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Expert quantity surveyor with extensive experience in tax depreciation and property valuations across residential and commercial properties.

The NSW Stamp Duty fallout: my three big predicted outcomes

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There’s been a cacophony of opinion this week filling column inches and taking over the airwaves of property centric media.

Refreshingly, the big news wasn’t pandemic related. Nor did it involve a concession speech of any description.

No, the chatter has been dominated by a NSW government discussion around the abolition of stamp duty which is a thorn in the side of property owners.

Given there was an expectation stamp duty would be substantially curtailed – if not abolished all together – in the wake of the GST’s implemented in 2000, this new proposal has been a long time coming.

There appears to be much dancing and rejoicing about the plan – well, awkward dad-dancing and restrained accountant-style rejoicing anyway – but as is often the case, we have precious little fine detail on the proposal at present. As such, trying to predict the exact fallout of this change is difficult.

But I’ve never been one to shy away from a challenge – particularly when it comes to tax matters. It’s my extraordinarily boring superpower.

Here’s a summary of the proposal and my three long-range predicted outcomes should the changes come to pass.

The proposal

The NSW proposal would essentially see buyers given the choice of paying stamp duty or opting for an annual land tax when acquiring a property.

This would mean purchasers could choose an ongoing yearly land tax payment rather than a lump sum stamp duty which, by the way, is just over $42,000 based on the median Sydney house price at present.

According to media reports, because there’s been far less market activity this year (due to some global pandemic or something) the revenue generated from stamp duty has fallen dramatically. As such, now is a prime time to implement the changes. Not only would a restructure be less painful right now, but government has grown more accustomed to lower stamp duty.

But it’s not all altruism on the state’s part. A 2019 Grattan Institute study on the abolition of stamp duty stated:

“…shifting from stamp duties to a broad-based property tax could leave NSW between $4.1 billion and $5.2 billion a year better off.”

In short, abolishing stamp duty should make it easier for many buyers to purchase a home, and the annual land tax means the government is receiving a more regular income stream.

Seems like a win for everyone at this stage

My three predictions

Let me say from the outset, details about the proposal are still a bit light on, but let’s assume the protocols will continue to be generally in line with the information we have to hand.

Prediction one. I suspect there will be increased buyer demand for property that’s been opted into land tax rather than stamp duty.

These assets will be more price accessible, especially for first homebuyers and investors. If buyers are choosing between a transaction with a big up-front cost, and one with more manageable ongoing cost, then the latter is going to come up trumps in most instances. The result of higher demand is (all things being equal) higher prices too, so expect to see land-tax properties fetch more than their stamp-duty contemporaries.

Prediction two. Be prepared for a potential two-tiered market divided along property value lines if they don’t change the way land tax is worked out at the moment.

Annual land tax is currently assessed on the basis a property owner’s holdings exceeding a threshold of $755,000 in taxable land value. While details are yet to emerge on what thresholds will be in place under a new system, if the status quo of land tax thresholds were maintained, those who sit below the figure are unlikely to adopt the ‘pay upfront stamp duty’ option.

I have one big caveat though. Governments have a history of finding ways to get their pound of flesh. I don’t really believe they’d introduce a scheme that provides a loophole for avoiding tax altogether, so expect a flat percentage or sliding scale of some description to ensure the money keeps flowing into consolidated revenue.

My third call is a bit more solid. I think 2022 could be ‘The year of the NSW flipper’ under the changes.

Buying a dodgy property, doing a quick fix up and on selling for a profit was extremely popular a decade or so ago. In the ensuing years – national economic challenges aside – it seemed every woman and her dog wanted to give flipping a go, so competition for renovatable property heated up.

But a big part of making a flipping profit is keeping costs down, and stamp duty has been a monstrous drag on the bottom line of renovation projects. The removal of stamp duty would help make flipping more profitable.

There are wider flow on benefits from this prediction as well. Beyond simply the property owner’s financial gain, there’s the broader economic upside with increased use of consultants, contractors and materials. Flipping is an excellent stimulus for the real estate sector, so let’s hope I’ve nailed that one like Nostradamus on a good day.

So, I say ‘hurrah!’ to the proposed changes but I look forward to seeing the nitty gritty instil more confidence into an industry that’s the economic foundation of this country.

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/

Property Investors are being ignored and it’s hurting Australia

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The government’s helping hand during 2020 has seen assistance arrive thick and fast to all corners of the community.

