The truth about depreciation and CGT

Posted on July 20, 2021 by admin

There are plenty of quandaries swirling around the zeitgeist which confound me. For example, what university course should I take to become a millionaire ‘influencer’? Also, why wasn’t our national anthem composed by a sweat-drenched, pub-rock band from Adelaide?
Big questions that someone else will have to resolve I’m afraid.
However, there is a line of enquiry that slots very nicely into my area of expertise (regardless of how painful that sounds).
And that’s: “How do claimed depreciation tax benefits effect your GST when selling an investment?”.
It may not be as sexy as making Khe Sahn the theme our Olympic gold medallists salute from the podium, but it is important to understand for most landlords – particularly at present given plenty of owners are considering a sale during this hot market.

How does it work?

There are two primary divisions that allow investors to claim depreciation on their asset: capital works and plant and equipment.
Capital works refer to the building’s wear and tear on mostly structural components. Things like roofs, floors, tiling, cabinets, electrical cabling etc. all deteriorate over time and their drop in value can be used as a tax deduction. But these deductions also decrease the base cost of your property, which means there will be a higher taxable amount as capital gain when the property is sold.
You can also claim depreciation deductions for removable/transferrable plant and equipment assets within your property. These are things like air conditioners, blinds, light shades etc. If the property is sold, a gain or loss is computed separately for such items. If the depreciating asset’s termination value is higher than its cost, you get a capital gain. Conversely, you incur a capital loss where the termination value is smaller than the cost of the asset. This claimable capital loss can also increase your CGT bill when you sell.

Is depreciation worth it?

So, when you sell a property and make a capital gain on that sale, the tax depreciation deductions that you claim can influence the cost base for that property. This cost base helps determines your assessed CGT liability.
Say you make $100,000 capital gain in two years. If over those two years you also claimed $10,000 in depreciation for tax purposes, then the ATO views that sale as a $110,00 capital gain.
Now some would argue what’s the point in claiming depreciation deductions if you’re only going to have to recognise them in your CGT liability when your sell.
Well, there are some important elements that make claiming depreciation lucrative for investors regardless of CGT.

Firstly, you’re not paying all of that capital gain back to the ATO if you’ve owned the property for 12 months or more. Under those conditions, you’ll get a 50 per cent CGT exception, so straight away the CGT impost from claimed depreciation is cut in half.
Also, remember CGT is something that effects your taxable income. So, if you’re on the 45 per cent marginal tax rate, the impact is all but cut in half again.
Secondly, most people try to retain their property for a price cycle of at least 10 to 14 years… some much more. Time decreases the value of a dollar. One dollar will buy more now than it will in the future. If we lived in a zero-inflation environment, that would be alarming.
Given this economic truism, the benefit you get from claiming, say, $10,000 in years one or two of ownership vs the cost of repaying part of that claim in the form of CGT in 15 years is dramatic. In short, you will still be way ahead, and the benefits grow proportionate to your years of ownership.
Thirdly, investors are most often in an accumulation or growth phase during the first few years of owning an asset. During that time, they are looking to maximise their cash flow. This helps cover their holdings costs including interest, maintenance, management fees etc. It also assists when sourcing finance. It’s important to get these benefits early because in subsequent years you’ll pay down your mortgage. In addition, your rents will rise. This means the further you progress along your portfolio ownership, the easier it should get cover holding costs – or even proceed to cashflow positive.
Ask any experienced investors – it’s better to be paying a little more CGT when you sell in the distant future, than struggle to get a loan or pay your bills early in the piece.

So… what are you waiting for? Depreciation delivers benefits today that result in a reasonably pleasant ‘problem’ for future you – how to deal with the extraordinary gains you’ve made through long-term property investing.

Spotting investor danger zones with the MCG Landlord Win/Loss Index

Posted on May 14, 2021 by admin

Numbers are cool… well, at least I think so.

There is so much to be learned by running some well sourced digits. I love to revel in the trends and roll about in the algorithms. Stories unfold and revelations abound so you can make sound decisions and potentially profit from the pointers delivered by data and analysis.
The thrill I get from this should surprise no one who’s met a quantity surveyor. Our stock-in-trade is looking at spreadsheets of figures to help clients minimise tax or accurately assess building contracts and insurance figures.
But I like to expand my interest beyond the basics of my profession and see what else can be unearthed, and that’s led me to create a new index which should prove invaluable to anyone with a keen interest in avoiding investment danger zones.

