Buying a home to live in but renting 1st 4 years

Hi all

I came up with an idea this afternoon which got me thinking. I researched the internet on it but couldn't come up with anything useful.

Here's my situation and idea: I work full time and am boarding with my parents which allows me to save quite a bit. I am also studying for a degree which will take another 4 - 5 years.

My idea is that I could buy a home that I'd like to live in, but instead of moving in straight way, rent it out to help pay off a bit of the mortgage. This also gives me extra time and money to finish my study. I wouldn't have to fork out extra costs for food, power, etc.. Rates and insurance are about the only expenses I can think of.

That's the basic idea. My questions are:
1) Any tax implications? My intention is to buy the home for myself long term. I am aware that tax has to be paid on the rental income...
2) So are any expenses deductible that relate to the rental income? Rates, insurance, interest etc... for the years I rent out?
3) Any comments, advice etc...?

Thanks

Razor

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Originally Posted by RazorX

Hi all

I came up with an idea this afternoon which got me thinking. I researched the internet on it but couldn't come up with anything useful.

Here's my situation and idea: I work full time and am boarding with my parents which allows me to save quite a bit. I am also studying for a degree which will take another 4 - 5 years.

My idea is that I could buy a home that I'd like to live in, but instead of moving in straight way, rent it out to help pay off a bit of the mortgage. This also gives me extra time and money to finish my study. I wouldn't have to fork out extra costs for food, power, etc.. Rates and insurance are about the only expenses I can think of.

That's the basic idea. My questions are:
1) Any tax implications? My intention is to buy the home for myself long term. I am aware that tax has to be paid on the rental income...
2) So are any expenses deductible that relate to the rental income? Rates, insurance, interest etc... for the years I rent out?
3) Any comments, advice etc...?

Thanks



Razor

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Profit is taxable. So expenses are deducted from income to calculate profit, including work done, provided it is repairs and maintenance and not capital items. E.g. if you buy a house and re roof it the next day, the IRD quite reasonably say that the re roof should have been taken into account on purchase and therefore you have bought a house effectively with no roof, or a no-value roof, and re roofing is merely completing the purchase. Capital items no longer have the benefit of depreciation. R and M are by far the biggest expenses you will incur although it is not a consistent outgoing, but when it hits - it hurts. The other point is that values are likely to remain static more or less, and the net income from a property will not cover all outgoings - so either find a complete bargain or just accumulate your dough - unless you are hell-bent on making a donation to a bunch of tenants, who I can assure you will not thank you. :D

Property prices may fall a bit more in the short term RazorX and as FP has suggested above cost of maintenance can add up so you need to pick a property very carefully.

I would suggest joining the local Property investor association who will be more than happy to give you advice, long term property is a solid investment to build from and to have your own property means you have control over your destiny.

I think you will find that property has been a foundation for many wealthy people to build upon, no doubt others will think this is bad advice and some will suggest there are far superior investment to be had which I would agree with but l like property and it will undoubtly have its growth days again like it always has done over centuries.

I agree with fungus pudding and robo.
Get the advice from local property investor assc.I would check to see if/and what interest rate you can get a mortgage.With out a job[income] it may be difficult.
Legal fees,and upfront costs will have to be paid before you receive any rent.You will have to check similar properties to see what rent you will receive.You will need spare reserves to cover times without rental income,and money to make the property a "good renter".
Beware, after paying a plumber you may decide to give up uni and become a plumber.Man they know how to charge.!!!!

Hi RX,

In answer to your questions;
There are tax implications (mostly positive) but it is workable
Your expenses can be offset against income, albeit there are some notable changes in this sphere as already mentioned
Comments/Advice...

I suspect no matter what property prices do, having a financial plan leaves you in a better place in 4 years time than the 95% of people your age who don't.

If the objective is "own a home" rather than "earn financial returns", then your own home initially as an investment leaves you somewhat better off because some expenses that would not have been deductable as personal expenditure becomes so as business expenditure.

If the objective is growing your wealth, then the question is one of opportunity cost instead.

Could you receive a better risk/reward/volatility outcome doing something else? You could definately earn better returns doing something else (i.e. starting the next facebook sized idea), but this future potential output need to be balanced against risks, probabilities, size of opportunity etc. Given you are posting on a site dedicated to share investing we can guess you are either interested or active in this sphere? This should have given you a feel into the relative merits of share investing versus leveraged residential property?