And rightly so!

Our economy would be tanking into an unholy mess if it weren’t for the help on offer. Fortunately, the past decade’s worth of decent fiscal management has seen the nation in a strong position to implement these measures.

But while I applaud the actions metred out to assist businesses, their employees, the unemployed and many others, there is one cohort that I believe continues to be effectively ignored.

Worse still, if we continue to shun them when handing out the help, many may exit their market resulting in chaos for the wider community.

The group I’m talking about is property investors

 

Are you joking?

I can hear the voices of dissent already, “You can’t be serious Mike! Property investors are money-hungry, high-net-wealth real estate hoarders who don’t give a hoot about anything except making more dough at the expense of tenants!”

I know the public perception of property investors isn’t exactly glowing, but let’s inject some common sense into the discussion.

For starters, residential real estate is our nation’s biggest investment class at $5.5 trillion according to RP Data. Bigger than the combined value of superannuation ($1.8 trillion), the stock market ($1.6 trillion) and commercial property ($0.7 trillion).

It generates vast cash flows of support not just for agents, property managers and owners, but industries like construction, development, maintenance, professional services and so on. All these folks rely on the income residential investment brings.

Australian Bureau of Statistics (ABS) census data also showed that of the nation’s 2.1 million property investors, around 1.5 million own just one investment, while approximately 400,000 own just two. That means around 90 per cent of all investors have modest holdings. These aren’t high-wealth individuals. They are mum-and-dad level landlords just looking to get ahead and plan for retirement.

Another factor to consider is that property investment is a voluntary decision. Why is that important? Well if property investors are disincentivised to buy assets, there are far less rentals available for the general population.

ABS data from 2015/16 revealed 25 per cent of Aussies rent from a private landlord, while just four per cent were in government- funded rentals.

We do not want to discourage people from investing in residential real estate, but that’s exactly what’s happened during this pandemic.

 

Where’s the money gone?

Major financial assistance has been extended to the general population to support businesses and their employees.

JobKeeper has been an enormous success by any measure. It helps households pay their rent and put food on the table, so I’d call it a win… although it is being wound back in coming months.

Of more concern was the disproportionate support handed to tenants early in the crisis at the expense of landlords. As soon as the pandemic was upon us, there were legislated moves to protect tenants from eviction.

Now, I’m a decent human and generally OK with this, but it did involve landlords giving up legally enforceable right under existing lease arrangements. It was also a blatant signal that legislators felt landlords couldn’t be trusted to do the civilised thing by their renters.

But landlords aren’t stupid. Apart from the fact most are very reasonable people, they also know helping genuinely hard-hit tenants would ensure their investments weren’t vacant.

So, the vast majority of investors stepped up and did what they could. Cut rents or deferred tenant debts.

There was help from the banks in terms of the six-month repayment holiday for borrowers, however this wasn’t free money. The amount is being recapitalised back into the loan and interest will be charged on this figure.

Another scheme was HomeBuilder which delivered a boost to employment in the construction industry… but it was applied to owner occupiers only, so investors missed out again.

This was a wasted opportunity in my opinion. Investors will complete renovations and maintenance on their assets, so any assistance to encourage this would have been ideal. Not only would it have supported construction, it would have benefitted tenants with plenty of new fittings, fixtures and finishes added to rentals.

Finally, in our recent federal budget there was literally nothing in terms of direct support for investors. There was some infrastructure spending to benefit everyone, along with some additional support for first homeowners, but that was it.

 

Forgotten cohort

From what I can see, a lack of substantive support for investors has been a bad decision.

Recent reports show that rental vacancy rates are resilient in many big cities, and much of this has to do with supply.

Finn Simpson, a manager at Belle Property Dee Why recently posted the following about the lack of available rental properties in Sydney’s northern beaches after soft numbers were delivered for his suburb:

“Dee Why isn’t an isolated case either. There is a shortage of rental housing up and down the beaches. This extreme lack of supply is causing the rental market to do crazy things – we are leasing properties extremely fast and are getting offers way above what the landlord is asking.

“It’s making it very difficult and frustrating for tenants looking at the moment.”

 

In other words, demand for rental property remains good and rents are unlikely to soften in the near term.

I have little doubt part of this has been a fall in the supply. Many landlords will have been offloading their investments to help boost their household’s financial situations.

Some landlords have also been frightened off by changes to their state’s rental legislation that delivered more power to tenants. Why take the risk when you can potentially be forced to keep a bad renter?