The seed of an idea

The MCG Landlord Win/Loss Index is an up-until-recently-unknown dataset which reveals a whole range of information useful for keen property investors.
I’ve noticed how much more important household income has become to Australians throughout the past year. Given my usual job involves helping property investors maximise their annual income by reducing tax, I was delighted to take on the challenging of building the index.
The Win/Loss index identifies suburbs across Australia where landlords lose the most amount of rental income on average per month.
‘Oh Mike, what a depressing index!’ I hear some of you say. ‘Couldn’t you create something a little more upbeat?’
While I appreciate the feedback, you’re missing the point.
You see, across all property markets, there’s normally some form of rental vacancy. There might be that rare outback centre where there’s only a few rental properties on offer meaning vacancies are pretty much zero – but chances are your property investment will be empty and seeking a tenant at some stage, regardless of where you invest.
Up until now the property industry has been devoted to the idea of simply looking at rental vacancy rates as a measure of rental demand and investor risk. This metric is fine, but it does miss on one crucial front.
You see, it doesn’t measure the real dollar pain felt by average investors within each suburb. So, there was an opening to create a comparison index.

The details

The MCG Landlord Win/Loss Index calculates the average rent lost per investment property in every suburb across Australia. To reduce anomalies, it excludes any suburb with less than 50 properties occupied or available for rental.
The index uses total rental listings greater than 21 days for each suburb, multiplied by each suburb’s aggregated median rent to assess the total rental lost per suburb. This figure is then divided by the total number of rental properties in the suburb to deliver an average loss per rental property for each suburb on a monthly basis.
It levels the field so you can compare all suburbs on a dollar basis.
I also added a risk index which groups suburbs into even sets from one to 10 depending on their ranking in the list overall.

The outcome

Here’s my national top 10 loss leaders for March 2021:

There are a number of ways the index can be used.
Firstly, it identifies those areas where tenants are in a stronger position to negotiate on rental terms because vacancies are causing the most financial pain for landlords.
As you can see from the table above, a Caufield East landlord is losing an average of $765.37 per month per property due to vacancy. The reason Caufield East has a large average monthly loss is that the rent figure here is relatively high, and oversupply is causing properties to become vacant at this elevated rental amount.
Compare this to somewhere like North Gosford NSW where landlords are only losing $4 on average per property per month.
If I’m a cash flow motivated investor, I know which suburb I’d rather invest in.
This handy index can also help buyers weight up the cost-benefit of cash flow vs. capital growth too. For example, if you are a high-income earner and can afford to cover vacancy losses, you might still choose to go with Caufield East because the property has excellent capital growth potential.
Of course, watching how the index trends over the coming months will also reveal new information. For example, we’ll be able to spot trends such as suburbs with least risk of rental losses, or locations where investor are at most risk of falling income.

The upside

It’s not all news about losses either. By applying the same measures in reverse, I have been able to identify regions where investors are keeping their income losses to a minimum. Here are the March results for those with minimal vacancy-driven rent loss:

These are the nation’s ‘safe haven’ regions and should be a top research priority for those looking to keep their losses to a minimum.
You might be able to tell, I’m a bit excited about these new numbers. They’re another useful tool for investors looking to identify prime investment hotspots.
Not a bad set of numbers I reckon, even if I do day do myself.
To keep track of the index as it evolves, check out: https://rentlossindex.com.au/

Investing in fast rising market

Posted on April 8, 2021 by admin

Oh, the swings and roundabouts of pandemic property investment!
That sounds like the title track of a Gilbert and Sullivan production. It conjures up images of barely-in-control players swinging each other about the stage while traversing vocal gymnastics of the highest calibre.
Property markets have been riding a similar emotional rollercoaster. We’ve gone from famine to feast in a short space of time, and it’s been head spinning.
Keep in mind, building wealth via property investment is supposed to be a sedate pursuit. I’ve heard more than once it’s about ‘getting rich slowly’.
This is absolutely sensible, of course. The joy of real estate is that through excellent leverage you can acquire an asset and use the rental income to pay the outgoings while you play the waiting game. ‘Time in the market’ means come a property cycle or two, you are sitting on a handsome chunk of equity.
This is all well and good, but you’re not always investing during a flat market where you can take your time analysing price and selecting an asset.
So, what can you do to ensure you’re securing the right kind of asset at an appropriate price during moments of huge price upheaval?
Here are my three tips for buying when values are rising quickly.

Understand your goals
First up, before you even act, you must establish your investing foundations by understanding your goals.
It seems basic, but the one thing buyers often fail to do is define what they hope to achieve by purchasing a particular property.
For example, are you a sit-and-wait investor or a quick flip renovator? Is your end game a desire to live off the rental income or sell down for equity?
By defining your intentions before purchase, you can ensure you’re choosing the right asset for your circumstances.
You should also take time before the purchase to understand what your lending situation is. How much can you borrow? What repayments can you reasonably service? What sort of rent does the asset need to generate?
Knowing all of this means you can set your budget wisely ensuring you don’t overextend yourself and put too much pressure on your finances.

