Turning your old home into a rental?

The majority of landlords in NZ have only two properties: the home they live in and one other. Most of them are negatively geared i.e. the rent doesn’t pay for all the expenses of the rent and they have to top up that account.

Often they bought the first one and have seen a large increase in value and equity. This increased equity has enabled them to purchase their second home and keep their first home as a rental. Should they do this? and if so, how should they do it?

Here are some questions you need to ask yourself:

1. Will the property make a good rental

Not all properties are good rentals. More often than not a property that is a great home is not a great rental. Try to consider this from a renters perspective.

2. Get a healthy homes inspection done

Healthy Homes Standards is the most commonly misunderstood issue for private landlords. It made large changes to the requirements needed to rent a home. They vary hugely to what is acceptable living standards for someone who lives in a home they own. We recommend visiting the tenancy services website and reading our blog to get a better grasp of what is required. We recommend using a third party inspection company such as NZRentalWOF for an independent report.

3. Get a rent appraisal

The rental market is moving fast. It’s difficult to know what a place is worth if you are not a property manager. Most property management companies are happy to provide a free rent appraisal or you can check out the rent tab on www.homes.co.nz.

4. Crunch the numbers

The most common error is underestimating the cost of having a rental. On average the mortgage repayments only make up 76% of your expenses. If your mortgage is $400 per week then you’d need to be able to charge $500+ per week in rent to cover the overall costs.

5. Restructure your holdings

When you purchase a new home with your existing home the debt is still private. Private debt is not tax deductible. If you move your rental property into a trust then you can deduct all debt payments. Over time this becomes a huge benefit.