Here’s a few interesting points on spotting property spruikers, taken from the August issue of Australian Property Investor
Watch out for property spruikers who:
Last week I wrote about Depreciation Schedule – Where Can I Get One?, I realised that some people may not know what a depreciation schedule is and why you actually want to get one. So I better explain myself…
The dictionary definition for depreciation is: “A decrease or loss in value, as because of age, wear, or market conditions.”
The good news for property investors is that the Australian Tax Office (ATO) allows us to claim this “decrease or loss in value” an expense. The best thing is that we actually didn’t pay for it, i.e. we didn’t have to pay anybody for the “decrease or loss in value”, but we are allowed to claim it! People in the accounting industry call this paper loss since no money actually comes out of the investor’s pocket.
Let me help you understand with an example. I will be using a slightly modified version of my personal transaction:
Property Purchase Price: 370,500
Loan Amount: $359,385
Annual Interest (8.2%): $29,469.57
Annual Rental: $15,600
Water Rates: $800
Council Rates: $800
Strata Rate: $1,000
Depreciation (First Year): $3,000 (This is the number from your depreciation schedule – and will vary from property to property and is dependent on the age of the property and capital improvements that has been done on the property)
Tax Rate: 30% (My Assumption)
If I don’t have a Depreciation Schedule:
Net Income: $15,600 – $29,469 – $800 – $800 – $1,000 = -16,469
Tax Deduction (30%): $4,940.7
Actual Cash Outfow: $4,940.7 – $16,469 = -$11,528.3
If I have a Depreciation Schedule
Net Income: $15,600 – $29,469 – $800 – $800 – $1,000 – $3,000 = -19,469
(used for tax calculation)
Net Income: $15,600 – $29,469 – $800 – $800 – $1,000 = -16,469 (actual
cash out flow – however depreciation does not cost you real cash and is not included)
Tax Deduction (30%): $5,840.7
Actual Cash Outfow: $5,840.7 – 16,469 = -$10,628.3
As you can see there is $900 worth of savings (real money). That’s potentially a short holiday, a new computer, an iPhone, 15 months subscription to Your Success Club, saving to offset your interest paid, the list goes on!
I was talking to some people who owned investment properties last week and I was astonished that even though they knew about depreciation they didn’t know they could actually buy a depreciation schedule. Most people know about claiming depreciation for investment properties, but obviously not everybody knows that you can pay a qualified valuers to get an Australia Tax Office (ATO) approved depreciation schedule which you can used in your tax return. So this post is dedicated to closing this gap!
I have used several companies to purchase depreciation schedule for my properties, this is just the ones I have personally used and this is definitely not the definitive list. Feel free to Google one or ask your friends or even go look through the yellow pages
So if you have an investment property, do yourself a favour and order a depreciation schedule especially if you don’t already have one. You are literally throwing good money away if you don’t have a depreciation schedule.
PS: You can actually negotiate on the price with Deppro (for that matter, with anybody), I told my colleague about deppro and he was smart enough to ASK for a better price. I think he got $100 off simply because he asked! So the question is, are you brave enough to ask?
Property – Buying vs. Renting, this is going to be a simply example that we will step through so that we can see the differences between buying a property and renting a property. The three scenario are below:
Your cash position between the first two scenario is:
You don’t need to be genius to figure out that it is not worth buying a house to live in the given market conditions above (which is quite realistic).
In the third scenario, which is hardly ever talked about in the news, newspaper, magazines, we will uncover a not so common method. First we need to go through some basic when investing in property in Australia.
In this example, an investment house would cost you $30,400 in interest payment and $3,000 expense in rates. With this investment, you will receive an income of $16,000. The net cash loss is $17,400 (16,000 – 30,400 – 3,000), in addition you will also receive a paper loss of $3,000 from depreciation, making your net loss $20,400 (17,400 + 3,000)
This is where things gets interesting, the Australia Tax Office (ATO) allows negative gearing. Negative gearing is basically the ATO allowing individuals to claim losses as tax deduction. So assuming you are on the marginal tax rate of 40%, in this example $20,400 loss x 40% = $8,160. In short, the ATO gives you back $8,160 by making you pay less tax. This mean it only cost you $9,240 (17,400 – 8,160) to hold this investment property every year.
This scenario doesn’t end here, so you buy an investment property and rent it out, which means you will need to rent a place from the market else you’ll be homeless…. Your final cash out flow is $24,240 (9,240 + 16,000) which is the cost of your investment property and renting from somebody.
What does this all mean? The gap between renting for the rest of your life and owning your own dream house is actually not as big as you think. All you need to do is think outside the box and obviously not live in your ‘dream’ home. Just make your rental property your ‘dream home’. Remember the difference between “Buy to Live” and “Buy to Rent then Rent From Others” is $8,160 ($157 per week) this could mean a car, a holiday, better furniture, more expensive rental or if you are like me, another investment property, your choices are limitless.
Property: “Buy to Live”, “Rent Forever” and “Buy to Rent then Rent From Others”
*The above is only an example and different people will have different financial situation, the example also does not include the cost of purchasing the property, such as stamp duty, conveyancing, legal cost etc.