Current sales evidence is key
The secret to buying right is understanding property value, and that means ensuring your comparable sales evidence is as current as possible.
I talk to plenty of buyers’ agents from around the country. They say determining what to pay for a property when prices are rising quickly is one of the toughest parts of their job.
They want to compare their potential property purchase to similar sales so as to gauge market value.
But sales evidence in a fast-rising market become quickly out of date. By the time a contract has progressed beyond the settlement stage and is being recorded as a confirmed sale, there’s been at least 30 days – often more.
This one-to-two-month lag is a long time when prices are rising on a weekly basis.
Also, you rarely find a sold property that’s identical to your potential purchase. You invariably have to try and allow for myriad factors such as land size and outlook, accommodation and condition, what sort of ancillary improvements there are etc etc. The list is extensive.
Overcoming this is tough, so in fast moving markets you need gather as many very recent sales as possible.
My advice? Attend as many auction events in your area of interest as you can. In addition, reach out to local agents and ask for their lists of recent sales.
You can use dated sales (absolutely no more than six months old), but you may have to guesstimate the difference between that past market and the current one. It’s not easy, but it is possible.

Rely on professional advice
This is far and away the best move to make.
Look for independent professionals, such as buyers’ agents, who operate in the current market. They specialise in securing property by monitoring their areas of speciality every day… and they know how to adapt and adjust for market changes.
They can also advise you when it’s appropriate to pay above the apparent current value for a property. If a property is ideal for your circumstances, and there’s substantial evidence to indicate its value will continue to rise sharply in the short term, paying a premium is a smart move.
Are you prepared to miss out now (again) and regret it in the future?
Buyers’ agents and advisors can help you find that ‘sweet spot’ price that places you at the front of the purchaser pack, but doesn’t overexpose you too much financially.

Buying in a rising market can be challenging (just like listening to an amateur singing Gilbert & Sullivan), but it can also be rewarding. With the right guidance and a calm steady approach to your purchase, you can secure an investment that will both service your needs and deliver solid value gains and rent returns.

Mike Mortlock is a Quantity Surveyor and Managing Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating. You can visit them at www.mcgqs.com.au/ Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular speaker and commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at https://www.mcgqs.com.au/

The wealthy, the comfortable middle and the rest: Australia’s wealth and income ladder explained

Posted on March 2, 2021 by admin

“If poor people knew how rich rich people are, there would be riots in the streets.” Those are the exact words of American actor and comedian Chris Rock during a past interview with New York magazine. He was referring to the enlarging gap between the rich and the poor in the US.

Here at home, studies have shown the clear lines that segment the rich, the comfortable middle and the rest. And the Coronavirus, too, has caused an economic shakeup like never seen in decades, further reconstructing the very nature of wealth and income distribution in Australia.

But amid plans to recover from the ravaging pandemic, one thing remains clear – the rich are getting richer. Latest figures from the Australian Bureau of Statistics suggest that wealthy Australians are pulling away from the rest of the country, raising the inequality gap to a record high.

So what exactly is going on with Australia’s well-off, middle class, and the low earners?

In a last year study, Acoss noted that close to half of Australia’s private wealth is owned by 10% of the country’s richest. Coming in second are about 30% of the “comfortable middle” holding about 38% of Australia’s household wealth, leaving a 16%-stake to the rest.

The research which sought to compare the nation’s upper, middle and lower wealth and income rungs further uncovered that the top 20% with wealth averaging $3.3 million own at least 99 times the wealth held by the lowest 20%, with an average of about $36,000.

The bottom, middle and upper rungs

According to Acoss, the lowest 10% earn an average weekly wage of $592 or $30,784 annually. This category typically comprises the individuals relying on JobSeeker Payment. A household on Jobseeker Payment earns about $341 or $610 weekly in social security payments for a single individual and a single parent with children respectively.

The middle-income earners typically comprise couples with children living off one fulltime job and a part-time wage. The middle 20%, generates an average weekly income of $1,884 ($97,986 pa), the report stated. Here, the couple is essentially raising dependent children with one partner earning about $85,000pa and the other an average low of $30,000pa. Such households are likely to maintain a fair asset base.

In the top category, couples with two full-time wages dominated the highest 20%. The average income of a model rich household averages $4,166 per week ($216,627 pa), according to the research. Compared to their middle-income counterparts, households in this category had about 10 times more average investment income. The top 20% households recorded an average annual income of about $85,000 for each partner. These individuals were likely to sustain a comfortable lifestyle with multiple financial buffers in case of a crisis occurs.

However, the net income for the top 5% soars to an average of $6,796 per week or $353,371 annually. Unlike the top 20%, the highest 5% is mostly made up of couples with zero dependents and one high income generator. Both incomes afford them an exclusive lifestyle among the wealthy.

Between 2017 and 2018, the net worth of the richest tenth of Australian households hit $4.75 million, substantially promoted by a range of business investments, company stocks, and real estate assets. This segment holds about 46% of the total household wealth.

The comfortable middle – with an average net worth of below $1.3 million – hold close to half of that figure in their own homes, superannuation and investment properties. The lowest earning households record an average net worth of around $277,000 comprising superannuation and owner-occupied homes.

