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.

Quote:

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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.