- Hello, Connie here from Prosperity Finance.
I designed a tool to help you
to see the cashflow projection
if you have investment property you acquired
before the 27th March 2021.
Now, a lot of you probably
have heard about two weeks ago,
New Zealand government announced some new policies
aiming to help first home buyers.
Now, of those policy, there are two policies
that actually not in investors' favor.
One of them is extending bright-line rule
from five years to 10 years,
and the other one is not allow property investors
to claim interest on your investment property loan
as expense anymore from first October 2021.
Now, with a bright-line rule, a lot of property investors,
unsure they want to hold the property for long-term.
A lot of people have investment property
really for their retirements.
However, the other rule which is interest deductibility rule
it's really devastating to a lot of us.
The reason it's so critical is because
that directly affect the cashflow.
Now, as any business, cashflow is a business blood.
Without blood, people can't live, right?
Same for business.
Without cashflow, your business cannot survive.
You'll broke, right?
So investment property business is no different
from other business in that aspect,
as investors has to pay extra cash
to cover the tax obligation.
It is important to understand what the actual
cashflow requires in order to service all the expenses,
including the extra tax obligations.
That's why I designed this tool,
to help you to quantify the amounts
so that you can start early, start planning,
consult other experts such as property consultant
and tax consultants, so that you can plan early
and get the best possible outcome.
So let's have a look what that tool looks like.
A simple Excel spreadsheet.
Now, all you need to do is input values in those blue cells.
And then we will notice what's
the changes on the left hand side.
Now, these look like a profit-loss report,
but it's more like a cashflow forecast
for the next five financial years.
Now, just a disclaimer.
This is not tax advice and certainly
is not your actual cashflow.
It is a projection of cashflow for your rental property.
And the purpose of this tool is just
to help you do the budget and think about
what you're going to do for the next few years.
Now here, I made assumption that the input
in the blue cell would apply for the next five years.
Also, this model is designed for property
which were acquired before 27th March 2021.
Because if you acquired after that,
then from first October 2021,
the interest costs will not be allowed to offset at all.
So basically you're looking
at the financial year 2026 position.
But what's more difficult is for investors
who had property acquired before the 27th March,
what is look like over the next few years.
I'm also going to explore other factors
which also may affect your cashflow.
Firstly, let's have a look at this example.
So for illustration purpose,
I already input some values here.
Now, put your property address here
and that's a weekly rent.
Occupation rates.
Here, I assume a hundred percent.
Now, normally you get notice from your existing tenants
if they're going to leave the property
so that you have enough time to find the new tenants.
And from my experience there won't be any vacancies
between the two tenants.
So that's why I put a hundred percent.
Now, the next section is about this business
of renting a rental investment property.
Here I exclude the interest costs,
not just other costs.
So we have the insurance $1,000,
if you have property manager, I put 8% of the rent.
Now rates, that's the council rates,
and also in some area like in Auckland,
the landlord is responsible for water fixed charge.
Your attendants only look after the usage.
Now, I also allow some maintenance costs.
It depends on your property,
if it's relatively new or a bit outdated.
So you can put whatever you believe
the maintenance cost for your property.
Now, the next section is about your loan details.
So here I made the assumption about my loan interest rates.
Most of the people are on low interest rates,
some even less than 3%.
And then the loan balance is set first April 2021,
and the repayment method.
Now, a lot of investors have their loan
on interest-only if possible.
Now as at today, all banks allow interest-only
for your investment property
as well as the servicing stack up.
And then here is the, sorry.
I accidentally changed the input.
So the next one is the remaining loan term,
so you can find from the loan details
on your internet banking or phone banking.
There is a loan detail tab
so you can see what is the remaining loan terms here.
And the last section input is your tax rates.
Alright, so let's have a look the left hand side.
So let me explain.
So on the top is your income
which is the rent.
In this case based on $650 a week,
a hundred percent occupation rates.
That's what you get for your revenue.
And then all the expenses here,
so property management is based on your percentage inputs.
So then I get the outgoings.
Right, so in this case, we can see that
without the interest costs, it's only $6,900 a year,
but you get $33,800.
So without the interest,
there'll be a bit profit, which is taxable.
But in reality, we do have to pay interest.
There's no free lunch, right?
So in this case, it's interest-only,
so $750K is the loan balance time by 3%.
That's the annual interest cost.
So now I get my profit before tax,
before principal repayments.
It's also a cashflow, we can call it cashflow.
So there's about $4,396,
and then I pay my tax at 33%.
So then my net cashflow at the moment
is just under $3,000 every year.
That's before the new rule kicks in.
Now, to a lot of people,
even though you probably have purchased
the property last year at 80% leverage LVR,
it's more likely you're also in the positive cashflow
because interest rates are low.