Thanks to everyone for your replies.

In response to some specific issues:

Fungus: Because my long term outlook is to purchase a home to live in I will be looking to get a house that is reasonably solid and (Hopefully) won't need much maintenance. Also I would top up mortgage payments from my wage as I work full time, so I would think that wage income, combined with rental net income should meet mortgage payments.

Robo: Thanks for the idea about property investors association. I also believe that property prices will fall in the short term, I am also sure that interest rates will go up in the short term, so its do I buy now and lock in some lower rates, or wait? Will any short term drop in property prices be eaten up by interest rates rises?

Halebop: Definitely the objective is to own my own home. I was going to wait until I had finished my study so as to take advantage of the great rates I get at home :) But then I started thinking that now is a pretty good time to buy, with both property prices and interest rates at lows. In four years who knows? I also thought that by renting out I could use some of the rental income to help pay rates, interest etc... as mentioned above I would still have to see if my current income would support any property I buy.

Cheers all, any more advice most appreciated.

Razor

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Originally Posted by RazorX

Thanks to everyone for your replies.

In response to some specific issues:

Fungus: Because my long term outlook is to purchase a home to live in I will be looking to get a house that is reasonably solid and (Hopefully) won't need much maintenance. Also I would top up mortgage payments from my wage as I work full time, so I would think that wage income, combined with rental net income should meet mortgage payments.
Razor

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Yes. But assuming prices do not rise between now and when you require the property for your own use (a distict possibility) then why would you want to own it and lose money running it - rather than just buying it later when needed? Instead of losing money you could be accumulating it by saving from earnings. In your position I would be looking and learning the market, and be ready to pounce only when and only if you see a suitable bargain. And remembering that you do not have to buy - don't be too scared to make the odd mean offer. They can only tell you to p**** off. It's the old '100 slaps in the face are worth one in the sack theory' (I'm assuming you are a male - but if not you may even understand that better :t_up: ). Good luck,look at everything and be patient; you will be well rewarded in this market.

Thanks FP, great advice! (You assumed right :))

I think possibly the first thing I should do is go to the bank and see how much they are willing to loan. No use looking at a property if the bank won't lend, and like you say do some research - (Which has been really limited to look at what properties are around, prices, and interest rates at the moment. I should draw up a list of what to look for in a good property.)

On the other hand rough estimates show that I should be able to save over 40k in 4 years so that would give me a decent deposit if I waited... which would make said bank nicer I'm sure :)

[QUOTE=RazorX;352154]Thanks FP, great advice! (You assumed right :))

I think possibly the first thing I should do is go to the bank and see how much they are willing to loan. No use looking at a property if the bank won't lend, and like you say do some research - (Which has been really limited to look at what properties are around, prices, and interest rates at the moment. I should draw up a list of what to look for in a good property.)


[QUOTE]

Yep - no harm in that. Just remember that you must cover more than mortgage payments in your budget. e.g. insurance and rates can't be avoided and essential maintenance. Also do your calculations on the total price, not just the borrowed part, because essentially the money you put in is borrowed from yourself. IOW you are paying the opportunity cost of tying up your own funds.

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Originally Posted by RazorX

My idea is that I could buy a home that I'd like to live in, but instead of moving in straight way, rent it out to help pay off a bit of the mortgage.

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If I may make a wee contribution. You need to look closely at the language you use and the auditable paper trail you lay down. If you get a mortgage from a bank to buy a "home" that you "want to live in" chances are you won't be able to claim the interest payments as a deductible expense.

If however you would like to buy a "house" in which "i will lease out to tenants to gain an income" then you can claim the interest as an expense.

IRD will allow expences claims if those claims relate to income producing activity. If there is evidence to show the purpose of the expense isn't related to producing income you may end out of pocket.

Hi MM and bleg

Thanks very much for the tips. Your comments bring a few things to mind:

Taking about buying a 'home' but renting out until I move in scenario - If IRD won't allow expenses claimed in this case do I also have to return the rental income since my intention would be to help pay off the mortgage until I moved in, not to make a profit? In theory if I'm not allowed to claim expenses because my intention is not to crate a profit, then i should have to return tax on the rent received either.

