LATELY I’ve noticed a few news articles about developer incentives being offered in various markets around Australia. I’m sure many of you would have seen the headlines.
In Brisbane, the developer behind a luxury apartment project in West End is offering buyers a car – a Toyota Yaris hatchback.
Another townhouse development in Corinda, in the city’s southwest, is offering a year’s supply of avocado on toast.
Further south there have been reports of a developer behind a Parramatta apartment block in Sydney offering $30,000 in cash.
Meanwhile, in Western Australia apartment developers have been offering up to 1 million frequent flyer points, amongst other incentives.
It’s not just limited to apartment developments; incentives are offered for house and land packages too, with free gift cards or even furniture packages.
Developer incentives are nothing new, and they often serve as a warning sign to buyers that something is amiss.
But lately I’ve been wondering whether there is any upside in being lured in by the incentive carrot at this point in time. Let’s examine the issue before making a determination.
The downside to incentives
Developers generally offer incentives because they need to get pre-sales in what could be a slow or oversupplied market, which in turn enables them to get a project up and running. Offering incentives is a marketing trick to lure buyers in.
The problem for buyers is that they could end up technically overpaying for a property and then having issues with obtaining finance.
You see, the incentive is usually offered in lieu of reducing the purchase price. So if the developer offers a $20,000 car, buyers might feel like they’re essentially paying $20,000 less for the property, but they’re actually paying the price on the contract which could actually be $20,000 too much as the incentive is built into the price.
So let’s say you buy a property for $500,000 with a $20,000 incentive. You might think you’re really paying $480,000, which is probably its true market value, but you’ve still contracted to buy the property for $500,000.
When banks assess whether they will give you finance, they usually don’t take the incentive off the price – they will look at the price on the contract, and the valuation must come up to par for a buyer to get finance. The problem is that since the property is probably worth less the valuation may not be high enough for the bank to lend to you.
Put simply, valuations can fail to stack up because the property is only worth the price minus the incentive, but you’ve contracted to pay the full price.
This creates a whole lot of confusion, and the easy solution would be for developers to just reduce their prices. This would be beneficial for buyers because they can pay less stamp duty, but developers argue that buyers have come to expect incentives, so it’s a box that needs to be ticked in their marketing strategy.
Is there any upside?
If there is a cash incentive, as a buyer you shouldn’t think you’re getting a discount because you’re actually just paying what the property is worth – ie. the net price.
So if you’re not really getting a discount is it worth taking advantage of a developer incentive?
Well, as I see it, you’d have to first look at why this particular developer is offering an incentive. They might well be desperate for sales, but they also might just want to get some quick pre sales to get things moving.
You’d then need to look ahead to the future. Even if the market is quiet it could turn around in time, which means you could benefit from getting in now.
In the case of apartments there has been a lot of press about an oversupply, particularly in Brisbane and Melbourne, which has impacted prices. But many experts believe unit prices will rebound in time as the supply and new development dries up, and houses prices become even more out of reach, leading buyers to turn to apartments for affordability.
If you buy a property where a developer incentive is being offered you’d probably need a discount on top of the incentive to ensure you can get finance and you’re not overpaying. Remember you generally make your money when you buy, by buying under market value.
Most importantly, do your research
You don’t have to stay right away from developer incentives but you should absolutely do your research before buying to determine if the property you’re purchasing is actually going to be a good investment.
Whatever you buy must have the right fundamentals to ensure it will grow in the future. If it doesn’t, you should forget about it.
The depreciation party is over…
Well, kind of!
In an attempt to “reduce pressure on housing affordability” the Government has announced dramatic changes to the way depreciation is claimed on property.
Let’s start with the good news:
1. Any existing investment properties purchased (contract exchange date) prior to May 9 2017 are not affected (unless they were not income producing in the 2016/2017 financial year).
2. Commercial, industrial and other non-residential properties are not affected.
3. Capital works deductions have not been affected. This means you will still be able to claim depreciation on the structure of the building provided it was built after the 16th of September 1987. And you will still need a Quantity Surveyor’s depreciation schedule to do so.