On average, households with referenced persons over the age of 65 years recorded a net worth of more $1.3 million – about 1.5 times that of the younger families.

But the survey also found that income distribution is more uniform compared to wealth. The top 20% richest individuals have annual pre-tax incomes of about $330,000, the middle 20% make about $116,000 while the lowest 20% earn $41,000.

In terms of income from investments, the biggest chunk is concentrated at the topmost. Close to 70% of investment income goes to the 20% most moneyed households. The fifth wealthiest Australians cash about $1,000 worth of investment income weekly even as their top 5% counterparts pocket about three times more ($3,000pw on average).

As the new year rolls out, the incomes of lower earners have been bolstered by government support programs such as the Covid-19 JobSeeker initiative, JobKeeper as well as the one-time stimulus payouts to welfares.

The government stimulus initiatives notwithstanding, inequality could worsen if the support programs are retracted, unemployment numbers continue to soar, and wage rates stagnate, this is according to the Australian Council of Social Service chief executive Cassandra Goldie.

If the state organ’s word is anything to go by, there’s still a lot more to be done before “normalcy” becomes a reality for most Australian households.

“If the government continues on its current path focusing on tax cuts and tax incentives for private sector activity there is no question that into the future we will see a serious increase in both income and wealth inequality and the concentration of wealth in the hands of fewer and fewer people,” Goldie warned.

As earlier indicated, the pandemic has further altered the inequality levels. A 2020 report by the International Monetary Fund (IMF) revealed the worrying income distribution patterns during pandemics including the 2003 SARS, Zika Virus in 2016, Ebola in 2014, MERS in 2012 and the 2009 Swine Flu outbreak. In all of the analysed instances, the IMF noted that pandemics resulted in higher income inequality, with the lower income generators being the most affected.

The true costs of investing without expert advice

Posted on February 18, 2021 by admin

Property investment has achieved an almost religious following among a large swathe of the country’s population – zealous in their devotion to building portfolios.

It’s understandable of course. For starters, home ownership is so deeply ingrained in our nation’s psyche that we’ve classed it as ‘The Great Australia Dream’… and this appeal has flowed into the investment realm.

It’s also an aspirational beacon for many Aussies. I’m yet to meet a young couple dreaming of the day they purchase their first tranche of shares, but plenty are keen to become landlords.

There are the perceived social status benefits too. You can lord it over friends and family, casually dropping in titbits of conversation that subtly let one and all know you are successful enough (on paper at least) to own an investment.

For example:

Mate at the BBQ: “Those steaks are burning.”

You: “Yep… they’re as hot as the market since I bought that investment house just up the coast!”

There you go – subtle as a pickaxe.

But here’s what puzzles me. Most people seem to believe that because they live in a house, they know all there is to know about real estate as an asset class.

That would be OK, if the barrier to entry weren’t so low. Assuming they can access adequate funds, most grown adults are allowed to, by and large, participate. They can throw hundreds of thousands of dollars into the hurdy gurdy of the investment market regardless of prior experience or specialist education.

And many can become numb to the numbers. For example, I’ve seen people flinch at the idea of paying a few hundred dollars for professional advice on a property’s market value, but they happily hit up a bank for an extra $50,000 to add a patio, change the carpets and repaint the outside, They justify it will, “Improve the value and increase the rent!’ without actually understanding how it will do either of those things.

It seems to me that plenty of property investment successes result as much from luck as planning.

Now, I don’t want to deny people their unfettered opinions on a range of subjects outside their field of knowledge. I’m OK with that bloke at my local cafe believing he could successfully reorganise the Australian cricket team’s playing roster in a way that would see them victorious against New Zealand.

After all, he does make an excellent cappuccino.

But when it comes to property, there are plenty of incredible experts on hand who can help guide you and from what I’ve seen, ignoring their advice can be very costly.

Here are just some of the costs average Aussies miss when they choose not to rely on professional advice:

Opportunity cost

In the simplest terms, opportunity cost is the loss incurred by choosing one investment over another.

For example, you decide to purchase in a near-CBD suburb with the intention of making capital gains. You purchase a unit in a new high-rise project rather than a larger, but older, apartment in a small six-pack block.

Both cost $500,000 and deliver $385 per week in rent. However, over the next five years, the older unit sees its value increase to $575,000, while the new unit only increases to $525,000.

The opportunity cost of choosing the new unit over the old apartment in this scenario is $50,000. A solid chunk of change in anyone’s language.

And an experienced local professional would have likely guided you toward the investment option with the best growth potential.

Opportunity cost is one of those unseen expenses that eat away at your long-term plans, and that can be managed with the right advice from the start.

Bad decision costs

Granted, this is a form of opportunity cost – but in this case it’s at the extreme end of the scale.

A great example of this occurred in Queensland’s mining towns during 2012. Investors were seeing outrageous rental returns for what once low-cost housing as mining workers fought it out for accommodation. The head-turning rents drove property prices to heady highs. Homes once worth $80,000 were selling for $800,000 and achieving 10 per cent gross rental return.

