Occupying Investment

We’ve often wondered how many investors convert their primary place of residence into an investment. We’ve seen a lot of first home owners buy a property for stamp duty concessions or first home owner bonuses and live in their property for 6-12 months before promptly converting it to a rental. However, anecdotally most of the investors that have occupied their investment property fall into what we believe are a group of ‘accidental investors.’

It’s not that they never planned on becoming property investors, it’s fair to say that most of them would have aspired to it, but their investment was purchased primarily as a place to live, rather than a pure investment.
The numbers are significant. Our research team analysed 1,000 of our residential depreciation schedules for the figures. As part of our schedule process, we ask the client whether they have occupied the property or not. The reason is that the depreciation schedule must start as at the acquisition date in most cases, but achieving the best result for the client may mean minimising the deductions for the first few years, as the client is not entitled to depreciation deductions whilst they’re occupying the property.

The stats are in! We found that 22.4% of our clients occupied their investment property as their principal place of residence. The average amount of time spent living in the property was 1,462.8 days or pretty much bang on 4 years. The average length of time came as a bit of a surprise to me, especially when the strategic first home owner/investor would likely be bringing the average down. Perhaps there’s some CGT strategies influencing things here but I don’t believe that to be the case in any significant way. Whatever the reason, be it upgrading the family home whilst in a position with enough equity to keep the old place, it’s interesting to observe that a sizable proportion of investment properties may have been purchased for their liveability, amenities and location, rather than their pure ability to generate cashflow or capital growth. It could also be a reason why the average investor has an investment property quite close to their home and perhaps even partly why investors average only one investment property. Rather than a carefully researched investment decision, these properties are most likely selected based on emotion and the needs and wants of the resident. We all know that the best investments are not always the properties you’d want to live in yourself!

Most importantly for me, these figures come with a big warning.

The recent changes to plant and equipment depreciation (as at 9/5/2017) state that if you occupy your investment property for even one day, you’re effectively killing off all plant and equipment depreciation deductions and will be left only with division 43 deductions (building structure). The average first year deductions for someone that has occupied their investment property is $7,985.64. There’s no magic formula. but half that could be wiped out. Over the investors first 5 qualifying years our figures are pointing to around $14,000 being lost.

So, in a perfect world where everyone operates as tax efficiently as possible, the percentage of investors opting to live in their property will go down. However, as stated above, the investment property often pops up as an opportunity, rather than a shrewd business decision. Time will only tell whether the changes to depreciation will drag the ‘lived in’ investment property stats lower.