Now that we know what isn’t affected, let’s look at what has changed…
The government will limit plant and equipment depreciation deductions to outlays actually incurred by investors. In essence, unless you as the buyer had physically purchased the items – you can no longer depreciate them. This is a massive change to what you can claim – there by reducing investors’ cash flow.
Originally I thought a quick fix would be to structure the sales contract so that the plant and equipment is separated. But I suspect that the legislation will be worded such that if the plant and equipment was in situ at the time of purchase, you can no longer claim it.
You see, under the recent changes, I suspect the developer will be deemed to have bought the plant and equipment – not you.
However, the acquisition of existing plant and equipment will form part of the cost base, thus reducing your capital gains liability. So investors who hang on to their properties long term, will no longer reap the benefits of depreciating plant and equipment.
So in summary: if a residential property was built prior 1987,and has not been renovated – there will be no depreciation claim.
This is very rare as most pre-1987 built properties we inspect have had some renovation carried out.
If built after 1987 – only the construction costs can be claimed.
Whilst there is still much uncertainty regarding the specifics of this budget’s depreciation-related changes, one thing is crystal clear: If you own a residential investment property and haven’t had a depreciation schedule prepared, now would be a good time to get a quote!
Developers, Project Marketers and Property Sales Agents – If you are selling property and using depreciation numbers that include plant and equipment: STOP NOW! This element needs to be removed from the selling equation, at least until the legislation is finalised.
Here is why I think this is dumb policy.
The proposed changes are being made to “reduce pressure on housing affordability.” In my opinion, it will have the opposite effect for 3 reasons:
- Property investors may now feel the need to hang onto their existing properties to continue claiming depreciation because if they sell that property they won’t be able to get as many deductions on the next one.
- Developers rely on high depreciation figures in the early years to show investors how affordable an investment property can be. If the allowances are taken away, they will struggle to get pre-sales which are required by banks to fund the deal.
- These budget measure are forecast to save $260 million over a 3 year period. I suspect far more will be lost if developers can no longer get new projects off the ground.
Whilst I believe housing affordability is a major issues, this appears to be policy on the run…so the Government can be seen to be targeting property investors, when changes to negative gearing could have been more effective.
I will provide a further update once the legislation is finalised.
Using super to buy a home… Is this the dumbest idea ever?
Recently I discussed the suggestion from various politicians including Barnaby Joyce that buyers trying to break into the market look to more affordable areas. The idea that currently has momentum, however, is allowing first home buyers to access their superannuation (super) early to use it as a deposit for a property.
Currently super can be accessed prior to retirement for a variety of reasons. These include severe financial hardship or permanent disability, but buying a home is not one of them.
The idea of allowing young buyers to dip into their retirement savings keeps coming up time and time again. Liberal MP John Alexander one of the biggest advocates. That’s despite it flopping when Paul Keating first raised it back in 1993, and even he, seemingly forgetting his election platform back then, has now rubbished the idea.
In my humble opinion, it’s the dumbest idea ever.
The argument for
The point of allowing first home buyers to access their super early is of course to enable – or at least help – them to get into the property market sooner, before prices rise even further out of reach.
Advocates point to New Zealand, which has adopted this policy, and has a quickly rising take-up.
And that’s about it for the positives of the argument.
The argument against
The arguments against the idea are numerous, far outweighing the positives.
The thing is, allowing first homebuyers to use their super for property is actually likely to worsen affordability. Prices are likely to be driven up due to an increase in the capacity for people to pay for housing. So, essentially it would be counterproductive.
Not only would it likely lead to a surge in demand, with more buyers in the market, but it will give those who can already afford a house more money to play with. Meaning they’ll be able to pay more for property, driving up property prices. Existing home buyers will be the only winners.
On top of this, it would severely compromise the whole point of super, which is to provide an income in retirement.
Not only will the lifestyle of our future retirees be significantly hampered, but they’ll likely be completely reliant on a government pension. But will we as a country even be able to afford to pay all these people to live? Probably not – which is why super was introduced in the first place.
Retirees might own their own home, but what will they use to live off? Don’t forget, this includes buying food and paying for living expenses.
The reality is that most young people don’t even have enough money in their super accounts for a home deposit. A recent analysis finding displays the average super balance for young people was lower than what’s needed for a 20% deposit.
