Buying in Recessionary Times, Edwards Law: Q & A as we near the end of Alert Level 2
Level 2 office access.
During Level 2 our offices are open. Inline with Level 2 recommendations we will be requiring all of our staff and visitors to sign in and out of the Withers Tsang office.
Summary of COVID-19 Government relief scheme available to SME and individuals
As we head towards Alert Level 1 in the “new normal”, it is timely to take stock of the targeted financial relief scheme available to SME business owners and those who have unfortunately lost their jobs because of the impacts of COVID-19.
Please give us a call if you have any questions or need help with the application.
By the way, do you need help to negotiate bank’s borrowing and to prepare cashflow forecast required for loan applications?
We can help, please call one of the partners.
“Keep fighting hard to maintain and build your income …”
Buying in Recessionary Times
We all know that acting counter-cyclically and actually buying an asset when everyone else is selling is the key to driving a great real estate deal. So what are the key things to consider when deciding to join the market?
Patience is a Virtue. Firstly, understand that not every vendor in the market will be a distressed buyer forced to sell. As interest rates fall it is becoming easier for people to hold property. In many cases rent is now sufficient to service a mortgage at the current interest rates. For every ten buyers in the market that would like to sell but are not forced to, there may only be one who really must. So, entering into a negotiation with a really low offer is not always going to find success. Agents with work hard to keep a vendor’s personal circumstances out of view so the process of bargain hunting can become very frustrating very quickly if your low offers are just returned unsigned. Being realistic on price is generally the key to engagement unless you have the capacity to stay engaged after many rejections.
If the vendor is not a distressed seller, but none the less wants to move on, might they be open to a vendor finance arrangement to secure a sale and could this be as valuable an advantage to you as a lower price might have been? There is no harm in asking.
Is your income at risk as a result of COVID? If it isn’t, you are lucky, but how will you use this luck to your advantage? Challenge yourself to use this advantage while it lasts, thankfully for the rest of us, it’s not going to last for ever.
Focus on income but buy in growth areas. The income is key to expanding the portfolio and the growth area is key to building equity. To identify a growth area, remember population growth and property price increase are closely aligned.
If you are going to make low offers, your chance of success is much higher if the offer is unconditional. Doing due diligence before pitching your offer if it means your offer is clean will improve your chances of success significantly.
Ask the high selling agents in your patch what they have got coming up, and make this call regularly. Often, it’s the person who called the agent last that gets the first call back when something comes to the market. Don’t sit back and expect the agent to ring you. Be proactive with your communications.
Remember the Golden rules, if possible, buying at a price where the rental yield will cover the mortgage interest. For decades this has been next to impossible, but with interest rates falling so far the equation has changed, the combination of current rent levels, slightly lower prices but much lower interest rates is making it much more achievable to add to the portfolio with a positively geared property. Remember to set your desired yield slightly higher than the mortgage interest rates. The offer you make to achieve positive gearing then is the annual rent net of rates, insurance and body corp divided by the desired yield.
The numbers don’t lie, take the fear away by gathering the facts on the rental potential and the holding costs and do the maths. If the maths demonstrates a profit why would you not buy?
Despite the removal of the LVR rules, understand that the banks are still “stress testing” lending applications at interest rates that can be as high as 6 – 7%. So, your income is, and will remain, the key driver of your borrowing power. Keep fighting hard to maintain and build your income and remember that the net surplus from your existing property portfolio forms part of your income for borrowing purposes.
Examine your own portfolio, are there opportunities to do some capital works funded while interest rates are low that would allow you to lift the rent levels above the interest cost of servicing the finance for the work. Projects like this are bite sized, increase your income, and enhance the property in every respect. i.e. Polish the gold nuggets you are already standing on.
Consider taking variable interest rate lending rather than fixed. Whilst the fixed rates offer certainty, they rob you of flexibility and are often higher rates, day on day, than what you are paying on a variable rate. There is currently no upward pressure on interest rates so is the certainty of a fixed rate really something you need if a variable rate is cheaper? Don’t automatically re fix when current fixed rates terminate. have a careful look at how much you can save by remaining floating when compared to the fixed rate alternative.
When buying, consider having the other properties in your portfolio revalued. This may enable you to raise a deposit with the lender who has security over your existing portfolio so that you can select a new lender for a standalone mortgage on the new property. Doing this takes planning, if you are not ready with all the information required to construct this arrangement with your existing bank the default position is to cross collateralise your new loan with the existing bank. This then makes it ever more difficult to uncouple yourself from your existing lender.
Are you involved in a partnership arrangements where the property is owned with others? Could it be an opportuneness time to negotiate an exit from the joint ownership, either by buying the partner out or selling out yourself. This may enhance your overall borrowing power as you will no longer be on the hook for your partners portion of the mortgage debt you share.
Consider Commercial as an alternative to Residential, there is no five-year Brightline and no loss ring fencing on commercial acquisitions.
If lower interest rates are improving your cashflow, consider increasing your principal repayments. This is simply saving by building equity in your portfolio. The lower your debt level, the more equity and income you will drive from your portfolio, this in turn drives your borrowing power up for the next acquisition.
