Woe is Us For Being a Landlord
This week one of our Owners sold their rental property. It was something of an emotional event, as it had been their first home, their first home until their little family outgrew it.
It’s a fairly humble home in a humble area, but it’s saved by its location, a jaw-dropping view of the sea. They fell in love with it on the spot.
Rather than sell it, they did what lots of Kiwis do – suck out some equity to buy a new home and rent the old one out.
Twenty years later, they’ve decided to let it go, hopefully to a first-home buyer.
As a landlord, they don’t expect any sympathy. They hardly breathe the word when others don’t have a home.
And it’s true, bad landlords do exist. But they did try to be a good one and take a business-like approach.
Tenants – they were lucky. Most of them were good, one was not.
Maintenance, there was plenty. Like all ageing houses, it had disasters: the header tank blew, flooding the house, a corner of the deck slumped, a leak in the bathroom went unreported, turning the bathroom and toilet into very costly mush. They’re not rich, but they fixed it all.
Of course, they’ll get some payback in terms of capital gain so again, no sympathy sought.
But it does bug me that running a rental is still not really viewed as a business, especially as the tax laws tighten.
In any other business, you can claim things like maintenance, losses and interest on your loan payments.
But it’s also true that the nature of property has given it a couple of big advantages that aren’t really related to tax at all.
For one, banks will lend a lot more on a property than they will for other forms of business.
And two, the capital gains – while not always as great as they have been in recent years – are untaxed.
However, capital gains are, in truth, often what makes the hassles of being a landlord worthwhile.
Many rental properties run at a loss because there’s only so much that tenants can afford to pay.
The Tax Working Group is looking closely at whether we have taxed income too heavily and capital too lightly but in the meantime, successive governments have skewed the playing field against property, arguing that too much has gone into housing when it could go into more “productive” parts of the economy.
The ability to claim depreciation has gone, even though buildings do lose value (it’s the land value that rises).
Proposed ringfencing rules will nix the ability for landlords to offset their rental losses against other income.
Upping the “Brightline Test” to five years, officially an income tax, is considered by many to be a capital gains tax by another name.
But if the tax does come in, fairness dictates that property should not be the only form of wealth that’s targeted.
In the meantime, we have to ask what effects these measures will have on our critically short rental market.
If we penalise landlords too heavily, will they go away? It’s hard to imagine that Kiwis will easily give up their addiction to property.
We believe they won’t because the banks have already ensured that anyone still in the game has plenty of equity and is therefore financially stable.
But as the capital gains flatten, I believe some landlords will definitely dip out.
That’s great news for first-home buyers, but it means a shrinking number of rental houses against an ever-growing pool of renters.
There is no single fix to our housing shortage. Ultimately, I think we will finally see the rise of corporate landlords with deeper pockets who can build houses specifically for the rental market.
They are common overseas and it’s well past time they came here.
Ma and pa landlords will always be around, but they’ll think twice now before they leap.