You can't eat the house


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House ownership is firmly entrenched in the NZ psyche as a way to build retirement wealth. For many, this has worked extremely well as the markets, supply and demand, and the tax system have been favourable towards residential rental property. However, all that glitters is not always gold and the winds of change are starting to blow.

It is becoming increasingly evident that:
  • House prices in parts of New Zealand are significantly over valued and unsustainable based on international benchmarking. As an example, Auckland is one of the least affordable places in the world to purchase a house based on the average house price compared against the average wage.
  • Sometime in the future, a capital gains tax of some description may be levied on all residential rental properties. This is common in many OECD nations.
  • Interest rates will rise and there could be moves to slow the purchase of properties by non-NZ residents. This could dampen house prices.

In light of the above, it may be prudent to consider selling a residential investment property and placing the proceeds into other more liquid and diversified investments. This is particularly relevant for those who have a debt free rental property and are now in retirement and looking for sustainable income flow. In Auckland, house prices are so high that it is common to have a return on market value of under 2% pa once rates, insurance, maintenance and management charges are taken into consideration. Care needs to be taken when interpreting these sorts of figures. The above is derived by taking the current market value of the house and dividing by an average of 48 weeks per annum of rental income.

2% or less is a very low return considering the risk and time input required. Fortunately, history has shown that these low returns are improved via tax deductions and capital growth. This is fine for those working and who can offset rental property expenditure against their salaries. The capital gain is attractive as it is building wealth for another day. However, once you retire, the ‘another day’ turns into ‘here and now’ and what you often want is good income from investments rather than good capital growth. The problem with the capital gain is you cannot use it piecemeal. It is hard to eat the garage door, or sell the kitchen. Getting a lump sum out of the property normally requires the owner to sell the entire property. If income is your requirement, then selling a rental property when prices are currently high (such as now) makes good sense for many.

Let’s look at a simple example of an Auckland rental property with a market value of $550,000. If it was sold and the money was reinvested at say 6% before tax, then that gives a before tax income of $33,000 with less time input and stress than owing a rental property. Of even greater significance is that the reinvested $550,000 is liquid so you are able to take out lump sums as and when needed to fund various purchases. There is no point taking the capital to your grave. Enjoy it while you can. Retirement is when you enjoy the fruits of your labours and start to sell capital assets to provide the lifestyle of your choice. We have a number of financial modelling tools we can work through with you to identify what may be the best option for you.