But, of course, this was never going to last and those who bought at the tail end of the mining boom got very badly burned.

I’ve heard of very smart people caught up in the greed who lost hundreds of thousands of dollars – and many bought at a time when the advisors I know were warning of a looming crash.

Missed deduction costs

This one falls firmly into my field of expertise.

When you own an investment property, it is imperative that you use all legal means at your disposal to increase the return and reduce the tax burden.

Unfortunately, too many landlords rely on their own know how when it comes to tax write offs. They might include some general maintenance and repair costs, interest on the investment loan and management fees – but that’s it.

Far too many are unaware of the substantial upside in commissioning a tax depreciation schedule.

For just a few hundred dollars, a tax depreciation schedule can deliver thousands of dollars in deductions from the very first year of property ownership. Depending on your circumstances, this means hundreds more in your pocket come tax return time.

Perhaps even more tragic, is that by not being quick to organise a depreciation schedule, some potential deductions become irretrievable.

I’ve yet to meet any investors happy with handing over too much tax. Yet that’s exactly what they’re doing by not having a schedule completed.

Maximising returns

This cost comes from looking at how you spend your money to improve your investment’s performance.

Many landlords want to improve their investment, but a fair number of them make important choices about what works are done based on personal wants rather than sound economic principals.

For example, if you own a suburban home in a modest outer suburb, don’t have an inground pool and fully ducted air conditioning system installed for the tenants, no matter how nice they are.

For one, the increased rent will not be substantially more than if you spent less money on building a modest patio and installing inexpensive individual air conditioning units in the bedrooms and lounge.

Secondly when it comes time to resell, there’s little chance that pool and ducting will add anything to the selling price like what they cost to install.

Again – finding smart ways to spend on your investment falls firmly within the expertise of professional advisors.

I urge you, particularly if you’re new to investing, call on the services of independent professionals to help you navigate the waters.

Utilising their knowhow will yield far greater results with less risk and substantially more piece of mind.

The simple solution turning negative investments into positives

Posted on February 9, 2021 by admin

Sometime investors are too quick to judge whether a holding is ‘successful’ and end up making the wrong decision about whether to hold or sell.

Now, I admit I’m not immune to the occasional bad decision. More than once I’ve reflected on what possessed me as a 20-something to make dubious shirt selections for those evenings out on the town.

But unlike choosing a metallic-print short sleeve button up for the public bar, bad investment decisions have substantial, far-reaching implications for you and your family.

If you draw the wrong conclusion about how robust a particular property holding is based on incomplete information, you could end up with one the most common investor regrets – selling too soon.

I think the problem stems from a lack of understanding about the proper measure of investment return, and the strategies you can employ to boost your position.

In fact, there’s one very simple move that can transform your asset from a money sucking black hole to a wellspring of income – and it’s not negative gearing.

Let’s take a look.

The true measure of return

To understand what constitutes investment success, we need to discuss how return is measured and what you’re trying to achieve with your portfolio.

Most buyers look at a property and weigh up capital growth potential and rental yield.

For many, the gold standard is to have an asset that can be held in a neutral or positive cashflow position, while providing excellent prospects for long-term capital gains.

This delivers a true set-and-forget investment.

If you are making enough income from the property to covers its borrowing, operating, holding and maintenance costs, then it will sit invisibly within your portfolio, taking care of itself until you want to access the equity through sale or redraw.

But all too often, investors do a self-audit of their portfolio and are delivered a shock. They run the numbers and discover their cashflow is going backward each year. They see the bottom line and think, “This thing is draining me dry. Time to exit!”

This, my friends, is a grave mistake because you are ignoring the space your property occupies as part of your overall investment landscape.

A fast fix to negative cashflow

Let me give a rudimentary example of how not understanding the holistic role of real estate can have you offloading too soon.

Let’s say you purchased an investment property in a great coastal location.

It costs you $500,000 to buy and delivers a gross yield of 4.0 per cent, or $20,000 per year in rent.

The combined annual cost of interest on your loan, maintenance, government charges and management fees come in at approximately $25,000 a year.

While you are looking forward to capital growth over the next 12 years, you also note the property costs you $5000 a year to operate and maintain.

That’s going to be $60,000 over the coming 12 years. Life’s too short to be throwing that sort of money away! Best offload that home pronto.

But hang on tiger, here’s the thing – assets don’t work in isolation of your household cashflow, and while they might show an annual loss on paper, they also provide tax breaks.

This means, your investment could be reducing your taxable income by thousands of dollars each year with the outcome being a huge boost to your annual tax return.

So, in the above example, if you can find approximately $15,000 in deductions each year at a minimum, the property moves from being an anchor dragging your plans, to a motor driving your financial success.

The upside of depreciation

So, where can you find these deductions?