And here’s the shame – not everyone can afford to buy a home, so renting is the primary alternative. A lack of rental supply hurts these tenants due to rising rents and tighter vacancy rates.

 

What I’d have done

At the very least I think if we’d lowered the qualifications around HomeBuilder, and allowed investors to participate, it would have resulted in a huge win for all.

Another move would have been to address depreciation rules for investors. Allowing investors to create improved tax breaks to encourages spending on investment assets – another big win for landlords, tenants and auxiliary industries such as construction.

While I have no doubt these suggestion will be met with silence by the powers that be, I do think it’s time we all realised property investors are a foundational cohort in this nation’s economy, and a little support during this troubling year would have yielded exponential benefits across the board.

…

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/

Instant Asset Write-off – Budget 2020. What has changed?

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The instant asset write-off has been featured in various forms for the last few years. It’s role is to stimulate business investment via the enticement of immediate deductibility of newly purchased plant and equipment assets.

So what changed in the budget?

The announcement means that assets purchased from 7.30pm on the 6th October through to the 30th of June 2022 will be able to be claimed as a tax deduction in full in the year they are ‘installed’.

This applies to new depreciable assets as well as the cost of improvements to existing eligible assets. Additionally, for businesses with a turnover of less than $50 million the instant write-off also applies to 2nd hand assets.

What really changed?

  1. The turnover cap – It’s now $5 billion! The previous cap was $500 million and the year before only $50 million. 
  2. The asset value cap – The $150,000 cap on the value of the asset is gone from budget night onwards. Yet it still means that any assets already purchased between the 1st of July 2020 and 6th of October, you’ll still be able to claim the full amount up to $150 ,000 if the asset is installed ready for use before 30 June 2021.

On top of this, small businesses with a turnover less than $10 million can also deduct the balance of any simplified depreciation pools at the end of the year while the instant asset write-off rules apply. So whatever is left undeducted can be written off right away.

It’s important to remember that businesses still need to purchase equipment with cold hard cash. It’s not free money from the Government, it’s just a tax deduction.

What sort of assets can you buy?

Well these are plant and equipment assets as defined by the commissioner of taxation under TR 2020/ (at the time of writing). You can see an example of residential plant and equipment items here (https://www.mcgqs.com.au/ato-effective-lives-2020-2021-depreciation-rates/) but the list of commercial assets is a mile long. Think any sort of machinery or loose asset as opposed to structural assets like a building itself. On top of that, it’s really not designed for plant assets that are a fixed part of a building like carpets for example.

What about buying a commercial property, can I write it off?

The short answer is no. This has previously always been part of the exclusions. Here’s a bit of an example to help;

If you buy a fish and chip shop business, you’ll be able to write-off the cash register and fridges that come with the business. If you buy the building that houses the fish and chip shop and your purchase includes the vinyl floor, you won’t be able to instantly write-off the vinyl floor, even though technically it’s a plant and equipment item.

It’s really about established businesses being encouraged to invest in new assets and expand their operations.

So it’s a solid incentive for businesses looking to purchase new assets, but it’s not a hand out and there’s a few nuances you need to understand along the way.

How to claim working from home deductions and depreciation

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We have been transitioning from the workplace to the home office slowly over the years but throw a pandemic into the mix and we are now talking about a mass migration! In fact, research from Roy Morgan shows over 4.3 million people (32% of working Australians) have been ‘working from home’ (WFH) during the last few months since the COVID-19 pandemic shut down large parts of the Australian economy.

 Now that you’ve setup your home office, what sort of deductions can you claim?

Annoyingly, it depends on your exact situation, but I will do my best to break it all down into the following categories.

  1. Working from home during COVID-19

The Australian Taxation Office has set up some dedicated rules for working from home during the pandemic, including a temporary shortcut method which is absolutely smashing. The shortcut period began in March 2020 and is due to end on the 30th of September, but it is likely to be extended in my view.

To qualify for deductions the following must be true.

  1. You have spent the money (seems simple enough)
  2. The expense is directly related to earning your income
  3. You have a record or receipt

That rules out anything provided by or reimbursed by your workplace. If you are given a working from home allowance to cover expenses by your employer, you can still claim deductions, but you’ll have to declare the allowance in your tax return.

