Should Kiwi Business Owners Buy Rental Properties?

I want to ask you a simple question: would you ever buy a business that runs at a loss?

Most people would say no straight away.

But then why do we do exactly that when it comes to residential rental property?

I want to walk you through why I think NZ business owners need to think a lot harder before piling into residential investment property.

Phil and I don't currently own rental properties (though we've dabbled in the space before), so you might think we're biased. We probably are, a bit. But I don't think that makes the maths any less real

Property Has Been New Zealand's Default, But the Rules Have Changed
Growing up, property was the obvious next step (in NZ) once you'd made money in business.

You paid tax on your profits, then looked for something to park that capital in to beat inflation and the vehicle of choice was almost always property.

But the tax settings around residential property have shifted enormously over the years.

Back in the day, if your rental ran at a loss, you could offset that loss against your other income at tax time.

That's gone.

Then we got the bright-line rules, taxing gains if you sold within a certain period.

Then interest deductibility got limited.

Every change I can think of over the last decade or so has gone against residential property.

If your parents are telling you property is a guaranteed win because "that's how they did it," it's worth asking them directly about how those tax rules have changed under them, because the game has moved a long way from where it started.

Running at a Loss Isn't Something to Be Proud Of
A lot of rental properties simply don't turn a profit once you account for the mortgage interest, insurance, property management fees, repairs, and the odd emergency call-out.

When your rental income doesn't cover those costs, you have to top it up, and that top-up money has to come from somewhere. Usually, it comes out of your business.

Think about it for a second, you have to earn more profit in your business, pay tax on that profit, and then use what's left over to prop up an asset that is, by definition, losing money in the hope that a future capital gain (which may or may not be taxed by then) makes it all worthwhile eventually.

Even the properties that are profitable tend to be only slightly so, often just a few thousand dollars a year in profit by the time everything's accounted for.

And you've still got a mortgage to service on top of that.

"What Are You Chasing?"
If you're a business owner who's got to a stage where you're considering a rental property, the question we always come back to is: what are you actually chasing?

When we ask that out loud and there's usually a pause, because most people haven't stopped to think about it.

It's often just the default thing we do because we're Kiwis, and that's what you're "supposed" to do with spare capital.

But being the default option doesn't make it the right option for you.

Getting to a position where you've got surplus cash or capital to invest is genuinely something to be proud of.

Most NZ business owners are still fighting fires day to day, so if you've built enough stability to be thinking about investing elsewhere, well done! that's rare.

But before you default to property, it's worth pausing and asking what else that capital could do.

Could it go back into your own business? new equipment, a new location, expanding the team? Could it go into upskilling yourself? Is your entertainment budget bigger than your education budget?

If You're Going to Do It, Do It With Your Eyes Open
I'm not here to tell you property investment is always wrong.

I once had breakfast with a family on the New Zealand Rich List with serious property exposure, and they told me something that's stuck with me: "you don't make your money when you sell, you make your profit when you buy."

Their point was that returns in property come from buying under value, not from buying with emotion and hoping the market carries you. That's a genuinely different skill set to what most of us do when we buy a house we love the feel of.

Another good piece of advice I picked up along the way: set aside roughly 1% of your property's value every single year for maintenance.

And a word of caution on the "I made 60 grand on my property" stories you hear at the barbecue, check the maths.

If you bought for $540,000 and sold for $600,000, that's not a $60,000 profit once you factor in legal fees, real estate agent fees, relocation costs, and the opportunity cost of your capital being tied up.

It's often a lot less impressive than it sounds on Facebook.

One More Thing — This Is About Residential, Not Commercial
To be clear, everything above is about residential rental property.

Commercial property, for a business owner, can be a genuinely different conversation, but that's a topic for another day.

And to be crystal clear, if you're a business owner and you've already got a rental property or two, we're not going to think any less of you for it. We love working with Kiwi SME business owners, whether you've got investment property on the side or not.

My concern is business owners who are already good at what they do taking on more debt for an underperforming asset, when what this country actually needs is business owners backing themselves to grow the businesses that create jobs and opportunities.

So before you buy that next rental, ask yourself honestly: what are you chasing? and is property really the fastest way to get there?

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This article is based on insights from the Next Advisory podcast, where Luke and Phil help New Zealand business owners navigate economic challenges and build better businesses. Visit nextadvisory.nz to find out how we can help you.

Checkout more of our blog content at https://nextadvisory.nz/podcast