You see, you get the most compound growth in super during and after your youth. This is when you’ll grow your balance. Making it a big part of why the money needs to be left there.
So if you ask me, this is not the time to tell someone with all their life savings in a quality super fund with a mix of asset classes to take out all their money and bet on one asset class – housing. This is especially the case since property prices are likely nearing – or are at – the top of the market in Sydney and Melbourne. So the potential is there to actually lose money if overzealous first homebuyers pay too much.
What should be done instead?
Investors have largely been blamed for rising house prices and for pushing first home buyers out of the market. However, nagging proposals to get rid of investor benefits such as negative gearing and the 50% capital gains tax discount have been supposedly taken off the table.
Market forces should be left to iron out the problems in the market. But if government intervention is needed, the best solution is likely to be an increase in supply. The supply is needed especially in Sydney and Melbourne.
It would also be wise for governments to invest in infrastructure in regional areas. Or those further from the city to draw people away from our capitals and into areas where demand is not so great.
According to basic economics, when demand is greater than supply prices are pushed up. So, if supply is increased but demand stays the same prices should level out. Or at the least, grow at a slower rate.
Conversely, if you increase demand, as allowing buyers to access super would do, but keep the supply the same, prices will be driven even higher.
So, what is actually going to happen? Will first homebuyers be allowed to dip into their super in Australia?
The Federal Government has committed to addressing housing affordability. However, for now they seem to have taken this idea off the table due to widespread criticism. Although we will have to wait and see what their solution is in the May budget.
I, for one, can’t wait for the next bright idea!
Every investor – whether expert or amateur – should be looking for the same things in a property investment to ensure its success.
While there is no exact formula for buying a successful investment, it’s handy to have a checklist to consult to make sure you’re on the right track.
Below are some of the fundamentals you should be looking for when buying. Be aware that this isn’t an exhaustive checklist. However, it can serve as property investment tips that will help guide your decisions.
Property must haves:
- Good location – The old adage still rings true; it’s all about location, location, location. Well, maybe it’s not all about location, but the fact is you can change a property, but you can’t change a location. Being close to amenities such as shops, schools, public transport and even major transport routes is key when it comes to selecting a good investment property.
- Growth drivers – Are there any major projects taking place in close proximity to drive up the value of the property? This might be in the form of new or planned infrastructure or commercial developments that will improve amenity or access to the area. This is likely to draw more people to the area, pushing up demand for homes.
- Population growth – Are people moving to the area? Look at population growth figures in the area you’re buying in. Then determine whether there are factors drawing people in, such as employment nearby and improved amenity.
- Tenant appeal – Is there demand from renters in the area and for the type of property you’re purchasing? Does your property have the features tenants want? What are the vacancy rates? Demand from your target demographic is the key to securing a strong return.
- Build quality – While location is key, the property you buy is important too. This is especially true if you want to attract quality tenants. Do your due diligence, which includes getting a building and pest inspection, to ensure the home you’re buying is of a good quality.
- Value-adding potential – A well-selected property should see capital growth. However, it’s always a good idea to have the ability to add value through a renovation or by adding a room or a car park, for example. Value-adding potential also comes in the form of a change in zoning that will allow for development. If the market slows you may need to manufacture growth to increase your equity.
- Liveability – Does the property have a good layout? Does it have the features people want, such as extra bathrooms, car spaces, security, and a nice outdoor area, whether it be a roomy balcony or a good deck and backyard? All of these things will make it more sought after. Liveability also goes for the suburb. Ensure you buy in an area with a good community due to plenty of amenity and nice aesthetics.
- Individuality – A property that is unique is some way – or that stands out from the crowd – can experience strong growth as it will be in high demand amongst buyers. This is especially the case when it comes to units, particularly in areas with a lot of supply.
- Scarcity – Does demand outweigh supply in the area in which you’re buying? This applies to the area in general as well as the property type. If there is greater demand than supply in terms of both buyers and renters, the property value and rental rate will be pushed up.
- Low maintenance – Select a property that won’t require a great deal of maintenance. This will save you money and keep your tenants happy.
- Proximity to employment – People like to live in close proximity to work, so make sure there are employment options nearby. If you’re buying in a regional area make sure there’s more than one industry in the town.