Firstly, there are the well-known tax breaks. Your loan’s interest charges are tax deductable, as are many of your running and maintenance costs. Depending on your income these alone may generate a positive tax return each year.

But there’s also depreciation – the unsung hero of tax boosters.

Depreciation is a very cost-effective way of helping move your negative annual cashflow position into positive territory.

I’ve run the numbers, and they’re compelling.

By spending a few hundred dollars on a depreciation report, the average Australian investor generates tax breaks of around $9,250* in their first year alone.

If you’re earning $100,000 a year, according to the ATO tax calculator, this means a boost to your tax return of $3,423 – even more depending on what sort of property you have.

In fact, not getting a depreciation schedule is costing you far more than you might realise, and sometime when those dollars are gone, they disappear forever.

A little while back, I conducted a survey of our client base and discovered the average amount of lost time for investors who failed to commission a depreciation schedule quickly enough was 3.58 years.

In that time, the average investor without a schedule had potentially forgone around $20,537 in depreciable benefits.

I even found one client who waited almost 18 years to do a schedule and lost $41,000 in tax breaks as a result.

So – turn around you’re thinking and start looking at how you can easily utilise the laws of the land to turn that real estate investment dud into a diamond asset. One that boosts your households overall cash position each year and keeps you on your wealth-building path.

Source: MCG 1000 Assets Report

How the government delivered an ‘accidental investor’ boom

Posted on January 28, 2021 by admin

Cause and effect is a well know law of relationships. In 2020, there was an almighty cause, which brought an incredibly response across political and social landscapes.

But another lesser-known law is, “If you’re going to throw a party you’ve got to expect a little damage.”

In other words, things implemented to bring about one set of results invariable encourage others.

So it goes with moves by governments at all levels to help boost the economy and the building industry in the wake of COVID-19.

You see, a few moves by our politicians are also driving a buyer group I first spotted a few years back – and as a result, their numbers will be on the rise in 2021.

Accidental investors

About four years ago I was analysing data about our investor clients and their assets. It included elements such how far they lived from their investment and how long they’d owned their property before commissioning our services.

Among the very interesting statistics revealed was one standout – and I’ve been watching its progression ever since.

It’s the rise of the ‘accidental investor’.

In short, I identified the percentage of people who had first lived in their asset before moving house. They’d retained that original home as part of an investment portfolio rather than sell it.

In most cases, these owners bought their first home for the usual reasons. Maybe it was close to family, or great schools, or a workplace.

But for whatever reason, when the time came to shift, they were able to keep the property and find tenants, thus becoming investors without the initial intention of buying real estate as an asset.

In 2018, I found that around 23 per cent of investors had once lived in their investment property, with owners living in their former home for four years and 11 months on average before moving out and flipping it into their portfolio.

Then at the beginning of last year I published our 1000 Assets (2020) report which was a four-year study of investor behaviour.

The information revealed for data analysed between April and December 2019, the percentage of accidental investor had risen slightly to 25.7 per cent of landlords, with the average occupancy falling to four years, two-and-a-half months.

In short, accidental investor numbers were rising, and their initial occupancy period was falling.

The new trend in 2021

While there’s been a definite trend toward accidental investment throughout the past five years, I believe the numbers in 2021 will show an exponential rise.

And, this time, it will be no accident.

In a recent news article, property investment advisor Richard Crabb, said a new cohort was on the increase.

He said the ‘livevestor’ had spawned.

Livevestors are a cohort who are buying their home (usually their first) with the express intention of it becoming an investment in the future. As such, they purposefully move their property selection criteria away from the usual homebuyer checklist and, instead, look for long-term investment potential in their first house.

In short, they’re not-so-accidental investors.

Here’s why we’ll see the numbers skyrocket in the near future.

The introduction of the HomeBuilder stimulus by Federal Government has been a huge success. The building and development industries are singing its praises as employment and activity in the new-build property sector goes ‘boom!’.

In addition, there are a range of state and territory incentives, from first homeowner grants to stamp duty discounts, that have taken home buying assistance to record levels.

On top of this, low interest rates designed to keep our economy improving in the post-pandemic world are boosting the buying power of purchasers, as loan serviceability \ becomes ever easier.

This confluence of factors is about to spawn a new wave of accidental (on purpose) investors. They will drive markets in city fringe high-rental-demand suburbs with excellent long term value growth prospects.

These buyers will choose to stay in their home for at least 12 twelve months (the minimum usually required in order to qualify for various grants). But many will decide to move out soon after the year is up and make plans to upgrade their abode while retaining their first purchase.

When we next visit our study, my bold prediction is that the ‘Accidental Investor’ number will be over 27 per cent, and in-residence time will be between two and three years – and it’ll just be the beginning.

Accidental Investors are on their way and set to become a cohort of influence that will be hard to ignore in Australian property markets.