Um... and would this forum discussing ideas like this be considered part of an auditable trail? (Assuming they could identify me in real life... which I probably just answered my own question... but still...)

Thanks again

Razor

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Originally Posted by RazorX

Hi MM and bleg

Thanks very much for the tips. Your comments bring a few things to mind:

Taking about buying a 'home' but renting out until I move in scenario - If IRD won't allow expenses claimed in this case do I also have to return the rental income since my intention would be to help pay off the mortgage until I moved in, not to make a profit? In theory if I'm not allowed to claim expenses because my intention is not to crate a profit, then i should have to return tax on the rent received either.

Um... and would this forum discussing ideas like this be considered part of an auditable trail? (Assuming they could identify me in real life... which I probably just answered my own question... but still...)

Thanks again

Razor

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If you can convince IRD that 'just paying off the mortgage' is not making a profit ...good luck! Quite seriously, the best way to avoid tax in your case is simply to evade it, i.e. not declare it.

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Originally Posted by RazorX

Hi MM and bleg

Thanks very much for the tips. Your comments bring a few things to mind:

Taking about buying a 'home' but renting out until I move in scenario - If IRD won't allow expenses claimed in this case do I also have to return the rental income since my intention would be to help pay off the mortgage until I moved in, not to make a profit? In theory if I'm not allowed to claim expenses because my intention is not to crate a profit, then i should have to return tax on the rent received either.

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I'm not sure I fully understand your question.
It is arguable you have a responsibility to pay just the right amount of tax on your taxable income. Not a penny more nor a penny less.

If you are receiving rent as income you have an obligation to pay tax on that income. IRD have an obligation to tax you on your source income which will include rent. However you can offset your tax exposure by claiming back legitimate expenses generated in creating that income. If your tax reducing expenses are greater than your tax accessible income you don't pay tax. If your total income exceeded expenses you do pay tax. It is not IRD';s job to judge you on your business accumen (ie whether you are any good at making a profit) nor do they care about the legitimacy of the source of your income (you could be dealing crack for all they care) they just want their fair cut of your income.

It is also important to tell the bank and insurance company the property will be rented until you move in.

MM - so basically I'd have to return tax on net income. (Rent minus deductible expenses such as rates and R & M) This is irrespective of whether I intend to buy as an investment, or buy as a home?

Percy: Thanks for the heads up. I do need to look into insurance costs - no doubt they'll go up if I rent instead of living there myself.

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Originally Posted by RazorX

MM - so basically I'd have to return tax on net income. (Rent minus deductible expenses such as rates and R & M) This is irrespective of whether I intend to buy as an investment, or buy as a home?

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Put aside the buying the house thing for a moment.

If you receive an income IRD wants a cut of it. If you get income from wages they want a cut. If you get income from renting out a house / home, they want a cut. If get an income above a certain level from having boarders or flatmates, you guessed it, IRD want their share.

This is where you need to get into risk management. Whats the risk of having undeclared flatmate / rental income against the risk of IRD finding out? I doubt you'll be on IRD's radar for flatmate income. But it may be that at some stage your lifestyle is in excess of your declared income which may raise a flag with IRD. An extreme case of this is the accountant up Hamilton way that fleeced the family trust.

Check out IRD's website. They have loads of information (once you find it) on what your obligations are and on what it is you can claim.

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Originally Posted by RazorX

MM - so basically I'd have to return tax on net income. (Rent minus deductible expenses such as rates and R & M) This is irrespective of whether I intend to buy as an investment, or buy as a home?

Percy: Thanks for the heads up. I do need to look into insurance costs - no doubt they'll go up if I rent instead of living there myself.

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Also the bank my have different lending criteria on rental properties compared to owner -occupier. With the bank,insurance company,tax dept you must be truthful at ALL times. You are doing well to be thinking property,and saving $10,000 a year.Property is the same as everything.Put in the time,do the research, and you will get the rewards.Try to be the expert in the area you are looking at.Know what prices the sales were made at in that area.You may save 3 or 4 years savings by doing your research. A two bedroom with a sunroom can become a three bedroom house.Doing up the garden when selling can add thousands of dollars to sale price.
Having your finance arranged,puts you in front of people who have a house to sell.

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Originally Posted by RazorX

Percy: Thanks for the heads up. I do need to look into insurance costs - no doubt they'll go up if I rent instead of living there myself.

