Setting up and managing

your rental
Once you have a plan in place and youve narrowed
down the types of property you might buy, its time
to think about nances, ownership structures and the
way youll manage your rental property.
Once again, understanding all the options will help you to make choices that
support your goals and lead to the rewards you have in mind. The decisions
you make here could also help you to narrow down your preferred property
type and strategy.

Getting a deposit
There are two main ways to do this. You either save up a cash deposit or use
the equity you have in a property you already own.
With this second option, the lender agrees that the value of your existing
property is well above anything you might owe on it. By using your existing
property as security for the new loan, it can be possible to borrow the full
purchase price of your rental property. You might also be able to borrow
some extra to cover initial expenses for things like renovations.

You should think carefully and get independent advice before choosing
the equity option. If rents drop, your property is empty for a while or your
circumstances change, such as your employment, you might not be able
to keep up the loan payments. And if property prices have fallen, the lender
might have to sell both of your properties to recover the amount you still owe.
Some people are happy to tie their family home to their property investment;
others prefer to keep the two completely separate.

Choosing the right home loan

Your property investment plan will help you to choose a home loan to suit your
goals. A combination of dierent home loans can often give you the best match.
Here are just two examples to give you some idea of the possibilities:
> If youre planning to renovate before renting, an interest-only loan for
the rst few months could help to keep initial costs down until the rent
starts to come in
> If your rental income will be irregular you might have students leaving
at the end of each year or seasonal rent from a holiday home then
a revolving credit home loan or our TotalMoney1 home loan could suit

To nd out more about home loans check our How

to nance a house guide, pop into one of our stores,
or call us on 0800 BNZ LOAN (0800 269 562).

1. Account opening criteria apply. Not for business purposes. Full details, TotalMoney terms and conditions,
and disclosure statement may be obtained free of charge from any store or bnz.co.nz

Tax considerations
Owning a rental property is like running a business and with any business,
income (in this case rent) is taxable. This means youll have to complete
a tax return each year.
Legitimate expenses are normally tax deductible. Theyre usually things
you have actually paid for that were essential to the running of your rental
property. The interest you pay on the home loan for your rental is one
example. Repairs and maintenance costs can be another, but not when they
become improvements to the property adding to its value or increasing the
rent you could charge.
Tax laws can change at any time and keep in mind your rental property could
be a mid-to-long-term investment. For this reason some property investors
dont rely on tax savings in their plan, but simply treat them as a bonus
when they occur.
For information on taxes visit the
Inland Revenue website ird.govt.nz
or ask your accountant.

Gearing
Its not unusual to hear about a rental property being positively or negatively
geared. A positively geared property means that the income you receive from
your investment property the rent is greater than all of the costs of owning
it, including interest, rates, insurances, body corporate fees, maintenance
and others. With a negatively geared property, the expenses are greater
than the income. The easiest way to inuence the gearing of a property is
by adjusting your expenses. Normally the only expense you can really change
is the interest by either borrowing more or less where possible.

Negative gearing
Sometimes the rent a property earns will always be less than the ongoing
ownership costs (such as the interest on the loan) and management costs.
In these cases the owner will need to make up the dierence from other
sources of income.
Some rental property investors are happy to do this. Part of their plan
might be to put their own money into the investment with the expectation
that the property will increase in value to compensate over the long term.
This strategy is called negative gearing.
The loss the rental property investment makes might provide some tax
savings on the owners other income but there are no guarantees and a loss
will always be a loss. If the property does increase in value to compensate,
that money will only be available after the property is sold or if you decide
to borrow using the equity you now have in that rental property.

Yielding
Another term you may hear is yields. One way to compare multiple
investment properties is to look at the yield; it can help you decide which
property is the better investment. The yield is the return, as a percentage
that you will get on the cost of the property after expenses but before tax.
Dont include the loan as the amount may dier depending on the property
you buy. Any tax advantage, capital gain or loss or loan costs and interest
would be additional to the yield and make up your total return.

Heres an example:
Price of property

$240,000

Gross annual rent ($270 x 52)

$14,040

Annual expenses
Management fees

$500

Rates

$1,000

Insurance

$300

Maintenance

$250

Body corporate fees

$750

3 weeks vacancy

$810

Total

$3,610

Annual rent after expenses

(Divide rent by the price of the property and multiply by 100)
$10,430 / $240,000 = 0.0435 x 100 = 4.35%

$10,430

Expenses to consider
To run a successful rental property youll need a detailed budget.
Here are some of the expenses you might need to include:
> Advertising for tenants
> Travel to and from the property
> Loan interest
> Rates
> Insurance
> Professional services fees (e.g. accountant, lawyer etc.)
> Taxes and/or tax returns
> Compliance costs to make sure the property satises accommodation
requirements, especially for converted garages or sleep outs.
> Body corporate fees mainly for ats, apartments and townhouses
on shared land, these can be quite expensive
> Property management fees if you use a property management service
> Maintenance oor coverings, interior and exterior painting, exterior
cleaning (like gutters, decks, railings and water blasting slippery
pathways) bathroom, laundry and kitchen upkeep, and dont forget
replacing appliances if they are part of the rental package
> Lawn and garden care you might not want to rely on your tenants for this

Insurance
Compared to normal home insurance, there are additional things
you might want to cover as a landlord. Here are a few examples:
> Loss of rent because your rental property could no longer be lived
in due to some insurable loss such as a re
> Loss of rent because the tenant left without giving notice or you had
to evict them
> Theft or loss of your own possessions from the property
> Deliberate damage or vandalism to the property or your possessions
standard home insurance would normally cover accidental damage only
If youre thinking of using the equity in your family home to help buy an
investment property, you should also take the time to review your life insurance
cover. You dont want the family home to have to be sold if something happens
to you and your rental property cannot be sold for enough money to fully repay
the mortgage.
We oer an insurance product called
PremierCare1 which has optional
cover specically for landlords.
To nd out more call our Property
Investment Team on 0800 269 009.

1. PremierCare is available through Bank of New Zealand (BNZ) and is underwritten by the insurer, IAG
New Zealand Limited, a member of the Insurance Council of New Zealand Inc. BNZ does not guarantee the
obligations of IAG New Zealand Limited. BNZ receives a commission for arranging PremierCare Insurance.

Ownership structures
There are many dierent ways you can own a rental property. Some of the
more common ones are personally, jointly, in a partnership, as a trust, as a
standard company (Ltd) or as a Loss Attributing Qualifying Company (LAQC).
The structures vary in the way that taxes can be calculated and managed.
They also oer dierent levels of separation between the rental property
investment and your other possessions and businesses if things go wrong.
You should get advice from your accountant, lawyer and/or nancial adviser
before deciding which structure would best suit your plan and your goals.
In the meantime, here are a few points to get you started:
> Individual or joint: you buy the property in your own name or joint
names and any rental income you have left over, after expenses, is added
to your personal income/s for tax purposes. If your rental property makes
a loss because the expenses are more than the rental income, it might be
possible to deduct that loss from your other sources of income. This can
reduce your total taxable income and therefore the tax you have to pay.
It wont recover the entire loss, just a percentage of the loss up to the
total of any tax you have paid.

For the most up to date

information on rental
income tax visit the
Inland Revenue website
ird.govt.nz

> Trust: some investors choose this structure to help separate the
rental property from the rest of their commitments. A trust can also
make it easier to share the income from a rental property across other
members of the trust, such as other people in your family. The trust will
need to have separate accounts and tax returns, which can add to your
accounting costs.
> Company: you and your partner can establish a company and become its
shareholders and directors. The rental property is owned by the company
and the income, loans and expenses are all in the companys name. There
are two main types of companies that people choose for rental ownership.
A Loss Attributing Qualifying Company or LAQC can pass losses to its
shareholders, which they can then oset against other sources of income
for tax purposes. LAQCs are the most common type of company for
rental ownership.
A normal limited liability company (Ltd), cannot pass losses outside
of itself onto its shareholders. It can only carry those losses forward and
o-set them against taxable income when the company makes a prot.
Set up costs and ongoing additional accountancy requirements apply
for both, such as ling an annual return to the Companies Oce and
a separate company tax return.

Property management
Another thing to include in your plan is whether youll manage the property
yourself or pay someone else to do it for you. Most property management
companies oer a full range of services, from helping you nd the right
tenants and taking care of repairs and maintenance to collecting the rent and
completing regular property inspections to keep an eye on your investment.
Some property investors never see their tenants or visit the property. They
simply buy the property and pay someone else to take care of everything else.
The services you decide to get someone to provide, if any, will normally depend
on a number of factors including the amount of time you have available, how
condent you are about some of the skills required and how close you live to
your rental property. Either way, its a good idea to nd out about property
management services and how much they cost before nalising your plan.

Financial management
The nancial management side of owning a rental property is something you
can either do yourself or ask your accountant to help with. Youll need to keep
detailed nancial records and receipts as well as complete a tax return each year.
Youll also need to keep an eye on your cash ow and plan ahead to make sure
youll have enough to pay the bills when theyre due or cover unexpected repairs.
Having a separate bank account such as a TotalMoney1 account can help.
Again, how much you decide to do yourself will probably depend on your
available time and your skills. If you decide to do most of it yourself, an online
accounting tool like Xero could be a good idea visit xero.com to nd out more.
1. Account opening criteria apply. Not for business purposes. Full details, TotalMoney terms and conditions,
and disclosure statement may be obtained free of charge from any store or bnz.co.nz