With news of some major banks now dropping their interest rates below 6%, many investors have brought their attention back to the cash flow component of their current or future investment properties.
One of the most commonly discussed pieces of information is the weigh-up between how cash flow is affected between new and existing properties.
The difference comes down to one main difference: interest deducibility.
With interest deductibility being one of the main reasons to invest in new builds, it's important to understand how it actually works. Let's demonstrate how interest deductibility affects an investment property.
To do this, check out the cash flow analysis below for a property worth $650,000:
Don't get bogged down in the details; cash flows can be confusing to read through without the help of an advisor.
However, the point to note here is that interest on the new build is deducted as an expense which means the property isn't profitable on paper.
Making no profit isn't a great result at first glance, but it ultimately leads to the new build property being 38% less expensive to own because you don't have to pay tax on the profit.
It's such a subtle difference in the cash flow analysis, but it has such a profound difference to the result - your cash flow.
Now, imagine this across a portfolio of properties. Of course, as you increase the number of properties in your portfolio, the cash flow burden becomes more of an issue if you're paying too much tax, which is why new builds are such an attractive option to investors.
The tax benefit of buying new instead of existing property is even bigger with higher interest rates.
This is especially true if investors have other existing properties as part of their portfolio which now have a taxable profit due to the phasing out of interest deductibility.
As a result, new builds have fallen into favour more and more with New Zealand investors as they seek to reduce their liability.
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