment property.

I feel a lot better when I am taking action and making moves to control and improve my situation – I encourage you to also. It beats sitting around and reading gloomy articles by people who don’t invest themselves.

I have some choices on how to get through this, remembering that we are months away from the rules being finalised. I will have a good long chat with my broker and accountant before making any real moves.

1. Sell one or more assets and reduce debt.
2. Sell one or more assets and reinvest, preferably in an asset that is not impacted by the new tax and produces a higher income.
3. Do more deals and increase cashflow to cover the increased costs.
4. Do more deals and increase cash, then reduce debt and/or reinvest.
5. Keep assets and pay down debt over time.
6. Some mixture of the above.

I’m going for #3, #4 and #5 and seriously investigating #2, with an eye on starting to invest in commercial property.

Most of my properties are multi-tenancy and would not suit a home buyer, with one exception, which has stunning ocean views in Wellington. It produces great cashflow for me because I developed it to do so, however the yield on today’s value is low. I could sell and reinvest the equity into something of similar value and increase my cashflow.

My strategy for properties to hold has always been multi-tenancy and I will keep looking for opportunities to buy, renovate and rent out properties. For example, there’s a growing shortage in one to two-bedroom flats for older renters.

For deals to increase cash a relatively fast strategy is to renovate run-down homes and sell them to homebuyers. Slower but potentially more lucrative is development, subdivision, etc. Team up with experienced operators if you consider this route and get tax advice first.

Lastly, on repaying debt. Somebody much more successful than me pointed out that nobody ever went broke with too much cashflow and not enough debt, and that is as true today as ever. Interest rates are historically low and this is a tax on debt so it makes sense.

This article was published in the June 2021 issue of the New Zealand Property Investor Magazine and is shared here with permission from the magazine. 

The magazine is an excellent resource with digital and print options. We highly recommend it. 

Nick Gentle
Business Owner & Operations Manager
nick@ifindproperty.co.nz
027 358 3855