All text must be copied without modification and all pages must be included.
This document must not be distributed for profit.
Changes to the KiwiSaver First Home Deposit Subsidy and Withdrawls
Property Investment- Rental, Capital and Total Yields
Property Investment- Principal and Interest or Interest Only Debt
The office will be closed over the following period in the near future:
Effective 1 April 2015, Government has changed the rules around KiwiSaver HomeStart grants and KiwiSaver first home withdrawals.
The key changes are:
For more information see:
PROPERTY INVESTMENT- RENTAL, CAPITAL AND TOTAL YIELDS
The gross yield for any investment property is 12 months rental income divided by the value of the property. Therefore a residential property that is tenanted at $300 per week with a market value of $300,000 would have a gross yield of 5.2% ($15600 rental per year divided by the $300,000 market value).
The net yield takes into account the likely cash outgoings of rates, insurance, repairs and maintenance, property managers fees and loss of rent due to an untenanted period. For example, based on the above example and say per annum rates are $1500, insurance is $300, repairs and maintenance are $300, allowing for untenated 2 weeks $600, that is total of all these costs are $2700. The net yield is 4.3% (12 months rental income less $2700 divided by market value $300,00).
Capital yield (or capital gain) is the ratio of the increase in the value of the property to the cost of the proerty.
For example , if you purchased a property for $100,000 and the value went up to $115,000 after one year the capital yield would be 15% (the increase $15,000 divided by $100,000)
Total yield is a combination of the two.
You could work out these ratios on a before or after tax basis.
Historically and generally:
PROPERTY INVESTMENT- PRINCIPAL AND INTEREST OR INTEREST ONLY DEBT
If you are investing in property and all your debt is tax deductible, then it depends on your attitude to risk, and your proposed portfolio growth , as to whether you should be funding only interest free debt, or principal and interest.
The more aggressive you are, and depending whether you want to accumulate a portfolio of several properties, the more likely it is that the debt will need to be interest only. This will ensure that properties can be accumulated without over-committing your income in the eyes of the banks. You obviously have to pay debt back eventually, but on this basis you can pay it back upon downsizing your property investment portfolio
Alternatively, you can consider paying back progressively by making principal and interest payments over the life of building your portfolio.
Features and benefits of principal and interest debt payment are as follows:
pay less interest
lower financial risk
pay off mortgage quicker
Features and benefits of interest debt payment are as follows:
higher tax deduction due to higher expense claim
accumulate more property sooner
improved cash flow
Choosing interest only payment is cheaper, but paying principal and interest debt can sometimes mean outgoings are too high to enable you to borrow further. If, for example. the property investor pays interest only, then the purchase of another property may be affordable. Many investors also believe too that the potential capital gains to be made by accumulating more property can also outweigh the cost of paying more interest.
|TOTALACCOUNTING KNOWLEDGE CENTRE AND ARTICLES ABOUT TAXATION AND BUSINESS IN GENERAL PRESS HERE||FOR BUSINESS STARTUP KNOWLEDGE CENTRE PRESS HERE|
|FOR INFORMATION ABOUT COMPANY INCORPORATION PRESS HERE||FOR PREVIOUS MONTH EMAIL NEWSLETTERS PRESS HERE|
If we can assist further, please email TotalAccounting as follows: