Our Rental Investment

At the beginning of this year, and just before Covid Lockdown 1.0 began, Simone and I made an offer on a second house. Due to Covid, locking down, and working from home, everything then came to grinding halt for the next 6 or 11 weeks. But afterwards, we managed to complete the ordeal that is buying a house.

The idea behind this was simple. Our current house has increased in value to levels we’d never dreamt of, rental income is mostly reliable, and having someone else pay for your asset is always a clever idea. We did this by taking out a second mortage against the equity in our current house. And then handing over the day-to-day management to a rental company. They make sure we always have tenants; we’re paid on time and that all the minor repairs are taken care of. All for a very reasonable fee, in our opinion.

This all seemed hunky dory until recently. You see, we had to think about getting an accountant to make sure we’re not unknowingly dodging tax or leaving money on the table. And the things we learnt… Hopefully things I can impart on you now, in case you are ever in this situation. The more we learn, the more I’ll be able to share, so hopefully this adds to the overall investment category right here on KyleDunkerley DotCom.

After seeking advice from our other rental owning friends, we decided to go with Shepard Hensman Charted Accountants for a few reasons. Firstly, the super high recommendation they gave us for this business. People forget how much weight recommendations carry these days.
Secondly, the accountant they worked with personally is a Christian with high moral standing. We’re not looking to rip off the government and we’re not looking to dodge tax. We’re just wanting to make sure we’re working within the system without being stupid. Or leaving money on the table.
And lastly, who really understands tax and tax law if it’s not your everyday job? No one. Thats who! But accountants, they know stuff. Stuff I would very much like to know too. Which points to the fact that we needed one.

Do not pay off your second mortage!

This is the biggest thing we learnt. And it’s completely counter intuitive. Yet ask anyone who does, or did, or managed, or had, rental properties and they will scoff when you tell them this. Apparently, this is the first trial by fire. And the reaction is always the same when you tell people this is what you found out.
“Ah mate, of course you don’t pay off the rental mortage!” they will exclaim to you, as if you suddenly noticed the sky was blue.

I mean, the whole idea of buying a rental is to get someone else to pay off the mortage. Then in 20 years’ time when you owe nothing on it, you sell it and make heaps of pure profit dollars. Dollars which then the government decides to tax you on, I’ll have you know. This is roughly the retirement plan for 90% of New Zealand. But there is a smarter way of doing it. And it employs the idea of a debt snowball. Thanks to Dave Ramsey, this idea of a debt snowball is now firmly planted in my brain and I can think of no other way of doing it.

Let me explain how this is supposed to work, instead of ending the blog post here and using it as an excuse to write another one.
Every week, fortnight, month, the bank will come calling – asking you to pay towards your mortgage – both on your primary house and your rental. Hopefully the rent you’re charging is enough to cover the second property payment. But if you look closely, you’ll see 70% or more go towards the interest and only something like $200 actually go towards the principle. This is no good. The first step is to organise with your bank to do an interest only payment. Then you use the extra money you’re getting from the rental and throw that at your primary mortgage – you know, the house you’re actually living in.

And while you’re doing this, something else magical happens… You now claim tax deductions based on the interest you’re paying to the bank! Thats right, you can claim tax back on the money you have to pay to the bank. We’re still working this out and once I get a proper grip on how much it is, how it works, and other things, I will do another blog post. See! This is why we needed an accountant. But the more interest you pay to the bank, the more you claim back from tax. Can you see the positive feedback loop forming?

By doing it this way, your primary mortgage drops really quickly with this supplemental income. Then you can take the money you would be paying to the bank for your primary mortgage and add that to your second one. Suddenly, you’re only contractually shackled to the bank for half the time!

In summary, the more debt you have, the higher the interest payments. The higher the interest payments, the more tax you get to claim back. And since you’re not directly paying the interest – that’s covered by your rental income – you’re almost getting paid to have debt. It’s crazy, and your first instinct will be to disregard it, just to reject it outright. But go and ask someone who has had a rental for a while. You’ll get the scoff and the reply that makes you feel like it’s something you should have known all along.

As Simone and I learn more, I’ll be sharing the lessons here. Recently I have been feeling like it’s my current purpose to educate as many people as possible on financial literacy. After all, if you can teach it, you can understand it.

We’re in this journey together and a rising tide lifts all boats. If we all knew how to work within the system, we’ll all be better off. If we’re better off, we’re freeing up our time. When we have free time, we can be truly impactful. Impactful in our lives, in our social circle, in our community, in our world.

And now I must put this in for the legal reasons…
I am not a financial advisor. All advice is taken with this in mind. I do not benefit from you using the same platform I do, or by using a different one. I do not have any insider knowledge of any company listed. Everything I will talk about – from the tools to the news – will be as available to me as it is to you. Again: I am not a financial advisor and never will be.