And if you are on interest-only,
it's very likely you are in positive cashflow.
Now, let's have a look what is the implication
as a result of the new tax rule.
So now, basically from October 2021,
you can only claim 75% of your interest
for that financial year.
And then in this financial year
you can claim 75% of total interest as expense.
And for 2024 financial year, you can only claim 50%,
and then 2025 and then nothing in this financial year, 2026.
So basically for first April 2025
onwards, which starts off this in here,
according to the new rule you cannot offset interest
against your rent at all.
So for this year, you're going to pay extra tax of $7,425.
So, then it's your total tax.
So basically that's the tax plus the extra tax,
so that's giving you the total tax under the new rule.
I'm gonna give you the net cash flow post-interest.
The post-interest non-deductibility rule.
That's the cashflow position.
So you can see for the first year
the gap is relatively small.
$2,900 versus $2,000.
But look at this here.
It's from positive $2,900 to -$4,480.
Now, this is only just for one property.
Whatever you have, two, three or more,
can you really afford it?
You have to run your members, right?
So that's just the one factor that reduces your cashflow,
but it can be significant.
It depends on the input,
it also depends on how many properties you have.
Now, you notice that I have some text in red.
Not the numbers, the numbers will become red
when it's negative, but the text.
So one's here, but there's also other three here
which is tax rates, repayment method,
and the interest rates.
Now, just this goverment rule is just a trigger,
but other things can also happen,
and it can all happen at the same time.
So we need to be aware of these
and see what is the worst scenario.
So the second factor that affects cashflow is the tax rates.
And you probably know by now from first April,
for some people, if they're earning over $180K a year,
you will be taxed at 33%.
Now, you can see as soon as they changed that,
this figure updated.
Now that's become -$6,000.
Now let's see the next one.
Now, why I want to mention this repayment method?
Now, at the moment, as I mentioned,
most of the bank allow you to do interest-only.
That's on the servicing stackup.
However, the reserve bank may introduce a new policy
which prevents bank allow interest-only
to investors anymore.
So if that goes ahead,
that means you have to pay principal and the interest.
And also for people who are interest-only now,
even the interest-only policy still exists
but your servicing doesn't allow,
you also have to pay principal and interest.
And now I'm going to change that to principal and interest.
Please, watch the left hand side of my screen
just to see how the cashflow going to change
as soon as I change the method.
Right.
Now you can see for 2026, you have to tap in $21,538.
That's because you not only pay the interest,
but you also pay principal.
And here I only used 30 years for loan remaining term,
but if let's say you have 25 years,
you can see the principal repayment's even more.
What if you have a bigger loan amounts?
That's a huge difference.
Now finally, let's look at the rates.
Now, most of the people are low interest rates,
some even below 3%.
Some are still three or more because you kind of
lock in for longer, so it's still on the old rates.
But generally speaking, we are at the bottom
of the lowest interest rates.
The interest rate would increase eventually.
It's a matter of time.
So we need to kind of sensitize this interest rate factor
so that we can afford the payments at higher rates.
So let's just change it to 4%.
It can be more than that.
During the GFC time, it was even close to 10%,
so everything is possible for running investment property.
So let's see, I changed to four, look at that.
$26,500.
Wow, and that's, again, it's only for one property.
What if you have a couple or more?
It's going to be a huge difference.
Just to give you a quick summary
so you can see the difference.
So I take some screenshot,
just before this video
so that you can see the difference
so I don't have to change all the time.
So the first factor is the interest deduction rule change,
And you can see that from $2,900 to -$4,480.
And the second factor is tax rates.
If your tax rate is going to go up from first April,
then you have to pay the extra.
So it can be -$6,000, and the repayment method
from interest-only to principal and interest with this.
And lastly,
is interest rates change from three to four like that.
Okay, so the purpose of this video is really
to quantify cashflow variation from now
to under the new policy, and also if other three factors,
the tax rates, the repayment method,
and interest rate do change,
what your cashflow going to look like per property.
So that you can get more real.
What are you going to do?
Are you going to sell, or you think about other strategies?
I saw on the media people talk about
buying new build or commercial property
or restructured debt or increase your yield,
et cetera, et cetera.
So they all can be strategies,
but I think it's down to individual,
so it is important that you start planning
as early as possible.
This tool is going to help you
and I also highly recommend
that you use professionals.
Get the expert advice like property experts,
tax accountant, et cetera,
so that they can help you to create a game plan
and help you to achieve the best possible outcome.
So thank you so much for watching
and I hope you find this tool useful.
If you have any question regarding your loan,
feel free to contact us.
We are more than happy to help you.
Thank you, I will see you next time.
Bye-bye.
(bright music)