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Depreciation: what is it and what do you need to know?

Depreciation: what is it and what do you need to know?

Sep 1, 2017 | Investment Property

Over time wear and tear will inevitably depreciate the value of your investment property. Depending on your circumstances, you may be eligible to offset the cost of wear and tear in deductions on your taxable income.

What is depreciation?

Property depreciation is the devaluation of a house and its contents over time due to wear and tear. Just like a car depreciates in value over time, a house and its fittings depreciate in value too. In Australia, property investors can claim this loss in value as a tax deduction.

What type of depreciating assets can be claimed?

There are two types of property depreciation assets, both of which can be claimed as tax deductions on your overall taxable income.

Depreciation on housing allowances refers to the construction costs of a new property, including bricks and concrete. Over time these assets will experience wear and tear and therefore depreciate in value. For example, if you have a new property with a price point of $650,000, 50% of the build is depreciable at 2.50%, which equates to more than $8,000 per year in tax deductions.

Depreciation on plant and equipment includes fittings within your house such as an oven, dishwasher, carpet and curtains. Depreciation on housing appliances like an oven and dishwasher can be calculated according to the ‘Effective Life’ of the asset. An item’s effective life is calculated from the time of purchase until the item can be sold at no more than scrap value.

The depreciation of assets can be calculated by one of two methods, the prime cost method of depreciation or the diminishing value method. According to the ATO, once you have chosen a depreciation method for a particular asset, you cannot switch to the other method.

[Source: Australian Taxation Office]

Which properties are entitled to depreciation tax breaks?

Properties built from 18 July 1985 onwards are entitled to claim depreciation on housing allowances. Properties that were built prior to 1985 but have had structural improvements from 27 February 1992 onwards are also claimable for depreciation on housing allowances.

How is depreciation calculated?

In order to claim depreciating assets on your property, a report called a depreciation schedule needs to be put together and lodged to the ATO. A depreciation schedule will outline the value of your property’s assets, both housing allowances and plant and equipment, and calculate the rate of depreciation thereafter. A professional called a quantity surveyor is qualified by the ATO to calculate depreciating assets. Other professionals who are qualified to put together your depreciation schedule include a clerk of works, a builder who is experienced in estimating construction costs and a supervising architect who approves payments at each stage of a building project. In order to claim the maximum amount in deductions on your property, the best time to arrange a depreciation schedule is immediately after settlement and before tenants have moved in.

Why does understanding depreciation matter?

In order to maximise return on your property investment, it’s important to take a look at each financial facet of the investment, tax breaks included. Claiming depreciation on your property investment will reduce your overall taxable income and therefore improve cash flow, making it a financial opportunity to further grow your property portfolio. Some investors will even factor depreciation into their buying decisions. Investors may choose to purchase a property built after 1985 in order to claim the maximum amount of deductions on depreciation.

In Australia, there are several rules and exceptions involved with depreciation, therefore it’s important to speak to a professional to find out if your property is eligible.

If you would like to understand more about depreciation and how it can be factored into your investment strategy, contact me today on 02 9095 6888.

Is it time to invest in Perth?

Is it time to invest in Perth?

Sep 1, 2017 | Investment Property, Property Market

Unlike its Eastern neighbours, Perth is one of the few Australian capital cities experiencing a weak housing market. While housing prices in Australia’s capital cities grew on average by 10.9 percent last year – the highest growth since 2009 – Perth hasn’t kept pace, with local housing prices dropping by 4.3%. Perth’s poorer performance can largely be attributed to the end of the mining boom coupled with the Federal election and cautionary consumer sentiment.

While this may seem like bad news, for the savvy property investor this actually presents an extraordinary opportunity. A distressed market without much competition can provide excellent conditions for investors to pick up a bargain. And with recent Core Logic data revealing that Perth has experienced its first quarter of growth in four years, things look like they may be turning around.

So, is it time to invest in Perth? Here are some things to consider.

Investors can get a bargain

There is good evidence to suggest that the property market in Perth is bottoming out. With Perth recently turning a corner in terms of growth, the signs are encouraging.

If you believe that the inner ring of a capital city is where the wealth concentrates, then the ability to invest for less than $600k in suburbs that are the equivalent of Sydney suburbs like North Sydney, Balmain or Edgecliff is simply irresistible. For property investors who love a bargain, this may well be the property market for you.

Investment in infrastructure is taking off

Infrastructure investment in Perth is likely to attract greater population growth which will further facilitate capital growth.

The WA government is spending and spending big. As an example, $13 billion has been spent in the inner 2 km radius from the CBD alone. Investments include $1 billion on the Perth Stadium, $1.3 billion on the new Perth city link and $500 million on Elizabeth Quay. The Government is also investing in the Royal Perth Hospital and Perth Convention and Exhibition Centre.