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If you are looking at a budget plan for a 30 - 50% increases in premiums. People think the Christchurch earthquake affects Cantabrians. The rest of NZ is in for a nasty shock as their renewals come up.

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Originally Posted by percy

Put in the time,do the research, and you will get the rewards.Try to be the expert in the area you are looking at.Know what prices the sales were made at in that area.You may save 3 or 4 years savings by doing your research. A two bedroom with a sunroom can become a three bedroom house.Doing up the garden when selling can add thousands of dollars to sale price.
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Some good points here from Percy ,think about demographics of our ageing populations, smaller properties closer to services will attract a premium in the future, the 100 to 1 ratio is also relevant , that is you could look at many many properties before finding the perfect investment, you will know as soon as you see it, this is an excellent time to be looking at property, even Skol seems to think so too.

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Originally Posted by robo

Some good points here from Percy ,think about demographics of our ageing populations, smaller properties closer to services will attract a premium in the future, the 100 to 1 ratio is also relevant , that is you could look at many many properties before finding the perfect investment, you will know as soon as you see it, this is an excellent time to be looking at property, even Skol seems to think so too.

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Robo,
My brother is a valuer in Hobart.He said nearly exactly what you said,"smaller properties,near a mall ". The 100 to 1 ratio is a good reminder to RazorX.

Hi folks

Bit of a noob question here: What is the 100 to 1 ratio? (Goggle wasn't very helpful - kept returning results for 2 stroke petrol mixes lol)

Also I just want to make clear I am by no means trying to evade tax - that's something I have always advised strongly against both on moral grounds and as a survivability issue (I.e. if the IRD catches you, you are dead in a manner of speaking) I just don't want to pay any more than I have to in tax hence all my questions on what is and isn't taxable. I have been looking at the IRD site as well which is a bit of a mine field. Your patience and help is appreciated.

You may have to look at 100,yes 100 houses to find your house.My wife and I at one time looked at about 80 after selling our house before we brought another house.We ofcourse ended up with a great buy,but at times it was very depressing,as everything seemed to be just that bit out of our price range.

Ah thanks Percy - I take it that's actually going into 100 houses for an inspection as I'm sure I have been through 1000 in the property advertisements?

Even with that only one or two have made me think that it would be a nice house to live in without seeing it. I think potential sellers aren't putting their houses on the market. That said there are a few good deals - I went past a property last Sunday and noticed it was for sale in a nice area. Researched a bit into the price and thought it was very good for the area (215k) Three days later it had sold lol.

A lot of people decide they want to buy a house.First port of call is the bank,who tell them with their deposit,earnings, the bank will lend them 90% on a $210,000 house.So,first, second or third house they see in this price bracket they buy.Happiness.!!!!
With you looking to buy in the next 4 years,you have plenty of time to make your house an investment.Research.
Location,bus routes,schools,mall and services,we all agree on.I also place a lot on how the house is sited for the sun.You will want a place where you can have indoor/outdoor flow.You will need to look at whether the drive is shared.There are a lot of other things you will find are important.
Take your time,look at 100 houses,know your section of the real estate market as well as, or better than an agent,then you will get the result.Do the first one right,and you will enjoy the benefits of realestate investing.With gearing,knowledge,good sense you will become a wealthy property investor.

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Originally Posted by RazorX

Hi folks

Bit of a noob question here: What is the 100 to 1 ratio? (Goggle wasn't very helpful - kept returning results for 2 stroke petrol mixes lol)

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They might be trying to tell you to buy a lawnmower instead. :p

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Originally Posted by fungus pudding

They might be trying to tell you to buy a lawn mower instead. :p

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At a ratio of 1 to a 100 that poor 2 stroke mower won't last long:)

On a more serious note its good to see all the posts around property investment!!!! better watch out it might set off the 'whats the best investment' argument :mellow:

Robo with modern oils & modern engines it is quiet common. A few years ago you would not have believed in 50 to 1 ratios but now it is the norm

[
On a more serious note its good to see all the posts around property investment!!!! better watch out it might set off the 'whats the best investment' argument :mellow:[/QUOTE]

Not prepared to go down that road..!!!!!!!!! However,I do note successful property investors make successful sharemarket investors.!!!!! lol.