Do you own any property that may now be sub divisible or could the property you are considering be sub divisible under unitary plan? If so, perhaps you could divide the land and build another dwelling to rent. Gaining an additional income from land you already own will drive your income up and the investment exemption to section CB12 that taxes gains on land developed or divided within ten years of acquisition means that the ultimate proceeds from sale are not taxed where the development was done to enable you to derive more rental income.
Remember that if you have a profitable portfolio now, the addition of a loss making investment to it under the portfolio basis for loss ring fencing will still allow you a full tax saving provided the loss from the new property can be absorbed against the rental profit from the others. Ringfencing only impacts those who can’t absorb residential losses against other residential rental profits.
Q & A with Edwards Law Employment Law Specialists
What impact could the Wage Subsidy, Extension, and Income Relief have on your business?
COVID-19: Q and A as we near the end of Alert Level 2
Q. Can my business undertake a restructure if it has applied for the Wage Subsidy?
Yes, provided you follow a procedurally fair consultation process.
In spite of the wage subsidy, businesses are entitled to restructure and reorganise their operations so that, that they are operationally efficient, financially viable, and/or reducing costs/overheads. Before you do this, you must consult with employees about any “proposed” changes before implementing those changes. How and when you implement these changes will depend on when you applied for the Wage Subsidy.
After 4pm on 27 March 2020
• Employers must retain employees for the 12-week subsidy period.
• Roles can be disestablished during the subsidy period by extending the employee’s contractual notice period to align with the duration of the wage subsidy period.
• The employee’s employment would then end by way of redundancy at the conclusion of the subsidy period.
• Notice could be paid by the subsidy and be inclusive of holiday pay and KiwiSaver employer contributions in agreement with the employee.
Prior to 4pm on 27 March 2020
• Despite best endeavours, if it is not possible to retain employees, you can disestablish roles within the subsidy period.|
• The subsidy can be used to pay notice and outstanding entitlements on termination.
• Employers do not have an obligation to pay out the full 12-weeks to an employee. Any excess subsidy can be used to cover other employees’ wages. After 4pm on 27 March 2020.
• Employers must retain employees for the 12-week subsidy period.
• Roles can be disestablished during the subsidy period by extending the employee’s contractual notice period to align with the duration of the wage subsidy period.
• The employee’s employment would then end by way of redundancy at the conclusion of the subsidy period.
• Notice could be paid by the subsidy and be inclusive of holiday pay and KiwiSaver employer contributions in agreement with the employee.
Notice periods
• If roles are made redundant, notice according to their employment agreement (or variation letter) must be provided.
• If the contractual notice period is extended to align with the subsidy period, the contractual notice ought to be paid in full based on the employee’s agreed hours/wages and the remainder can be paid at the subsidy rate (if the employee agrees with the extended notice period on this basis).
Q. Is my business eligible for the Wage Subsidy Extension?
Your business will be eligible for the Wage Subsidy Extension if it has had, or expects to have, a revenue loss of at least 50 percent for the 30-days before applying for the Wage Subsidy Extension, compared to the closest period last year. It is paid at the same rate as the wage subsidy ($585.80 for full-time employees and $350 for part-time employees).
Applications open on 10 June 2020. Your obligations under the Wage Subsidy Extension include:
• you must pass on the subsidy to your employee;
• you must retain your employees for the duration of the subsidy; • do your best to pay your employees 80 percent of their normal pay; and
• you must have taken active steps to mitigate the impact of COVID-19.
Whilst specific details of your obligations under the Wage Subsidy Extension are not available, we suspect they will be similar to or the same as the obligations under the declaration for wage subsidy applications after 4pm on 27 March 2020.
Q. What is the COVID Income Relief Payment?
This payment is available for 12-weeks from 8 June 2020 for anyone who has lost their job due to the impact of COVID-19 since 1 March 2020. Those who lost full-time work will be paid $490 per week, part-time will be paid $250 per week. These amounts are not taxed.
If your business has gone through or is considering a proposal to restructure and disestablish roles, it can advise employees of this payment to ease financial worry.
Q. What do we do when an employee requests sick leave during the subsidy period?
You may find you have staff calling in sick because they expect to continue to be paid the wage subsidy. In this scenario:
• the employee should be on sick leave;
• if the employee has sick leave entitlements, the wage subsidy can be used to pay these entitlements according to their normal pay;
• once/if sick leave entitlements have been exhausted, then sick leave can be unpaid;
• you can request proof of their sickness, which the employee must meet the cost of if they are sick for three consecutive calendar days or more. Otherwise, the employer may be required to meet the cost of the employee providing proof if they are sick for less than three consecutive days.
If you have any employment related questions regarding the impact of COVID-19 on the workplace, further information can be found on the Edwards Law website www.edwardslaw.co.nz or contact their offices on Auckland: 09 953 9757 or Hamilton: 07 981 3140.
Level 2 Office Access
The partners and staff at Withers Tsang can help and support you. We have the experience and the expertise and the empathy to assist you in many ways.
Please call on us on 09 376 8860. We do want to be useful to you during this time.