Here’s what you can claim:

  • Electricity expenses associated with lighting and air conditioning or powering computers etc. in the area from which you are working
  • Cleaning costs for your dedicated work zone (mine has gotten out of hand I must say)
  • Phone and internet charges
  • Consumables – paper, ink etc
  • Home office equipment like computers, printers and additionally, furniture and furnishings
    •       With furniture and furnishings, you can either claim the
      * full cost of items up to $300 (immediate write-off), or
      * decline in value for items over $300 (depreciate over their effective life)

Sadly, this rules out things like coffee and milk and setting your kids up for online school etc. It also essentially rules out occupancy expenses like rent, interest payments and water rates as your working from home are is not a dedicated business located purely at your home.

Ok, so let us get claiming! What is the best way to actually do it?

There are three methods for calculating your expenses.

  1. The shortcut method mentioned briefly above
  2. The fixed rate method
  3. The actual cost method

Already I can sense your eyes glazing over, but it’s pretty simple. The actual cost method is as it sounds, the fixed rate method is probably not worth even mentioning. So let’s zoom (quite an appropriate choice of words for working from home) in on the shortcut method.

 In the shortcut method you can claim 80 cents for each hour you worked from home as long as you were working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls. You also have to actually incur additional running expenses as a result of working from home. In the shortcut method, you don’t need to have a dedicated work area like a private home office.
The shortcut method covers all your deductible running expenses in one fell swoop. You will just need to keep a log of your hours worked.

2. Working from home generally, but not because of COVID-19

The deductions you can claim depend on a few things, like whether you have a dedicated work area and whether your home is your principal place of business. For the purposes of this section, we will assume it’s not your principal place of business.

In this scenario you can claim everything listed in scenario 1 like utilities, phone costs, depreciation on equipment but you can also add depreciation on more fixed items like light fittings, curtains, and carpets. Estimating the depreciation on these items can be difficult given you are less likely to have a receipt for them compared to say your computer or office chair. This is where a quantity surveyor can help.

The main thing you CAN’T claim with your home not being your place of business is occupancy expenses like rent or interest on your mortgage and insurance for example. This normally means you will escape any capital gains tax issues, but it is always best to obtain accountants advice before you claim anything

3. Running your business from home

If your home is the place that you run your business from, and you have a room pretty much exclusively for business purposes, the rules are a little different. The deductions you can claim in this scenario consist of the sum of the scenarios above but add on the occupancy expenses. However, you must be aware of the potential capital gains tax implications, as you may only be entitled to a partial exemption.

The tax ruling TR 93/30 describes in detail the need to satisfy the qualification that they describe as being “the character of a place of business.” Basically, the area you are working from must:

  • Be clearly identifiable as a place of business
  • Not be readily suitable or adaptable for private or domestic purposes in association with the home generally (you have got to love ATO speak)
  • Be exclusively used for carrying on a business
  • Be regularly used for visits of clients or customers (this may not apply, but it would certainly help satisfy the ATO)

You can search for the ruling on the ATO website as it has a few examples, but I’ve given you the most important pieces and saved you the trouble of having to have 6 coffees just to finish all ten pages.

Now I must disclose that I am not an accountant, and this is intended merely as a guide to help you have the appropriate conversation with yours. Nevertheless, I hope it’s been useful and if you need any assistance with calculating depreciation deductions, we’re happy to help.

Best of luck navigating the demands of work whilst dodging zoom calls because you’re not wearing pants, children, pets and that neighbour that always seems to be mowing when you need a moment of quiet.

Spotlight on Property Investing Data – Suburb Trends

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Property investing continues to evolve day by day as we find ourselves with greater and greater access to property professionals, as well as the data and tools to do our own research. One such research resource I wanted to put under the spotlight is ‘suburbtrends.com’.

Suburbtrends offers research and data visualisation solutions. The website showcases some of the widgets on offer, with the most popular content being the suburb search and rent reviews data.

This website designed by analytics guru Kent Lardner, is a free resource assisting both individuals and property professionals to analyse trends across several metrics.
Kent says himself that his focus is “less on offering property price estimates (which are widely available on many websites) and more on the key trends that are impacting the market. My philosophy is that everyone is interested in key market trends, especially property investors.”

 Kent provides back of house research for valuations and advisory firms like JLL and his data is used by a number of property professionals such as buyers’ agents to assist with their due diligence and research.

 I wanted to highlight a couple of free tools you can check out by yourself.