- Stability – Have property prices been stable in the area in which you’re buying? Ideally you want a history of consistent growth, avoiding areas that have experienced big price falls.
- A solid history – Do your research and make sure the property hasn’t been sitting on the market for a long time, and if it has, determine why. Make sure it’s not due to an inherent problem with the property. Finding out why the sellers are moving on is also important. The last thing you want is a property that isn’t selling for a good reason.
- The right numbers – You want the property to stack up from an investment perspective, with good potential for capital growth and decent rental yields. Make sure the numbers add up! What is the rental yield, what are the total costs, how much will you be out of pocket for?
While a property investor’s major goal is likely to be capital growth, they’ll also be looking for solid rental yields to help them hold onto their asset.
To achieve the best possible rental return, you’ll need to maximise the appeal of your property to potential tenants. But what do tenants want? Generally they’ll want a home in a good location, close to employment, amenity and public transport. These are all things you should consider when you’re buying.
But you should also drill down to who the tenants in the particular area are, and what they desire from the property itself. How many bedrooms and bathrooms do they want? Would they like an outdoor area? Will they value nice window coverings?
If you already own a property there are several things you can do to increase the weekly rent and maximise your rental yield. Many of these are simple enhancements that won’t require a huge outlay of funds.
It’s often better to focus on increasing your income rather than cutting back on expenses by, for example, being lax in your maintenance of the property. Keeping your tenants happy will pay off in the long run, as you’ll likely have fewer vacancies and your tenants will be more willing to pay a higher rent.
While you can also consider self-managing to cut back on costs, this can backfire if it’s not done properly, costing you even more out of your own pocket.
So what can you do to increase your income? We’ve put together the below list to give you some rental yield tips. Just remember, whatever you do will depend upon what your tenants want – and are willing to pay more for.
And don’t forget to maximise your deductions for depreciation, which can further boost your rental yield.
Make your rental property pet-friendly
Australia has one of the highest pet ownership rates in the world. More than half the Australian population own an animal.
The reality is, however, that it can be difficult for tenants to find properties that a) allow pets and b) are suitable for pets. So it makes sense that if you allow pets in your property you’ll not only widen the potential rental pool, but you’ll also be able to command a higher rental rate. Some property managers estimate you could charge an extra $20 or $30 a week if you allow pets.
While pets can cause damage there are ways you can mitigate any potential problems. Such as having a relevant clause in the rental contract, having a vigilant property manager to regularly inspect the property, and covering yourself with appropriate insurance.
Provide modern technology
Ensure your property is well and truly in the 21st century by providing up-to date technology that every tenant expects – and demands – in a home now.
This includes having a strong internet connection, a strong mobile phone signal, adequate power points and even the ability to install pay TV.
Ceiling fans may be adequate in some circumstances, but most tenants dealing with an Australian summer will want air conditioning. Nowadays, most will be willing to pay a premium for it.
Heating can be just as important as cooling. Make sure you get a reverse-cycle air conditioner if you’re installing one and put it in the areas where it will have the greatest impact.
Providing your tenants with added extras that make your property more comfortable to live in, such as a dishwasher, washing machine, dryer, clothesline or even flyscreens, can lead to an increase in rent.
Remember you’ll be responsible for maintaining and repairing any appliances, so only install something that you’re sure will be beneficial.
While this will require an outlay of funds at the beginning, it could pay off in the end with a boost in your rental income and yield.
Whether or not this works, however, will depend on the market in which you’re renting your property. It’s usually best suited to inner-city areas. So, while it won’t be for everyone, it can work very well for short-term renters, such as executive rentals or student accommodation.
If you furnish your property well, with modern furniture, it can add hundreds of dollars per week to the rent.
You don’t need to go overboard with high-tech alarms or CCTV, but make sure your property is safe and secure, with doors and windows that lock properly.
Consider adding security screens, or if you want to go a step further you could invest in swipe card security measures. Privacy is also key.
Add some off-street parking
Public transport infrastructure is improving in many places, but people still like to drive their cars.
Your property should have at least one parking space, and if you have a second – even in the form of a shade-sail carport – it will be more in demand.
