Only buy new properties: What you need to know!
The next thing we encourage is to buy new properties. Why would we say that? Well, there are several very good reasons.
6-12 month builders warranty
First of all, when you buy a new property, you get a 6-month builders warranty in most states. One of the first things you do is instruct your new tenants to tell you every last thing that is wrong with your property. Now, most tenants would be shocked to hear their landlord actually encourages them to do that.
So when you’re adding that property to your portfolio, you’re going to have the most enthusiastic people in the world looking out for you to ensure everything is right with your new property, and that is the people who are living there! They can then send you a long list with everything that is wrong and you simply forward that to your builder. And your builder is obligated by law to fix them.
Very low maintenance costs
It also means that you’re going to have no maintenance costs during the warranty period on the property, which is excellent for your cash flow.
Good tenants
You’re also going to attract good tenants who are likely to stay a while. Everyone wants to live somewhere nice and being the first to live in a house is very comforting.
Depreciation
A lot of people simply do not understand what depreciation is. Depreciation is the ‘on-paper’ loss in value of the building over time. The Australian Tax Office allows you to claim that depreciation as a tax deduction. This can save you thousands of dollars every year. The only problem is that it tapers off as the years go by. So the newer the property is, the greater the depreciation claim will be.
For example, let’s say you have two properties, both worth $400,000, but one is brand new and the other is 25 years old. The brand new property will cost you less to own because of its depreciation benefits. For the average investment property, this can be around $100 per week extra to your cash flow!
To claim depreciation on a property you need a “Depreciation Schedule” to be created by a Quantity Surveyor. At the time of writing you could get a depreciation schedule conducted on the average house for around $690 and they are worth every cent! They will often pay for themselves 10-fold come tax time.
Understanding cashflow basics: Negative vs positive.
If you’re going to buy property, it’s important to understand the behaviour of a property’s cashflow over time. This next graph explains it.
Figure: Investment property cashflow over time
The vertical axis represents money, and the horizontal axis represents time. As time goes by the rent received on our property will go up dramatically compared to the costs, usually consistent with the price growth. The costs of holding the property, like rates, insurance etc, will generally increase only with inflation.
As we can see on the graph, most properties start off being in the negative, or in the red section. It is during this time that the rent is not enough to pay all the expenses associated with holding the property.
After a while, as the rent increases, the property will reach the break-even point where the rent equals the expenses.
Thereafter we enter the positive zone and it’s smooth sailing! You can own an unlimited number of positive properties, but you can only own a limited number of negative ones before you run out of your own money to top them up.
One of the main reasons people fail in property investment is that they get too many negative properties and they sink themselves in the process. So they end up having a bad experience and sell up!
The name of the game is just to get through the negative stage, or preferably avoid it all together! A common misconception is that if you want a positive property, you will have to go somewhere that has low capital growth prospects. This is false.
Reduce your tax with an investment property
Understanding the impact of rental income on your taxes is crucial. Rental income is treated as taxable income, but various property-related expenses, especially depreciation, can lower your taxable income and result in a tax refund.
For instance, if you own a $600,000 investment property with a $540,000 mortgage and it rents for $550 per week ($28,600 annually), the Australian Taxation Office (ATO) adds the rent to your income. Assuming you earn $100,000 yearly, your income becomes $128,600.
Without deductions, you’d owe 37% tax on the additional $28,600. However, deductions like loan interest, management fees, insurance, rates, maintenance, and depreciation (totaling $50,517) bring your taxable income down to $78,083.
Considering someone earning $78,083 should pay $15,844 in tax, and if you’ve paid $22,967 initially, the tax office owes you a $7,123 refund. This demonstrates how savvy property investors leverage deductions for significant tax returns.
Having multiple properties can lead to scenarios where investors pay no tax at all. However, it’s essential to consult with your accountant, given the ever-changing nature of tax regulations.
Discover a fresh perspective on property investment with us tomorrow, offering insights that will reshape your understanding of this dynamic market!
~Integrity Team
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(If you need Quantity Surveyor simply email your contact details to info@integrityx.com.au and we will have a reputable one in your area contact you)