 1. Suburb Search
The suburb search allows you to enter any postcode in Australia and then select the exact suburb of interest. It will then spit out a bunch of data, some of which is obvious like the average weekly household income and others which require a little help from his explanations found underneath like housing inventory. You’ll find things like days on market, the percentage of rental vs owner occupied properties, vacancy rates and much much more.

 2. Rent Reviews
This widget enables you to enter in your postcode and immediately have access to the median lease value for the area as at today, and a forecast of the likely rent in time. Property managers are beginning to use this rent review tool, which uses machine learning to forecast what the next rental review will be. It is an estimate of the increase or decrease for the coming month, shown as a dollar amount.

 I’ll be interviewing Kent on our podcast to discuss things like the value of his housing inventory metrics and how data can be utilised to help property investors make informed decisions by identifying trends that are likely to increase the demand within the areas they’re selecting to invest. In the meantime, I would encourage you to have a play around and see just how much data is available.

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/

3 Things to Be Aware of BEFORE Investing in Brisbane

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By Melinda Jennison – Managing Director of Streamline Property Buyers

Australia is not one property market.  National news headlines often make predictions about property price movements.  In most cases these headlines apply to the major capital city markets, and not all of the property markets around Australia. 

Brisbane is a very different property market to the major capital cities of Sydney and Melbourne.  Property investors appear to be drawn to Brisbane for the attractive gross rental yields, and because the Brisbane market is more affordable.

However, there are 3 important things that property investors need to be aware of BEFORE purchasing an investment property in Brisbane.  Let’s explore these in detail.

  1. Brisbane Flood Risk is Real and it is Costly

The Brisbane River winds through the City with broad flood plains spanning along its riverbanks.  Over many years, magnificent architectural developments have sprouted along the Brisbane River.  New residential housing estates have also been built in low lying areas, previously left untouched. 

Brisbane has experienced a number of significant flood events in its history.  In the 1980’s the construction of the Wivenhoe Dam was completed.  This new Dam was prompted by the failure of the nearby Somerset Dam to cope with flood waters in 1974, when the city of Brisbane was inundated.

Many assumed that the existence of the Wivenhoe Dam made Brisbane a flood-proof city.  Developers rapidly built projects along the river-front.  Many prestigious homes were also built along the river-front following the completion of the Wivenhoe Dam.

Then in early 2011, the Brisbane River once again became a raging river due to relentless rain.  Many looked on in disbelief and shock as the grim reality once again shredded the City causing widespread devastation and ruin.

Property Investors often underestimate the costs associated with owning a property that may have been impacted by flood waters in the past.  They also often fail to understand the additional costs associated with owning a flood impacted property.

Here are some reasons why you need to complete flood checks before you buy an investment property in Brisbane:

  • It is easier than ever to check for flood risk on a property. Buyers and tenants all have access to this information.
  • Demand for flood impacted properties is lower than flood-free properties.  Yes – you might be able to negotiate a better price when you buy, but the same will apply when you go to sell.
  • Previous Flood Damage can cause moisture readings in the frame to be elevated, increasing the risk of mould growth over time, resulting in costly repairs.
  • Flood is often an exclusion under landlord insurance policies.  If it is included, the insurance premiums will be higher, reducing net yield.
  • The cost of Contents insurance for Tenants can be higher, therefore making an investment less appealing for tenants.
  • Brisbane is not flood-proof.  If a home has previously been inundated with flood waters, it is possible that it could happen again.

For an in-depth review of previous flood events in Brisbane and for information on how you can check flood risk on any property in Brisbane, tune in to Episode 5 on the Brisbane Property Podcast which tells you everything you need to know.

  • Brisbane Offers Attractive Yields, but these may come at the compromise of long-term capital growth

Property investors are often attracted to the gross rental yields that Brisbane offers.  Whilst the median gross rental yield for houses is 4.2%, and 5.2% for units (Corelogic – July 2020), there are many opportunities where yields can be much higher.

High yielding assets are often added to a property portfolio where other growth assets may be negatively geared.  This has the effect of balancing out a portfolio.  When investors focus solely on high yielding assets, the historical data for Brisbane confirms that the long term growth may be compromised.

In-house research performed by our team, based on the 10 year change in median property values for houses across Greater Brisbane (according to Corelogic data up to June 2020) confirms the following.

  • There is a strong negative correlation between the 10 year change in Median Values and the Gross Rental Yield based on suburb data.