Having off-street parking in inner city areas will command the greatest premium, as this is where it’s most limited.
Creating an extra storage space can lead to higher demand for your property and higher rents.
Built-in wardrobes are very important, but renters may also like an outdoor shed or a cupboard under the stairs. Creating storage is fairly easy to do and will likely require only a small outlay of capital.
Presentation is important, so undertaking renovations can be a great way to improve your yield.
If your budget is small you can just do some minor cosmetic work such as painting or changing floor coverings, or even fixtures and fittings in the bathroom and kitchen.
You can, of course, also do more major renovations. Such as a complete overhaul of rooms, or even adding a bathroom, bedroom or an internal laundry.
Many tenants will also pay more for an outdoor space where they can entertain. You could also consider adding a veranda or deck, but this will come at a hefty cost.
Just make sure you’ve done the calculations and you know you’ll be getting your money’s worth by not only attracting more tenants, but by adequately increasing the rent.
Perhaps surprisingly, there are plenty of landlords renting their properties below market. If you’re not charging market rent, raise it, and review it regularly. A good property manager can help with this.
Adding a second dwelling, such as a granny flat, that can be rented separately can increase your rental income.
This will only suitable in areas that allow it of course and it can come with its own complications, as it may be harder to find tenants, and rent on the main house can also decrease.
This can lead to a decrease in a tenant’s electricity bills, and consequently they might be willing to pay more rent. The installation costs are significant, however, adding up to $3000 or $4000, so you’ll need to ensure you can recoup this – and more – in increased rent.
Consider arrangements outside of a long-term lease
Renting the property by the room can maximise your rental return, as can holiday letting or doing short-term leases.
Beware of the possible drawbacks though, as there can be higher vacancies and more wear and tear; any rental increase will need to make up for this.
They’re suave, they’re slick and above all, they’re convincing, with their sales pitch down pat. Who are they? Property spruikers.
Unfortunately in Australia’s largely unregulated property advisory market spruikers – masquerading as experts – can flourish and their unsuspecting victims stand to lose a lot of money.
How can you avoid being preyed upon? We’ve identified some of the telltale signs of a property scam so you know when to run in the other direction.
The (usually unsolicited) approach
This might come in the form of ‘special offer’ emails, cold calls from telemarketers or a letterbox drop. Or you might make the first contact yourself after seeing a seductive advertisement in a newspaper or magazine. Once they’ve got your contact details they’ll be persistent in their efforts to get you to sign up.
The spruiker will pull out all the clichés such as ‘offer of a lifetime’, ‘secrets’, ‘guaranteed growth’, ‘no money down’, ‘positively geared’, ‘get rich quick’ or ‘risk-free investment’. Many are unrealistic promises that a seasoned property investor can spot a mile away. But novice investors can be lured in.
Not all seminars are put on by spruikers, but this is a common way to target victims. You’ll receive an invitation to a free seminar, at which you’ll listen to a long spiel and be dazzled by a fancy presentation complete with glossy brochures, positive news story clippings, and detailed graphs and tables. Often they’ll either try and make you sign up for another – much more expensive – seminar or will book an appointment to talk to you one-on-one.
To earn your trust, the spruiker will be desperately trying to prove their credibility. They’ll have professional promotional materials, may associate themselves with reputable companies or charities, and will flaunt their own – whether genuine or not – success and wealth. They’ll try every trick in the book to get you to believe in them.
This is the absolute giveaway sign that you’re dealing with a property spruiker. They’ll make it so easy by doing everything for you. They’ll provide you with a conveyancer, valuer, mortgage broker, an accountant and even a property manager. While this might sound perfect for novice investors, what they’re really doing is ensuring the deal gets done by taking control of everything. All of the supposed ‘independent’ professionals are part of the scam. They will have you signing on the dotted line before you can reconsider.
The purchase will require you to borrow against an existing property so you don’t get a valuation on what they know to be an overpriced home.
They’ll want you to sign on the dotted line as soon as possible, often under the guise of a ‘time sensitive’ opportunity. This is just designed to get the deal done before you have time to wise up and change your mind.
