Prop­erty Value Guide:

Buy­ing a home or a prop­erty is not an exact sci­ence. Every prop­erty is unique and you just can’t cre­ate a for­mula that is applic­able to all your prop­erty invest­ments. The Median versus Aver­age prices record is valid but is not neces­sar­ily what you need as basis for your valu­ation. These num­bers are only indic­at­ive of the past sales his­tory of the area, not the cur­rent value that a buyer may offer for a given property.

So, if there is no con­stant for­mula for valu­ation, what should you do? The answer is simple yet some­what com­plic­ated, “Do Your Home­work”. This means that in order to min­im­ise the risk of los­ing your money, you have to do the due dili­gence in care­fully study­ing everything about the prop­erty that you want to buy. There are no short­cuts for this. You really need to dirty your hands in look­ing at past records, inspect­ing the prop­erty, under­stand­ing the mar­ket and hav­ing a struc­tured way of ana­lyz­ing the data you gathered about the property.

1. Pur­chase Price:

Identi­fy­ing the right pur­chase price will define the suc­cess or fail­ure of your invest­ment. You should care­fully study the cur­rent mar­ket and all the factors involved about the prop­erty. Prop­erty prices greatly vary between areas and also between houses and units. This means that even if two houses are situ­ated to each other, their prices will still vary because there are many dif­fer­ent factors that influ­ence its price. Like men­tioned pre­vi­ously, the record of the median and aver­age prices only shows the sales his­tory of an area and it does not really help in determ­in­ing the cur­rent mar­ket price of a property.

2. Renov­a­tion budget:

Renov­a­tion is not as fun and easy as por­trayed in tele­vi­sion; one mis­take could cost you a lot of money. That is why it is import­ant to under­stand the under­ly­ing prin­ciples that will guide you in determ­in­ing and plan­ning what to ren­ov­ate and the budget needed to imple­ment it.

The main goal of renov­at­ing is to add value to the prop­erty. It should be well planned and care­fully imple­men­ted. Here are some guidelines that will help you lessen the chances of going over-budget with your renov­a­tion and help increase your invest­ment profits.

Buy at the Right Price

Determ­in­ing the right pur­chase price for the prop­erty is very import­ant in order to profit from your renov­a­tion efforts. The lower you can pay for the prop­erty, the bet­ter. You’ll be chas­ing your tail if you try to profit from renov­at­ing a prop­erty that you appar­ently paid too much for. It is good to start out by estab­lish­ing the end value of the prop­erty after all the planned renov­a­tion. You can do this by research­ing the price of com­par­able ren­ov­ated prop­er­ties in the area.

Be Real­istic With Your Budget

Focus on the essen­tial things that would really add value to the prop­erty and work out an accur­ate cost­ing for it. As the say­ing goes, “A dol­lar saved is a dol­lar earned.” Some­times it’s hard to ren­ov­ate a prop­erty in a mar­ket where the prices of the houses are stag­nant or going down but you’ll never go wrong if you focus on the essen­tial things and be able to set a tight budget for it.

Con­stantly Plan

Win­ners are plan­ners! It is import­ant to really think about what you need to achieve after the renov­a­tion. Some­times when there is no plan, it’s just too easy to change your mind on some­thing while the renov­a­tion is in full force. This may tend to increase the scope of work and start blow­ing up your budget.

Before mak­ing a plan, it would be best to thor­oughly inspect the prop­erty with a paper and pen on a clip­board and start tak­ing down notes as you walk up to the front door and into the house. It is also wise to con­sider the fact that first impres­sions count and that it cre­ates the ini­tial per­cep­tion of value of the house. So take note of the things you see as you walk up to the front door and see if the exter­ior paint on the front walls are okay? Does the lawn need mow­ing? How about the land­scap­ing? Does the door­bell work?

Add Value to the Property

It all boils down to per­cep­tion and emo­tion. The main goal of renov­a­tion should be to add per­ceived value and that it should cre­ate an emo­tional attach­ment to the buyer right away. Avoid renov­at­ing with your per­sonal pref­er­ences in mind because it usu­ally costs higher than usual. It is best to keep things simple with neut­ral designs just to make the prop­erty live­able and functional.