What does this mean?  Basically, it confirms that a high rental yield comes at the compromise of Capital Growth in Brisbane.  Conversely, high capital growth comes at the compromise of high rental yield.  This is what the data over the last 10 years confirms.

Of course, past performance is no guarantee of future performance.  It is important to look at the supply and demand metrics that exist now and how they may influence the prospects for growth in rental income and asset value in the future.

  • Suburbs in Ipswich and Logan Shires offer the highest rental yields in Greater Brisbane, compared with suburbs in other Shires such as Moreton, Brisbane City and Redlands. 

Our research confirms that the median gross rental yields as at June 2020 for houses in the Brisbane City Shire are 3.5%.  In Moreton the median value is 4.4% and in the Ipswich and Local Shires the median value is 5.1%. 

Brisbane Property Investors are urged to look at the long term trends when making investment decisions, rather than on short term fluctuations in market prices.  Property is an asset class where most investors are in it for the longer term, so decisions need to reflect the position of an investor in 10 or 20 years’ time.

  • Not all Bayside suburbs in Brisbane are Desirable

The coastline along Brisbane’s eastern suburbs adjoins Moreton Bay, which is dotted with islands shielding those locations from the Pacific Ocean.  This means that the mainland eastern suburbs in Brisbane do not have desirable beach front living that many coastal suburbs in Sydney and Melbourne enjoy.  

This is an important consideration for property investors, because the local area’s desirability needs to be considered in line with any good investment strategy.

As an example, some coastal locations are located on muddy flats.  For investors who are not local to Brisbane, they may not be aware that at low tide this can mean a distinct and pungent smell.  Property Investors would not be aware of this if they were located interstate, and therefore local knowledge is imperative to help investors to understand what makes an investment grade location for property investment.

These 3 things are just some of the factors that Property Investors needs to consider when looking to expand their portfolio into Brisbane.  Whilst the Brisbane property market might present with challenges that are different to other property markets around Australia, there is still ample opportunity for property investors to position themselves in a quality asset in Brisbane.  A thorough process of due diligence before selecting a suitable investment location and property is necessary to avoid the risks.  A step by step guide of 9 Property Due Diligence Checks before you Buy will ensure you don’t make a mistake.

For further information about investing in the Brisbane Property Market, contact Streamline Property Buyers – the local area specialists.

HOW TO AVOID SELLING THE WRONG PROPERTY EVEN THOUGH IT FEELS RIGHT

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By Good Deeds Property Buyers

Should I sell my investment property now the boom is over?

APRA & The Royal Commission into Banking and now COVID have impacted the lending practices of the major banks in Australia and many would-be buyers are surprised to find that their access to funds has been severely curtailed. Now that money is harder to come by it’s critical that borrowing capacity is not tied up in poor-performing assets. Has all this got you asking: “should I sell my investment property now?”

The answer to that question will depend on a number of factors. Do you need the money? Will cash flow be tight when the interest-only period expires? Are you jumpy because all the headlines are screaming “prices are falling”? How important is this property in terms of your long term wealth creation goals? Is it a quality asset?

In reality, it’s the answer to the last two questions that make all the difference. It’s a common misconception that all property goes up in value yet it’s simply not the case. Some lose money, some make modest gains and some are excellent investments. Performance varies dramatically between locations and even within an individual suburb, there can be a great disparity. What clouds the issue even further is the fact that there is no universally accepted framework for measuring performance.

Don’t sell the wrong property.

Most people decide to invest in property because they want to accumulate wealth and ultimately experience financial freedom. Yet this dream won’t eventuate if they hold a property that doesn’t perform. The consequences of a poor performer could include limiting your ability to buy or upgrade your family home. The opportunity cost of having your money tied up in a property that is not growing in value cannot be underestimated. When pondering the question, “should I sell my investment property now?” it’s important to evaluate each property in your portfolio on its own merits in order to avoid selling the one you should keep.

It’s actually easier to sell the wrong property than it is to sell the one you should be selling. The rationales all seem quite logical on the surface:

“I’m selling this one because it’s made money and can’t possibly go up too much more.” Well, this might be true if you bought in a “hotspot” but won’t necessarily be true if you bought in a blue-chip area.

“I’m not selling this one because I’ll make a loss.” It sounds like you made a mistake buying this one, might be time to cut your losses.

“I’m selling this one because it’s the easiest one to sell.” Alarm bells should be ringing here. Good assets are easier to sell than bad ones, which means you’ll offload the good one and keep the dud. Is that what you really want, long term?