If you hear the term ‘rental guarantee’, alarm bells should be ringing. It might sound like a safeguard for an investor, but if a property is in demand by tenants why would you need the rent guaranteed? Chances are when the guarantee is up you’ll have long vacancy periods or significantly reduced rental rates. Or the guarantee will go by the wayside once the deal is done, as it won’t be worth the paper it’s printed on.
The person or company offering you this opportunity purports to be the only one with access to it. They’re choosing to offer it to you, for a limited time only. They’ll try to convince you that they’re the only people who can find you the right property. In reality you’d likely find a much better deal yourself.
A property is offered, rather than a strategy
The first thing a genuine, professional property adviser will do is find out about your individual circumstances before giving you options as to where and what to buy. They’ll consider your budget, goals, and whether you’re looking for a property that will give you capital growth or rental returns. A spruiker, on the other hand, will have a particular property they want you to buy from a stocklist. And unlike most real estate transactions, there will be no room for negotiation.
The spiel about the opportunity will often focus on the tax breaks it provides. While this is certainly a benefit of investing it shouldn’t be the primary motivation for buying. The main reason to invest is to build wealth.
Often the opportunity will be for a house-and-land package, with the promise of a stamp duty saving and bigger tax breaks through depreciation. You’ll need to compare the cost of these new homes with established ones in the area to ensure you’re not overpaying. Although you most likely will be.
They’re marketing outside the local area
They’ll go interstate to spruik to investors, hoping buyers won’t be familiar with the location of the properties they’re selling. These homes will often be in outer suburbs and in low socio-economic areas that may not have great growth potential, despite promises that they’re the next big ‘hotspot’. Ask yourself: if the market is so strong, why wouldn’t the locals be buying?
If you’re approached by what you suspect is a spruiker, before giving out any personal information – and hard-earned money – ask lots of questions to find out who they really are and what their motivations are.
Are they formally qualified as an investment adviser and how and what are they being paid?
While the promise of a ‘get rich quick’ scheme can be tempting, it won’t live up to expectations. If it sounds to good to be true, it probably is!
Property is an excellent vehicle to build wealth. Make sure to keep in mind that it takes research and education to get it right. It won’t happen overnight. It takes time and patience to grow your nest egg.
The best way to invest is to do the homework yourself to find the right opportunities. You should have a team of trusted professionals, including a finance broker, solicitor and accountant, to give you independent advice.
(UPDATE: – Read about the 2017 Budget changes to depreciation here).
Dear Fellow Investors,
Cuts to Negative Gearing Stink
I get it. I get what Bill Shorten and the Labor Party are trying to achieve by cutting negative gearing…but it stinks for 6 reasons.
First, for those of you who might not know…Labor proposes to:
- Eliminate negative gearing to all residential investment properties other than new housing from the 1st of July 2017.
- Stop investors from claiming losses on secondhand properties against their wage income after that date.
- All investment properties purchased prior to this date will be “grandfathered” (meaning any current tax arrangement with your investment property will remain).
- Reduce the capital gains discount on all investment properties from 50% to 25%.
Stinky Reason #1 – How much will the budget be improved?
The latest data from the ATO shows that in the year 2012/13 property investors “negatively geared” or reduced their taxable income by approx $5.5 Bn. That’s $5.5Bn that the Government could have taxed (not necessarily collected).
Firstly, this data, the most recent available, was based upon a period when the RBA cash rate was higher than it is now.
Interest rates on borrowing have dropped since that time – meaning the losses investors can now claim will be reduced.
Back then, the outstanding rate of interest was close to 5.5%. It’s now close to 4.5%. That’s a drop of 18.2%.
I can currently get a 5-year fixed rate of 4.59% from NAB and there are many others…
If you reduce the amount investors have claimed in interest by 18% – there goes those negative gearing losses even allowing for CPI increases of other deductibles.
In order to get Labor’s forecast of $32Bn in savings over 10 years, Treasury must have predicted some significant increase in interest rates from years 6-10 right?
But let’s face it….Treasury can get it wrong – remember its forecast for iron ore prices? It was totally optimistic.
Stinky Reason #2 – Negatively Gearing new property only is risky business…
“Roll Up Roll Up”…I can hear the spruiker cry…
By allowing only new properties to be negatively geared….you are creating a “green light” situation for every spruiker to come out of hiding and promote new property to unsuspecting mum and dad investors.