Perth’s demographic change suggests future growth

Perth is primed for growth. The demographics of the city suggest encouraging future capital growth prospects. Here are some interesting demographic facts about the city:

Population

  • WA’s population is 2,600,000 people, with the majority living in Perth.
  • Gen Y makes up 24% of the population – They are leading the trend of high-density living by moving to upscale apartments close to the CBD; a new phenomenon in Perth compared to the Eastern states.
  • Overseas migration accounts for 57% of the state’s population growth in the last five years. Immigrants are largely aged between 20 and 34 and are looking for a vibrant, inner city lifestyle, resembling the countries they have come from.
  • 23% of Perth’s population are equity rich baby boomers. Many are downsizing, meaning they are increasingly considering apartment living in well-designed boutique townhouses and apartments close to work, recreation and hospitals.

Workforce

  • The healthcare industry employs more people than any other category i.e. 11.4% and this is projected to grow by 22.4% until 2019 and the construction industry employs 11.2% of the workforce. The mining industry only employs 7% of the workforce.

Business

  • 35% of ASX listed companies are headquartered in Perth.
  • Perth is in the same time zone as South East Asia which makes WA a natural business partner to the region.

These statistics are extremely encouraging as they point to future growth.

What should I look out for?

Of course, the impacts of the end of the mining boom are still being felt in the Perth market, which means that property investors should act cautiously. Working in the mines no longer means earning $250k a year or more. This has had a flow on effect on the property market.

Additionally, vacancy rates are between 5% and 8%. Considering a balanced market usually, sits at 3% this is bad news if you are a landlord.

Despite the doom and gloom, the truth is that WA’s exceptional growth and extremely high salaries in previous years was abnormal. While the current environment represents a new paradigm, it is one that is much more realistic. Residents are getting on with normal jobs that pay normal wages. For the truck driver that was earning $250K, they may now be earning a perfectly acceptable $100k a year and getting on with it! The lesson is that while the market may not be what it once was, it is still extremely promising.

So, should property investors abandon Brisbane or Melbourne for Perth? Investing in Brisbane or Melbourne is still an excellent idea; Brisbane has very strong yields and Melbourne is scrambling to accommodate the massive population growth. However, Perth is now a promising contender. If you already have exposure to the Brisbane and Melbourne property markets, Perth is definitely worth looking into.

Green shoots are starting to appear, the government is spending a lot of money and it’s a deep buyers market. Great news for investors!

To discuss your finance and investment property aspirations, give me a call on 02 9095 6888

Apartment vs House: What makes the better investment?

Apartment vs House: What makes the better investment?

May 1, 2017 | Investment Property

Purchasing a property is a highly considered process. In previous years, houses represented the most obvious purchasing decision, and only those with a lower budget opted for apartments. This is now a thing of the past as the Australian property market continues to thrive; attracting overseas investors, infrastructure evolution and changing living situations. Deciding whether an apartment or house is the right purchase for you is determined by several factors including the market, your strategic goals as well as your budget.

Consider the bigger picture

As with any major financial purchase, it’s important to look beyond your personal preference to the overall environment, in this case, the property market. A buyer should approach a property purchase as a rational financial transaction and not let emotion play a part. Focusing on economic indicators such as auction clearance rates, interest rates and median purchase prices will help outline a solid strategic plan. Seeking professional assistance from real estate agents, mortgage brokers and financial planners is critical to properly evaluate this information and apply it to your direct goals.

Find a mentor

We normally associate mentors with our business success or personal development; but not when making important financial decisions. Finding a mentor with a portfolio of properties is often the best way to expedite your investment property plans. Learning and absorbing previous experience which has turned to success will illustrate the path to success for you and your goals.

Look at the facts

It’s important to consider the following three indicators before pursuing the purchase of an apartment or a house.

  • Economic factors: understanding key economic drivers such as cash and interest rates, clearance and vacancy rates, demographics and employment figures will help illustrate how the market is currently performing as well as determine what might happen in the future.
  • Supply and demand: how many units versus houses are there on the market currently? Are houses or apartments being leased quicker? Understanding these factors, as well as any developments in the area is an indication of oversupply or undersupply in a particular location.
  • Affordability: understanding the affordability of the property will ensure you’re not over or under-capitalising in the desired area. Rental yield is also an important factor to consider the affordability for prospective tenants if you plan on using the property as an investment.

Apartment VS Hos

Advantages of apartments vs. houses

There are several factors which set apartments and houses apart.