“I’m not selling this one because I want to wait until it grows in value, it’s got to go up eventually.” I’ve got two words for you: opportunity cost. What else could you be doing with that money while you’re waiting (hoping) for the market to do you a favour?

“I’m selling this one because it’s not positively geared.” Whether something is positively geared or not depends on a number of factors, not the least being the amount of money you owe. The risk isn’t so much in the amount of money you owe, it’s in the quality of the asset. High yielding properties are usually very risky assets.

I’d like to know how to choose the right property to sell.

OK, so I’ve tackled a number of justifications people use for selling the wrong property. Why do we do this to ourselves? Well, it seems the answer might be in our brains and there’s even a name for it.

The disposition effect.

According to Wikipedia the disposition effect is:

The effect was identified and named by Hersh Shefrin and Meir Statman in 1985. In their study, Shefrin and Statman noted that “people dislike incurring losses much more than they enjoy making gains, and people are willing to gamble in the domain of losses.” Consequently, “investors will hold onto stocks that have lost value…and will be eager to sell stocks that have risen in value.” The researchers coined the term “disposition effect” to describe this tendency of holding on to losing stocks too long and to sell off well-performing stocks too readily. Shefrin colloquially described this as a “predisposition toward get-evenitis.”

We often see the same thing with property investors. Firstly, we humans hate to make a loss. If we sell a lemon, we actually incur the loss whereas if we hold on to it we can fool ourselves that it will come good one day. Instead, we sell the property that has performed well! We feel good about the gain and pat ourselves on the back for our savvy investment decisions.

We also hate to be wrong and selling a dud is a pretty tough admission that we made a mistake. Other people might realise we failed and that just compounds our sense of shame. Of course, we’ll avoid anything that causes us to feel regret!

How can we choose better?

You’ve already taken the first step – it’s awareness. Resisting the disposition effect won’t be easy, it will require self-control. Now that you know we have a bias towards selling the wrong property, the next step is to identify whether you have any lemons in your property portfolio and then develop a framework for prioritising which one/s to sell first. You can download our decision-making framework, click here – it’s yours for free.

Despite everything, being a landlord is still the best job

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By David Johnston, Managing Director of Property Planning Australia

Trust research fellow, Henry Halloran from the University of Sydney co-authored a report outlining how real home prices rose by three times wages growth since 2000.

Why does this occur? Primarily access to finance..

Our two most loved form of investments, property and stocks have a long history of outperforming wage growth. Residential property’s primary purpose however, is to provide shelter. This means it receives governmental and social support, and rightly so.

Notwithstanding this, residential property will always provide a vehicle for investment for Aussies looking to get ahead, and it will always outperform wage growth, despite the protestations of some. A critical point, often lost, is that specific property’s and locations under perform wage growth, and other areas outperform. Just as all individuals wages grow at different rates. Whether you believe property values should be socially engineered or not, residential property will remain a vehicle for wealth creation for the long term, and residential property will remain a preferred investment strategy due to its relative stability, and reduced complexity when compared to stocks.

https://www.afr.com/property/residential/despite-everything-being-a-landlord-is-still-the-best-job-20200819-p55nai

National Real Estate Auction Results

Auction results are in!
And the winner is Sydney…..
– Preliminary clearance rate of 71.9%
And the loser is Melbourne…..
– Dropped to 50.3 per cent from 63.6 per cent.
No surprises there.
Sydney had 25% more auctions than the same time last year. 632 V 503. What Covid?
Melbourne, understandably, only had 223 scheduled auctions.

We suggest keeping a close eye on the disparity in movement between Melbourne values and Sydney in particular, and the rest of the country, generally. Subject to long term structural economic changes, we believe this ‘gap’ may just provide opportunity when the market turns. We will be watching this ‘gap’ closely, and analysing the underlying data and fundamentals even more closely!
Remember though, all properties were not created equally.

https://www.domain.com.au/auction-results/

75 percent of Australia is under-supplied, rents to soar.

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By Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Contrary to the current situation in the inner-city rental markets of Sydney and Melbourne, Australia currently has the tightest housing supply conditions in more than a decade.

Market analysts and national buyer’s agency firm Propertyology report that, as the nation progressively opens up and household incomes improve with it, large parts of Australia will have intense pressure on rents in the near term.

A formal assessment of national property market conditions conducted by Propertyology confirms that only 4 out of 52 major Australian cities and towns had a residential vacancy rate of 3 per cent or higher as at the end of June 2020.