Selling new property is far less regulated and commissions are rife. Time and time again I get offers to sell property to my database and receive a 10% commission on the purchase price. But I don’t.
Whilst I’d love the 10% my father lost all his super from the dodgy side of the property market and the last thing I’d want is for someone else to go through that experience.
Tip – Have you noticed spuikers generally only sell new property?
That said, not all people selling new stock are bad – currently most are good…but this type of policy might attract less scrupulous spruikers after a quick buck or two.
Stinky Reason #3 – The Reverse effect
I get it – Labor’s policy aims to increase home affordability particularly for first home buyers.
Yes. Australia is expensive on the world stage – BUT could stopping negative gearing actually inflate prices?
How? Well the first thing I thought when the policy was released was “no point selling any properties I currently negatively gear – I’m hanging on!”
According to those ABS stats I previously mentioned – there’s close to 3 Million properties that might not be sold if everyone thinks like me!
Now, I’m no Warren Buffet but I do remember one thing from economics…price is a factor of supply and demand and if you take away the supply….prices tend to head north.
Stinky Reason #4 – The elephant in the room
This stinky reason is a surprising one, and in all my research I haven’t seen any mention of it.
Whilst the Government may, in the long term, claw back some revenue if this policy is implemented, if property transactions decline, the States are going to be significantly impacted by way of stamp duty collection.
If investors hold onto stock…the building industry won’t be able to magically increase supply to make up the difference.
And if you have far less transactions, you have far less real estate agents, conveyancers, buyers agents, brokers etc paying income tax.
Stinky Reason #5 – Slippery Slope
Labor has also proposes to cut negative gearing on new share investments. This leads to a whole bunch of questions such as:
- By shares are we talking listed only or unlisted?
- How are super funds treated? Family trusts?
And back to property…
- What if I buy a commercial or industrial building? If bought in my own name it appears I can still negatively gear it. However, if that same building is part of a listed trust, then I guess I can’t. Please explain??
- Is “property” treated as land + building and plant and equipment separated? Because that’s how the CGT calculation is calculated.
I could go on…
Stinky Reason #6 – The Renovators
“New property” is not all about starting from scratch.
Don’t underestimate the amount of people who like buying and upgrading property. This has a multiplier effect in that money is being injected back into the economy through the employment of trades and the purchasing of goods and services etc.
Now I’m not going buy into the debate over whether negative gearing is for the “rich” or for the working class. I would’ve thought it was pretty obvious that those with higher incomes benefit more from negative gearing.
And I don’t buy the argument, from the Real Estate Institute of NSW, that rents will suddenly go up because negative gearing is taken away. Rent is a factor of supply and demand – not what it costs an individual to hold a property.
What I worry about is the risk/reward ratio. I think at this point of the economic cycle (China’s downturn, mining slump, drop in commodity prices and a property boom in most major capital cities around the world)… this policy is potentially playing with fire for very little reward.
I agree there are certain elements that need to be fixed to make the system fairer and here’s my thoughts on that.
PS – If you think I’m writing this article as a staunch Liberal Voter…you are wrong. I was brought up to vote Labor. In fact, my father ran for the seat of Lowe in 1975 against Billy McMahon! I’m currently politically agnostic (my father would be turning in his grave) – but times have changed!
Time to spring in to action!
Don’t Forget Depreciation on Your Spring Renovation
I don’t know about you, but every time I see that sun coming towards spring– I start thinking “What can I fix up around the house….or who can I get to do it!”
But before your excitement gets you too caught up in painting your cupboard a crisp lime green, or thinking whether your wallpaper should have a touch of yellow or orange, it is helpful to remember the exciting benefits you may get with depreciation. After all, wouldn’t renovating be more rewarding if you knew that part of your expenses would come back to you through tax deductions?
How does it work?
When you renovate an investment property, you can actually claim particular expenses that you incurred as part of your renovation work. This includes the cost of that tile work you just did for your bedroom, or maybe that new edgy and urban kitchen sink. These things can actually get you a depreciation claim of 2.5% annum over a 40-year period. Even upgrading your plant and equipment items such as appliances and furniture also qualify for depreciation. Talk about claiming a reward for rewarding yourself! Where else can you get that?