Average distance investors are buying from where they live – A surprising Result

Posted on January 19, 2021 by admin

In round figures, approximately 2.2 million Australians own an investment property – which is less than 10 per cent of the population. Of these investor figures, the vast majority own just one holding (over 70 per cent). I firmly believe that investors are getting stuck at one property simply by getting the first one wrong. That could certainly be due to the structuring, finances, hiring the wrong property manager and many other components. However, I am inclined to look more at the property selection itself.

It begs the question; typically, how do investors select an investment property? From our research, we know that a quarter of investors occupy the property prior to it becoming an investment property. Yes, sometimes that is strategic, but given the average time investors spend in the property is over four years, it is also quite likely to be an ‘accidental investment’ of sorts. It becomes the investment simply because they retain one home when it comes time to move to another. It is horrifying to think how many properties are purchased from conversations at barbeques, but I think investors probably deserve a little more credit than that. Still, the media and well meaning family members are an unabating source of regrettable advice.

One pervasive notion is that investors buy around the corner from where they live, and their lack of success owes to the fact that they are not casting the net wide enough. Certainly, I’ve heard many anecdotes from buyers agents and advocates testifying to that fact. There is a clear psychological imperative for some investors that they are able to closely monitor and drive-by the asset. Others will state that it’s because they know the area well. There’s no doubt that this is normally true, but do they know where the worst streets, the best coffee shops and schools are locally or more important things like employment opportunities, upcoming supply and household demographics?

It is easy to be both critical and conciliatory of these motives and motivations. My mission is to help educate investors to make the best possible decisions and get the most out of their investing. Speculation is fun, but I certainly prefer looking directly at the data.
To this end, we ran an internal research exercise where we analysed the details of 1000 clients who had commissioned depreciation schedules with MCG, to which revealed a picture of investor buying habits. The report was picked up by national media and their angle was that investors are better educated than they ever have been and look towards the areas showing the best growth potential, rather than just being around the corner. This I think is true, but the data in all honesty could prompt one to write either of those stories.

Enough fluff let’s look at the data.

From a simple average distance point of view, investors are buying 293.47kms from where they live. Most commentators were surprised that the distance was so great, but whilst it excluded overseas purchasers, it is easily blown out by investors living in Melbourne, and buying in Cairns. Let’s tease it apart a little more;

6.9% of investors purchase within the same suburb they live in
60.1% purchase within 50kms of where they live
10.8% of investors buy within 2kms
29.5% of investors purchase more than 200kms away

How about that? Surprising? I’d be keen to hear whether that was closer or further than you thought.

The average distance between investors and their investment properties will only continue to increase in my view. With the influence of the coronavirus crisis investors are setting aside the familiarity of their home turf to seek out neighbourhoods in other states that might offer a better deal. There’s also far better research, data and experts out there that investors can leverage if they can resist the click-bait media articles around the latest and greatest hotspot. Happy hunting!

For more data and a copy of our exclusive 1000 Assets Report, please click on the link here and we will ensure it is sent to you.

My 2021 Predictions – thoughts on what 2021 will deliver

Posted on January 8, 2021 by admin

Profound predictions, bold statements and audacious utterings are not something normally associated with the button-down persona of quantity surveyors.

But I’m about to buck the trend.

Perhaps I’ve been I’m emboldened by this year of challenge. Maybe I’ve gone lockdown stir crazy. Possibly, it’s just the end of the year and it’s time to pop on the Hawaiian shirt, grab a festive morning mimosa and let fly.

Don’t stop me… I’m on a roll.

Here are my thoughts on what 2021 will deliver Australia’s property markets.

More building

There’s been a substantive move toward new-property investment in the past few years, and this will only pick up the pace in 2021.

Now there’s been plenty of stimulus reasons for this. First homeowner grants and various building boosts are part of the equation. Yes – I realise these things don’t apply to ‘investors’ but in many instances, these newly built properties will become investment assets (more of that in another blog).

In 2021 this new-home trend will continue. Government stimulus to assist the construction industry post-pandemic isn’t going away. In addition, once these homes do become investment properties, the depreciation benefits each year are more than enough to pay for cabanossi, Jatz crackers and brie at your EOFY celebration (yes, that’s a thing).

Attached housing changes

We’re all well versed in the challenges faced by new unit construction throughout the past five year. Oversupply issues in many capital cities coupled with bad press around structural concerns all hurt the industry.

But throw in a pandemic – which included swathes of lockdown time within your tiny apartment’s four walls – and you can see how stir-crazy residents are growing weary of units.

Buyers are already looking toward larger units, but there’s a noticeable increase in those acquiring townhouses as well.

Even if it’s a purchase for investment, the popularity of space can’t be denied. Tenants need room too, and they’re willing to pay for it.

Investors also seem to be growing weary of large unit developments based on our analysis at MCG. Smaller, boutique style projects with a bit of individualistic flare will continue to play a major role in our markets.

No ‘mass exodus to the regions’

Shock! Horror! I’m taking a contrarian position and make no apologies for it.