“The only thing currently preventing an official declaration of an Australian rental crisis is the sedation effect of the coronavirus containment measures,” said Propertyology Head of Research, Simon Pressley. “Mark my words, sharp rent price rises are inevitable!”

Generally speaking, a market with a balanced supply has a vacancy rate between 2 and 3 percent. Higher than 3 percent means the scales are tipped in the tenant’s favour, typically causing a reduction in median rent prices.

Out of 52 major Australian towns and cities, only four currently in a technical ‘over-supply’ situation – Sydney (3.8 percent), Melbourne (3 percent), Gold Coast (4 percent) and Geelong (3.5 percent).

A vacancy rate below 2 percent resembles a tight rental market and median rents are generally rising. Below 1 percent vacancy is ridiculously tight.

“Right now, 39 out of 52 Australian towns (75 percent of the country) currently have an under-supply, nine locations have a balanced market, and the remaining four are over-supplied,” Mr Pressley said.

Australian Residential Vacancy Rate - MCG Quantity Surveyors

While these numbers might surprise some people, they really shouldn’t. Directly before COVID, Propertyology’s 2020 Market Outlook Report flagged this under-supply.

“It’s not as if the coronavirus dropped thousands of extra dwellings from the sky on to this Land Down Under!”

The 3-time Australian Buyer’s Agent of the Year said that rental supply is a biproduct of the activity of mum-and-dad property investors.

“Large parts of Australia have seen several consecutive years of low volumes of properties purchased by investors. As local demand continues to rise, the pressure continues to push rents (and yields) higher.”

“The principle of a property management business told our buyer’s agents just this week that they only have nine vacancies among a rent-roll of 1700. This situation is not unusual for most of Australia,” said Mr Pressley.

5 out of 8 capital cities currently have vacancy rates below 2 percent.

According to Propertyology, from Wollongong to Coffs Harbour to Orange and several other locations in New South Wales are very tight. Everything in Queensland from Toowoomba to Townsville has intense pressure right now. Almost every Victorian location outside of Melbourne, the entire state of Tasmania, and the rental market of every location in Western Australia is currently under pressure.

Mr Pressley said that he’s never seen any situation in the last 25-years where so many Australian locations have vacancy rates so low, rental yields are north of 5 percent and interest rates are below 3.5 percent.

For state-by-state commentary (capital city and regional locations),

Just CLICK HERE to review the report.

Propertyology is a multi-award-winning buyer’s agency and Australia’s premier property market analyst. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia.

Residential Vacancy Rates - MCG Quantity Surveyors

It’s never too late to claim depreciation. Well, except when it is

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The other day I saw someone in an interview say “It’s never too late to claim depreciation.” Now in fairness, perhaps in the following sentence, they added some caveats but even though I tuned out and got back to work, I don’t think that’s a prudent way to start a discussion about deductions, whether you’re back claiming them or otherwise.

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It is important to understand that it certainly can be too late to claim depreciation deductions. For example, in one of our research studies of a sample of 1,000 of our residential property investor clients, 6.7% of them waited more than two financial years after purchasing their property to organise a depreciation schedule.
The significance of this is based around the fact that you can back claim up to two financial years’ worth of depreciation deductions. Your accountant needs to go back and file an amendment for previous years tax returns. It can certainly be done, but in general terms two financial years is the maximum. Therefore, our data specifically showed that 6.7% of the investors would miss out on deductions even allowing for the two year back claim.
What would that mean to them in real terms? Well on average, they each lost $20,537. That’s a fair chunk of deductions and could easily be $7,000+ gone from their back pocket.

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As a result, I’m here to say it certainly CAN be too late to claim depreciation. There is some good news though, the time it takes for an investor to organise a schedule is going down. Our data from 2016/2017 showed an average time of 691 days for investors to organise a schedule which is just inside of two years. In 2019 that figure was 524 days or 1.4 years, a total decrease of 24%.

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So the education around the entitlements seems to be helping ensure that people don’t miss out, but it’s important to remember that these are averages and we saw one investor wait 18 years to organise a report on a unit they bought brand new, I don’t even have the heart to tell you how much they lost in potential claims.

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In closing, it can be too late to claim depreciation. However, if you’re worried that you may have missed out, minimise any potential damage by speaking to a tax depreciation expert as soon as possible and be reach out some free advice on your potential claims.

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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/

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