2 Tips to get you excited this Summer
Property Tip 1. Scrapping reports – If you buy a property and are going to renovate the property, it’s worth getting a Quantity Surveyor out like Washington Brown, who will attribute values to those items that are about to be removed. This can add up to a substantial amount, especially if the property was built after September 1987. In order to do this, the property has to be income producing prior to the commencement of the renovation.
Property Tip 2.Depreciation Schedule – Once you’ve got your hands dirty and completed that renovation – get a depreciation schedule prepared on the new work that has just been completed. The depreciation process starts all over again!
Now, off you go with a spring in your step , knowing that your renovation work didn’t cost all that much since you have tax deductions to expect by the end of the year.
Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.
When I was on stage giving a seminar about Property Depreciation, I always have a Question & Answer session at the end.
In the talk… I discuss our Property Depreciation Calculator and how it helps property investors make informed decisions about the type of rental property they want to buy.
Then this guy up the back puts his hand up the back and says
What’s so special about your Property Depreciation Calculator?
“Well”, I say, “Let me tell you…”
“I’m pretty proud of our property depreciation calculator, it took me 4 years to build and is the only one of it’s kind. In fact, it’s the only property depreciation calculator that lets you work out the depreciation of a property based upon a proposed purchase price.”
“You see, I believe you can’t really work out the depreciation of a property by entering an area – and, let’s face it, how many of us know the internal unit area of our property. Do we include balconies, garages, common areas etc…You see that’s why I think the other calculators on the market that use an area are flawed.”
I’m pretty excited by now, and I go on…”I’ve got to be honest…when I started creating this property depreciation calculator, well, I had more hair!! It was a long an arduous task.”
“You see, I think no two houses are the same, and that basing the depreciation of a property on it’s area is flawed. So I wanted to create a property depreciation calculator where people could enter a proposed purchase price and easily get a result.”
“Now, in order to do that we needed to come up with a way where the calculator would grab lots of like type properties add them up and average them out.”
“That’s why it took 4 years to build, we needed enough data in the calculator to make it a calculator that property investors could use. And today, I’m proud to say, day in – day out…it’s the most used part of our website.”
“We’ve actually got a patent pending on it…again why I’m proud.”
If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.
Depreciation: Where to from here? – The property depreciation formula.
(NOTE: The laws regarding depreciation have changed – Read about the Budget changes here).
Whilst the depreciation laws in this country are quite complex, as a whole, I believe they are balanced and offer property investors realistic benefits. But there is always room for improvement.
As mentioned in my previous posts, I disagree with the rates at which certain items can be claimed, along with their effective life.
For instance, I would rather property investors claim 4% building allowance over a 25-year life span than the current 2.5% over 40 years.
In fact, I made that exact submission to the government as part of their Business Tax Working Group in 2013. At the time, the government was considering scrapping the building allowance all together.
My recommendation was that only construction or contracts signed after the proposed date would be subject to a 4% building allowance regime, based upon the original construction cost.
I also proposed that the original construction date at which the depreciation of building allowance kicks in could be pushed forward from the current 1985 to 1990 to help save the government
As the following table shows, by immediately making all purchases and contracts entered into for construction subject to a flat 4% building allowance, significant savings will be made and incentives to buy new property will increase.
Table 13.1: Current building depreciation regime
*First year deduction based on $250,000 = $6,250 (new property only)
Table 13.2: Proposed building depreciation regime
*First year deduction based on $250,000 = $10,000 (new property only)
The flow-on effects of increased construction to the wider community could be huge.
According to the Australia Bureau of Statistics (ABS) for every $1 million spent on construction output, a possible $2.9 million would be generated in the economy as a whole, giving rise to nine jobs in the construction industry (the initial employment effect) and 37 jobs in the economy as a whole from all the flow-on effects.
The government decided to uphold the status quo on depreciation laws instead of scrapping or significantly reducing the allowances. It recognised that this would have a significant impact on investment incentives.
Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.
This blog is an extract from CLAIM IT! – grab your copy now!