Articles by Matthew Gilligan
Many clients have been asking me if I think this is a better time to be investing in property in New Zealand. I think the answer is yes, but you need to be careful.
The Good News:
The Bad News:
Economists' Comments Intrigue Me
What intrigues me is the economists' view of things in the middle of quagmire. Statements like, "housing is down 12% and we think it has a bit further to go, perhaps another 5%" said one prominent bank economist five months ago. So his conclusion was don't buy, where I formed exactly the opposite conclusion from the same information. I felt a falling market full of fear = great time to buy.
Economists assume you are going to achieve the average. So if the market is down 12%, you will buy at 12% off the 2007 peak, and lose 5%....right? Well I guess that's right if you go about things in an average orderly way.
Buy at a Discount - Cliché but True
My clients know this is bargain season, soon to be followed by recovery season. (Whether it's a year, or 6 years, who cares? We are long-term investors, right?) So we know that if things are down 12%, we would be buying 10-20% below that...which means about 20-30% off the 2007 price. So then we are well below the historic peak price of 2007, and well below current market value. Which makes us safe, if things go down that extra 5%.
Cashflow is Always Key
If we buy properties with good cashflow (there are plenty around at present that at the very least are positive cashflow post-tax (refund), and some even positive cashflow pre-tax (refund)), then the recovery period is free capital growth. You do not have to fund the property, so the recovery to former peak value (however long it takes) is free growth. Then in the next boom, we get real growth again beyond the former peak.
Be Careful Though
The auction houses are full of new home buyers and investors drunk on low interest rates and recently relaxed lending criteria....you need to buy at large discounts, or you will not get growth for a very long time. That means you need to investigate the peak value in 2007, then take 30% off. That may mean that 99% of the deals don't work. But when you finally get one - well it's worth the effort.
GRA clients are bringing in great deals all the time at present...so get back in the market and start bargain hunting.
My advice is get off the beaten track and stay out of the overly populated auction houses. Look for things that are outside the square, like leaky houses for renovation, properties to land bank (if you have the cashflow to support, there are some great buys), coastal property, and distressed development property. Knock on the door of finance companies and developers....they like dealing direct with no agent.
Associated Persons: Update
The much talked about new Association Rules are back before Parliament, and unfortunately for those in the business of dealing in or developing property or erecting buildings, the Bill has not been substantially changed. The new expanded definition of association has largely survived the Select Committee process and the new rules are likely to come into force in August, potentially from early August.
We are currently working through the rules so if you are looking to buy a rental property in August please contact us for advice if you are concerned about potential tainting.
Holes In The Legislation Revealing Opportunity To Break Tainting
Contrary to previous media releases we have made about the new associated persons rules, we have found the latest rules released (which are expected to be implemented) do provide some opportunity to crack tainting. Talk to us if you are interested in how to break the new associated persons rules. There are some limited situations where this might be possible.
Important Note for Builders
If you are in the business of erecting buildings, this is the one activity that could lead to tainting of existing properties. To explain, if you are a dealer or developer only (i.e. not involved in the business of erecting buildings), any rental property that you own now and that was not tainted under the existing rules will not be affected by the new rules. Further purchases could be, but your existing rentals will not be.
On the other hand, if you are in the business of erecting buildings, existing rental properties that you have could be tainted if you carry out improvements on those properties. If you are in the business of erecting buildings and are looking at making improvements to a rental property, contact us immediately as you need to know the implications of this.
Changing Use on Existing Stock
The other major impact that the change in Association Rules has is for those of you who have property purchased for dealing and development purposes where you are considering a change of use. If you have a property bought for dealing and development purposes and you are considering holding it (i.e. making a complete change of use in respect of that property) you need to contact us urgently and consider restructuring the ownership of that property in the next two weeks before the new rules come into play.
In summary, the new Association Rules are coming in and, as feared, they are wide-reaching and going to make it very difficult for those engaged in a business of dealing in or developing property or erecting buildings to prevent future rentals from being tainted. More immediately than that though, if you have property owned by your dealing and development entity that you now wish to hold long-term, you may need to take action within the next two weeks to restructure the ownership of that property before the rules change. If you are in the business of erecting buildings, you also have to be extra careful if making improvements to existing rental properties.
If you want tax advice in relation to associated persons, please request an interview, contact the writer Matthew Gilligan ([email protected]) or Anthony Lipscombe ([email protected]) or call 09 522 7955.
Property School taught me there are more ways than I had thought about to grow wealth through property, and that wealth creation really is a possibility for us. - Lawerence Wong, April 2019
Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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