Upsides to renting out your property investment to social housing tenants

COMMENT: Thousands of Kiwi families are still currently living in motels, waiting on a seemingly endless list for public housing. But in an unusual move, private property investors are being asked to help the Government solve the social housing crisis.

The new interest deductibility rules, announced in late September, state if a property investor rents their house through public housing, they’ll have access to special tax incentives.

Many investors will be seriously considering a move to rent their properties through Kāinga Ora (formerly Housing New Zealand) or through a registered housing provider.

The financial incentive to do so is massive. For example, an investor with a $700,000 mortgage could save up to $7,000 a year if renting through the public housing system.

Many investors might pause at the thought of renting their investment to social housing, so is it a good idea to make the switch?

The first thing to note is that “public housing” can be broken down into two distinct groups.

There is state housing, which is organised through Kāinga Ora, and there is community housing, which is provided by registered community housing providers.

While Kāinga Ora may be better known, property investors can qualify for the tax exemption whether they use either method.

While the term “community housing providers” might be relatively new to investors, the providers themselves are often well known. They include the Salvation Army and Auckland City Mission, as well as other, lesser-known housing providers, like Link People. There are 62 groups registered around the country: 30 in Auckland, 10 in Wellington, four in Christchurch and one in Hamilton.

Community housing providers often don’t charge property management fees. This means an additional 8-12% savings of the rent percentage they would usually pay to a property management company.

Not only that, but community housing providers will often pay the property investor rent, even if the house is empty.

For context, investors usually budget for 4-6% of the year where their property is empty and receives no rent. But with social housing, investors won’t need to budget for this.

These factors combined are tipping the scales in favour of social housing – especially if the investors’ property isn’t covered under the New Build exemption.

But, community housing providers won’t just take any property an investor wants to give them. The houses have to make sense for the people who are in need of property.

So this might mean properties may need to be in a specific part of the city, or have a specified number of bedrooms.

Of the 24,474 people currently on the social housing register, 49.2% require a one-bedroom home; 31.2% require a two-bedroom home and just 13.8% of people need a three-bedroom property.

Similarly, the demand for social housing changes depending on location. There are currently just over five social houses needed per 1,000 people in Auckland.

But in Waimate, in South Canterbury, there are only 12 houses needed in total. That’s 1.54 houses required per 1,000 people.

So if you have a one-bedroom or two-bedroom property located in Auckland, you’re going to have a better chance of renting through a community housing provider, compared to if you have a four-bedroom property in Waimate, where no 4 or 5 bedroom properties are required.

Even so, not every one-bedroom property will be appropriate for every tenant.

Some have specific needs, for instance wheel-chair access. This might make it harder to rent a property with stairs to a community housing provider compared to a property that doesn’t.

Lastly, property investors will be aware of the drawbacks associated with renting through a community housing provider.

Firstly, you don’t have a choice over who your tenant will be, compared to if you’re renting privately. Secondly, a portion of social housing tenants (but not all) are naturally going to have a range of social issues or problems. This could negatively impact your property if the tenants are disrespectful or aggressive.

This fact alone might be enough to scare some investors off. For others, especially investors with smaller portfolios, the financial incentives may be enough to make the switch.

Whichever way you decide, it’s also important to note the legislation has not yet been passed through parliament and is not yet law. The rules could yet change through the select committee process.

- Andrew Nicol is managing partner at property investment advisers Opes Partners. Ed McKnight is Opes' economist. You can listen to their weekly podcast The Property Academy on iHeart Radio or look at the episodes below.