Despite the column inches written on how we’re all fleeing the city in search of low-density regional centres, I just don’t see it happening on a broad scale over the long term.

Yes – I understand the arguments. You can mostly work from anywhere with an internet connection. Why wouldn’t you enjoy the beach or bush? It’s time to escape the city.

But facts remain – we all want to be within a reasonable commute of our CBDs. That’s where the action is! They’re the major financial, services and social interaction hubs of our states and territories.

I expect that while inner-CBD and higher density suburbs will suffer a little in 2021, it won’t be distant regionals that benefit most. Instead, it’ll be lifestyle centres within a short train ride of the big smoke. Think Sydney’s Northern Beaches (post -Christmas lockdown of course).

Lending will drive gains

We are living in the era of a 0.1 per cent cash rate. Make no mistake… our children will talk of this moment with their offspring. Money has never been so cheap – but interest rates aren’t the only consideration.

Early in 2021, there will be serious discussion about stimulating the economy by making the process of securing a loan less arduous.

In the wake of the Royal Commission, APRA edicts and responsible lending laws it’s been a nightmare for loan applicants who, in many cases, could easily afford the repayments.

But political will to see the economy grow will compel the powers that be to ease up on lending guidelines well before June 2021.

And when it becomes easier to get a loan at these historic low rates, most markets will move.

Infrastructure boomtime

Again, post-pandemic Australia will be all about growth and ‘Build! Build! Build!’ will be its mantra.

Across major capitals you’ll see extraordinary projects designed to both improve lifestyle and increase employment. From transport to entertainment venues to commercial precincts, dollars will be spent.

The flow on from more money in the pockets of working Aussies always end up being a property uptick.

We are coming off a fairly low base in 2020, so the effect will be magnified in 2021.

First homebuyers are in force

After being relegated to the real estate wilderness for so many years, first homebuyers are making their presence felt now, and will continue to do so throughout 2021.

It should be no surprise that I’m all for investors. They’re an extremely well-educated cohort who, on the whole, seek to become smarter about the market and the benefits of participating in real estate ownership.

But in 2020, they stood back as uncertainty rained down, and that vacuum was filled by first homebuyers.

Government grants and improved affordability in certain locations have seen first timers step into the market like never before, and their influence will continue into 2021. Expect to see more housing produced to cater to this group, and for home ownership to become an ever-increasing badge of success among the young, particularly in the lower and mid-level property sectors.

Despite some concerns around easing government economic assistance and the efficacy of the vaccine rollout, I remain as upbeat as a Christmas elf about 2021. Stock levels are tight, confidence is rising and there’s political appetite for economic growth.

With all this in offer, I have no doubt we’re in for a great year.

Now… back to that mimosa.

Do you know how many investment properties you need to retire on?

Posted on December 8, 2020 by admin

In a way, I hope you don’t have an answer to that, as the number of properties isn’t really the answer. You could have ten properties worth $200,000 on 90% interest only loans in areas with no growth. Or 3 blue chip properties worth 1.5m each returning 7% growth per year unencumbered. The true answer to the question is far more complicated than the number of properties, it depends on your goals, and is in all honesty, better answered by far cleverer people than myself.

What I do know, is that the answer is unlikely to be 1 property. Yet, according to the latest ATO stats, 71% of investors own only one investment property. Owning 5 properties, which arguably might be close to enough to achieve your retirement goals, actually puts you in the top 1% of property investors in Australia.

It begs the question, what is stopping most investors from growing their portfolio? That is a question and mission I have been on for quite a while. With my podcast I have interviewed many experts across multiple disciplines with this question at the front of my mind. As head tax depreciation expert at MCG Quantity Surveyors, I’ve spoken to thousands of clients and analysed all of the data.

The best answer I have so far as to why people are not growing their portfolio, is because they’re getting the first one wrong. Purchasing the wrong property may saddle you with equity losses, too much negative cashflow needing to be topped up, or just an underperforming property. This property either turns you off investing altogether, or at worst, impacts your financial position such that you are unable to purchase again or in the very worst case, are forced to sell.

Therefore, I believe that having the right team around you is critical. It’s very easy to look at the cost of say, hiring a buyer’s agent, but harder for people to look at the potential cost of making a poor investment choice. A good BA is a perfect example of a professional on your team that’s going to help you to avoid becoming part of the 71%. My role as a tax depreciation expert is to ensure that whatever you purchase, you are obtaining the maximum allowable depreciation deductions. Yet in our latest research, we calculated that there are over a hundred thousand investors missing an average of $20,537 worth of deductions each.

If your goal was to only ever own one property and you achieved that, then all power to you. However, I believe that most investors begin their investing journey with the idea that they’re hoping to dramatically change their financial future or the choices they have later in life. And arguably, one property is not going to get you there. So, take time building your team and feel free to ask them hard questions. However, if they answer them well and you’re satisfied with their level of expertise, then value that expertise and tradecraft and go on the investment journey together.

Author: admin