Hmm well I have been doing research, read a book or two (Read Martin Hawes 'Save Money on Your Mortgage - very good) and did some sums

Seems that no matter how I work it with the properties around here I cannot make it break even even with an interest only loan. (It was suggested to me, that if I wanted to go down this path I should get a property that will pay for itself.) So I asked around and it seems that until most of the mortgate is paid off rental properties make a loss here.

Anyways.... I'm going to save up a deposit and keep my eye open while still expanding my knowledge of the housing market. The market seems fairly flat at the moment, although interest rates are prediced to rise to 5% by 2013 (I believe that is the correct date)

I have had a look at commercial rents... now if one could purchase one of those it might turn a profit... hard to live in at the end of 4 years though lol. Still thats an option for my investment portfolio to keep for the future. :)

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Originally Posted by RazorX

Hmm well I have been doing research, read a book or two (Read Martin Hawes 'Save Money on Your Mortgage - very good) and did some sums

Seems that no matter how I work it with the properties around here I cannot make it break even even with an interest only loan. (It was suggested to me, that if I wanted to go down this path I should get a property that will pay for itself.) So I asked around and it seems that until most of the mortgate is paid off rental properties make a loss here.

Anyways.... I'm going to save up a deposit and keep my eye open while still expanding my knowledge of the housing market. The market seems fairly flat at the moment, although interest rates are prediced to rise to 5% by 2013 (I believe that is the correct date)

I have had a look at commercial rents... now if one could purchase one of those it might turn a profit... hard to live in at the end of 4 years though lol. Still thats an option for my investment portfolio to keep for the future. :)

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And it's a much better option than residential property will ever be. Keep your eye on that market.

a bit off topic but with your 100 to 1 scenario do you guys always use the same property solicitor when making offers? I have been making a few low ball offers but every time I need to send the contracts thru to my solicitor ( which does not get paid until a sale goes thru) . I'm gussing she will start getting quite anoyed at all this unpaid work eventually....

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Originally Posted by bung5

a bit off topic but with your 100 to 1 scenario do you guys always use the same property solicitor when making offers? I have been making a few low ball offers but every time I need to send the contracts thru to my solicitor ( which does not get paid until a sale goes thru) . I'm gussing she will start getting quite anoyed at all this unpaid work eventually....

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An offer is not a contract until signed by the other party. If you need the solicitor to check your offer before it is presented to the vendor, then of course this should cost you. If you do not need the solicitor until you have an agreement or contract (that is both parties have agreed all points and signed) then it should nearly always eventuate in a completed sale and purchase, depending on special clauses.

In all the cases I have delt with the vendor required the offer on signed on the contract sent to them...

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Originally Posted by bung5

In all the cases I have delt with the vendor required the offer on signed on the contract sent to them...

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You make an offer to the vendor who may accept, reject or counter offer. If he accepts it is then a contract. If he rejects, or counter offers, it is no more than a piece of paper (although often referred to as the contract). But you were talking about the solicitor. I have always dealt without involving my lawyer until the contract was formed. i.e. all points agreed, signed and dated. Others are more cautious and if they want the lawyer to vet the offer before presenting it to the vendor, then they will almost certainly incurr a charge.

One thing to consider with commercial property--They can be great money spinners when they are rented ,but if theres a downturn and the lease runs out. sometimes they can sit empty for a long time.Ive noticed a few here in Auckland that have been empty for many months now.
One option for residential is to look for a house split into 2 flats. its better rent and you can live in one and rent the other.Also if you sell ,the vendor can do the same which makes it more affordable.
Downside is they are hard to find.

With resi there is always options skid.

1.If you buy close to your work you can save by walking.
2.If it has a double garage and you live close to a hospital you can rent that out.
3.If there is room for a sleep out you can rent that out.

This was our first property, it was already in two flats, but in a short time we doubled the rent, made some improvements and sold for a capital gain.

" Ive noticed a few here in Auckland that have been empty for many months now. "..

Skid... Make that many years in Penrose .. Mt Wellington.. East Tamaki.. and Manukau..

And onehunga--scarey stuff alright

the resedential minor dwelling is a good one for bumping up % of return for a property because you dont have to factor in the cost of the land.
Downside can be that the council can make it really difficult with permits etc.so you really need to do your homework.
Not sure how things are with the new S city council.
You would think they would be encouraging it to solve the population crises but we all know that its them that can be the real Turds[to coin Belges phrase]