Private property issue #82 - Property investors cashflow to improve

Most of the election votes are in. National came out on top. So, it looks like New Zealand will have a new government.

What does that mean? Property investors will soon pay less tax once the interest deductibility rules change. That’s good news #1.

Inflation also came in lower than expected this week. That's good news #2. So, interest rates may now be at their peak.

Add up these factors. What do you get? Our attitude towards the housing market will start to change.

That point around tax is a bigger deal than many people think. Some investors will save $100,000+ in tax over the next 15 years. Let’s dive into the numbers.

This investor will save $110,000 in tax after National gets in

Ed and I were just in New Plymouth. We were speaking at the Taranaki Property Investors Association.

One investor raised their hand and said they own a $500k rental, earning $540 a week.

It’s an existing property that would pay more tax under Labour’s laws.

Here’s what her cashflow would look like under the old vs new rules.

Add up the numbers, and National's new tax law will save her over $110,000 over the next 15 years.

It’s a stupidly large number. And you can check my maths here.

Let’s be clear. She’ll still have negative cashflow under National while interest rates are high.

But over the long term, her cashflow will be much better. That's down to one thing. Her tax bill will be smaller.

This change is significant. It will draw more investors into the market, even though interest rates are high.

Some investors who’ve sat on their hands will re-enter the market.

Will property prices skyrocket? No.

I think they’ll go up a bit over the next year (maybe 5%). But while there will be more demand, there will also be more supply.

Once the bright line test changes, more properties will come on the market. Some investors will sell and pay down the mortgage since interest rates are high.

But you’ve also got to remember that National wants to slowly bring back interest deductibility. While Act wants it back straight away.

So, some investors will hold off buying until the taxes are fully repealed.

They might think, “my cashflow will be better if I wait until interest deductibility is fully phased in.”

That’s not necessarily true.

Let’s look at the example of our New Plymouth investor again.

If you bought that same property ($500k renting for $540 a week), here’s what the cashflow looks like in the first year –

Whether you get 50% or 100% deductibility, you might still pay no tax. So no impact on your cashflow.

How can this happen?

Today’s interest rates are high. So even with 50% of your interest costs counting, you may not pay any more tax in the first year.

So, if you’re thinking: "My cashflow will be much better once we get 100% deductibility. That's when I'm going to buy an investment property."

That may not be true.

But it all depends on your interest rates and the size of your own mortgage. So, if you want to run your numbers, you can download my simple spreadsheet here.