  • ApartmentsGenerally a cheaper purchase price
  • Often located in highly sought after inner city or beachside locations which are attractive to tenants
  • Strata maintenance to assist with upkeep and maintenance of the property
  • Apartments provide investors with better yield due to a higher level of rent relative to the purchase price. This often means you can hold more property over the long term.
  • HousesMore privacy for occupants
  • More scope for renovations when looking to add value quickly, without the need for signoff from strata or body corporate
  • Ownership of appreciating land
  • Can be more resilient to market changes

Disadvantages of apartments vs. houses

Similarly to advantages of apartments vs. houses, there are several disadvantages to take into consideration prior to your purchase decision.

Apartments

  • Often restrictions on pet ownership
  • Restrictions on developing the apartment regarding upgrades and renovations
  • Less privacy for tenants
  • Fewer facilities including pools, backyards and outdoor areas

Houses

  • Generally speaking, a house will often hold a higher purchase price than an apartment
  • Maintenance of grounds including gardens and pools
  • No strata or body corporate to assist with building maintenance or compliance

Ultimately, there is no clear winner when deciding between houses or apartments. The key is to assess the opportunity on a case by case basis, against the indicators discussed, to determine which is right for you.

To find out more about whether an apartment or house is right for your investment strategy, you can contact me on 02 9095 6888.

Overdue tax debts to appear on credit reports

Overdue tax debts to appear on credit reports

Apr 27, 2017 | Debt Consolidation

From 1 July 2017, the Government has announced that it will allow the Australian Taxation Office (ATO) to disclose to Credit Reporting Bureaux the tax debt information of businesses that “have not effectively engaged with the ATO to manage these debts”.

The measure will initially only apply to:

  • businesses with ABNs
  • tax debt of over $10,000 that is at least 90 days overdue
  • not under arrangement, payment plan or in dispute.

Why is the government taking this action?

In the current economic climate, the ATO has been under pressure to move faster to recoup escalating tax debts. The ATO had previously allowed companies to accumulate more than $345,000 in back taxes before taking legal action.

How will this affect your ability to borrow?

Most banks will not lend you money if you have a tax default on your credit file. It is important to avoid such defaults when you consider they will remain on your Credit Report for 5 years.

Whilst entering into an agreement with the ATO, may avoid a credit default, the chances are you will likely;

  • Be subject to high-interest changes on the debt to the ATO
  • Limit your borrowing capacity or purchase price
  • Reduce your ability to qualify for a loan with most lenders

What are your options?

At Sanford Finance we have several lending options to help you:

  • Payout your Tax debt and avoid a tax default
  • Reduce your rate and monthly commitments
  • Increase your borrowing capacity, by consolidating your Tax debt to home loan terms and rates.

So if you struggling with a daunting tax debt and want to discover how we can improve your financial situation, call us today on 02 9095 6888

Housing affordability – how income to price ratios have changed

Housing affordability – how income to price ratios have changed

Apr 6, 2017 | Property Market

Over the past decade, there is no doubt there has been a property boom across the country, particularly in Sydney and Melbourne. This boom has spawned many heated conversations about the affordability of housing and whether it’s becoming more and more difficult for generations to enter the property market. Much of this debate is due to changes in income to price ratios.

Income to price ratios are measured by average house prices as a multiple of average household income. According to CoreLogic, Sydney is currently the most unaffordable with a ratio of 8.4-times, with Darwin the most affordable at 4.7-times.

The Australian property market is made up of micro-hubs, meaning that each of our capital cities has their own property market. As you can see in the above graph, no two capital cities have the same income to price ratio, making some areas more affordable than others. Sydney and Melbourne, the country’s largest capital cities, are the main drivers of price where there are continued population growth and more demand than supply.

CoreLogic’s recent Home Value Index states house prices in Sydney are up 18.4 percent on a year ago, making it the highest annual growth rate in 14 years. Head of Research, Tim Lawless says “The strong growth conditions across Sydney have provided a substantial wealth boost for homeowners, however, the flip side is that housing costs are becoming increasingly out of reach. This is especially true for price-sensitive segments of the market such as first-time buyers and low-income families,” (source: News.com.au, March 2, 2017)

If we compare these results to the income to price ratios since 1987, there is an obvious upward trend. Since 2013, in particular, there has been a significant increase, with the average income to price ratio increasing from 4.5 to 6.25.

(source: Clime, 23 February 2017)

So, what exactly is happening? Income to house price ratios have increased so significantly because the increase in housing prices in Australia has well and truly surpassed the increases in incomes in that same period. What that means is that houses are much more expensive, but people aren’t really earning all that much more. It’s no wonder first home buyers, in particular, are locked out of the market.

So what can we do about housing affordability? Lawless believes the property market is likely to moderate this year without the need for any major intervention from APRA or the Reserve Bank. Lawless predicts that affordability constraints and higher supply levels will slow investment demand, improving housing affordability.

If you’re looking to enter the property market and wish to understand how housing affordability in your capital city could affect you, give me a call today on 02 9095 6888 to discuss.