THE REAL COST OF A RENTAL PROPERTY

The real cost of a rental property is a question every investor should run the actual numbers on, rather than assuming rent alone tells the story. This guide walks through a full worked example — rent, interest, other costs, and what’s actually deductible today. Then it weighs that real cost against typical long-term capital growth.

30-Second Read

• Rent rarely covers a rental property’s full costs once interest and other expenses are counted, especially on a highly-geared property.
• Since 1 April 2025, mortgage interest is 100% deductible again. That’s a very different position from the 2021–2025 limitation period this article originally assumed.
• A property can run a genuine loss and still make sense. That depends on the cash shortfall being affordable, and long-term capital growth outweighing it.
• Under ring-fencing rules, a rental loss carries forward rather than reducing your other tax. It doesn’t disappear, but it isn’t an immediate refund either.
• NZ house prices have grown roughly 7% a year on average over the past 30 years (CBRE). Any specific property, though, can perform very differently from that average.

A Full Worked Example

Say you own a rental property renting for $600 a week — $31,200 a year. You have $600,000 of debt against it, at 6% interest, costing $36,000 a year. Add other costs — rates, insurance, property management, maintenance — of $8,000 a year. Total costs: $44,000.

$31,200 in rent, against $44,000 in costs, leaves a $12,800 annual loss. That’s about $246 a week in actual cash shortfall, funded from your own pocket.

Since interest is fully deductible under current rules, that $12,800 is also your taxable loss for the year. Under the ring-fencing rules, you can’t offset that loss against your salary or other income. It carries forward instead, against future rental profit. There’s no immediate tax refund to soften the cash shortfall, even though the loss is real and deductible in principle.

Some Perspective

Here’s where the “real cost” question gets more useful. Over the past 30 years, New Zealand house prices have grown by roughly 7% a year on average, according to CBRE. This varies significantly by period and location, though, and any individual property can perform quite differently from the national average.

Take a conservative approach and halve that long-term average to account for uncertainty. A $750,000 property growing at 3.5% a year would be worth around $1,058,000 after 10 years — a capital gain of roughly $308,000.

Against that, funding a $246-a-week shortfall for 10 years costs around $128,000 in total. Even after accounting for the full cost of holding the property, that leaves a net position of roughly $180,000 in this example. That’s before considering the eventual bright-line or other tax treatment on sale, and before any rent increases over that period, which would typically narrow the shortfall over time.

Why This Isn’t a Universal Answer

This example uses specific numbers — a specific rent, a specific debt level, a specific interest rate, and a specific growth assumption. Change any of those inputs and the picture changes too. A less-geared property, a higher-rent property, or a period of higher interest rates all shift the calculation meaningfully.

This is also a decision with real financial planning implications, not just a spreadsheet exercise. Getting advice from a qualified financial adviser, alongside your accountant, is worth doing before committing to a highly-geared purchase. The right call depends on your income, your risk tolerance, and your broader financial position, not just this one calculation.

Worked Example: Comparing Two Financing Levels

Julia buys with a smaller deposit and higher gearing. Julia’s rental runs a $246-a-week cash shortfall, similar to the example above, funded from her salary. She’s comfortable with this because her income is stable and she’s confident in the area’s growth prospects. She treats the shortfall as the cost of accessing a larger capital gain over time.

Liang buys the same property type with a larger deposit. Liang puts down significantly more upfront. That reduces his debt and interest cost substantially. His property runs close to breakeven instead of a loss. He gives up some leverage — a smaller capital gain in dollar terms relative to his initial investment. In exchange, he takes on a much smaller ongoing cash commitment.

Neither approach is universally right. It depends on how much cash flow risk each investor is comfortable carrying.

Checklist

• ✅ Calculate your property’s actual annual cash shortfall or surplus, not just the headline rent
• ✅ Confirm your interest is being claimed at 100%, under current deductibility rules
• ✅ Understand that a rental loss carries forward under ring-fencing, rather than offsetting your other income immediately
• ✅ Check long-term growth data for your specific area, rather than relying on national averages alone
• ✅ Get advice from a financial adviser on whether the ongoing cash commitment fits your broader financial position

Common Questions

Does a rental loss reduce my other tax? No, not directly. Under ring-fencing rules, a rental loss can only offset other rental income, or carry forward to future years. It can’t reduce tax on your salary or wages.

Is interest fully deductible again? Yes, from 1 April 2025 onward. That applies regardless of when you bought the property or drew down the loan.

Is 7% a reliable growth rate to plan around? It’s a reasonable long-term national average. Individual properties and periods vary significantly, though — treat it as a reference point, not a guarantee.

Does a bigger deposit always make more sense than a smaller one? Not necessarily. It reduces your cash flow risk, but also reduces your leverage. The right balance depends on your own risk tolerance and financial position.

Summary

The real cost of a rental property is rarely just the mortgage repayment — once interest and other costs are counted, plenty of highly-geared properties run at a genuine cash loss, which today carries forward under ring-fencing rather than reducing your other tax immediately. Whether that’s worth it depends on weighing the real, ongoing cash cost against realistic long-term capital growth for your specific property and area. A single national average figure isn’t enough on its own. Get the actual numbers right, and understand the current tax treatment. Get advice on how it fits your broader financial position before committing.

Talk to EpsomTax.com About Your Numbers

Every property’s real cost is different — the only way to know if a purchase makes sense is to run your own actual numbers, not a generic example.

Contact EpsomTax.com to work through the real cost of your next rental property. We’ll cover current interest deductibility and how ring-fencing would apply to your specific situation. We work with New Zealand property investors every day, and can help you go in with a clear-eyed view of the numbers.