3. Rental Return Yield

The yield is a per­cent­age indic­at­ing how much cash an income pro­du­cing asset gen­er­ates each year in rela­tion to the asset’s value or prop­erty value. The higher the yield means the bet­ter cash flow the prop­erty gen­er­ates each year. There are two types of Yield: Gross Yield and Net Yield.

Gross Yield – Gross yield can be eas­ily com­puted. For example: A prop­erty is ren­ted out for $350 / week and the value of the prop­erty is $ 500,000, then the gross yield is com­puted as $350 x 52 (52 weeks in a year) divide by 500,000.00 x 100 (to get the per­cent­age) = 3.6%

Net Yield is much more import­ant but it’s not that easy to com­pute for it. In cal­cu­lat­ing the net yield, the oper­at­ing expenses such as insur­ance, repairs and main­ten­ance, man­age­ment fees and vacancy rate is deduc­ted to the gross income of the property

Let me give you an example for this. Given the fol­low­ing data, we will com­pute for the net yield:

Prop­erty acquis­i­tion cost — $ 400,000

Monthly rental amount — $ 2,800

Vacancy rate (Annual basis) – 6% which if applied to annual gross rent would be $2,016.00 com­puted as [2,800 x 12 = 33,600 (6%) = 2,016.00]

Annual insur­ance cost — $ 1,400

Annual Taxes cost — $ 1,600

Annual budget for repairs — $ 500

Per­cent of rent man­age­ment fee – 5% which will be applied to annual rent less the vacancy rate. Com­puted as: [2,800 x 12 = 33,600 less 2,016 = 31,584 (5%) = 1,579]

Gross annual rent will be $ 33,600 minus the total cost of expenses lis­ted above which is $ 7,095 = $ 26,505 rental income after expenses.

$ 26,505 divided by the acquis­i­tion cost or prop­erty value of $ 400,000 = Rental Yield of 6.6%

Mort­gage interest and tax are not usu­ally con­sidered in the com­pu­ta­tion of net yield because these vari­ables are not dir­ectly related to the prop­erty itself. But if you are an investor and you’re try­ing to com­pute for the return on invest­ment, you should not only con­sider the mort­gage interest and tax but also the depre­ci­ation, land tax, stamp duty, mort­gage insur­ance etc.

 

Where to Get Yield Data

Where to Get Yield Data

Gross yields are lis­ted for all sub­urbs in Aus­tralia and you can see this list­ing in the back of every copy of “Your Invest­ment Prop­erty” magazine. Keep in mind though that these yields are com­puted based on median rents and median prices to which the res­ults can be sub­ject to stat­ist­ical anom­alies. What you can do is val­id­ate the data your­self by check­ing the rents at www.realestate.com.au and be sure not to choose the option to include sur­round­ing areas and to choose a spe­cific dwell­ing type: houses or units.

4. Pur­chase Cost

4. Pur­chase Cost

In buy­ing a home or a prop­erty, your cost is not lim­ited to the pur­chase price only. There are many other costs that you need to include in your com­pu­ta­tion as well. Lis­ted below are the costs added to the pur­chase price in order to arrive at the pur­chase cost.

Stamp Duty – Is a gen­eral tax imposed when you do doc­u­mented or non-documented acquis­i­tions like in buy­ing real estate, vehicles, busi­ness assets and other prop­er­ties; insur­ance policies, gifts and home loans. This is paid by the bor­rower or purchaser.

Here is a list of Stamp Duty rates in New South Wales as of June 6, 2012

Duti­able Value Duty Threshold

$0 — $14,000 $1.25 for every $100 or part of the duti­able value

$14,001 — $30,000 $175 plus $1.50 for every $100 or part, by which the duti­able value exceeds $14,000.

$30,001 — $80,000 $415 plus $1.75 for every $100 or part, by which the duti­able value exceeds $30,000

$80,001 — $300,000 $1,290 plus $3.50 for every $100 or part, by which the duti­able value exceeds $80,000

$300,00 — $1m $8,990 plus $4.50 for every $100 or part, by which the duti­able value exceeds $300,000

Over $1m $40,490 plus $5.50 for every $100 or part, by which the duti­able value exceeds $1m

Legal Fees

A soli­citor or con­vey­an­cer is needed to ensure that the paper­work is all in order when pur­chas­ing a prop­erty. It usu­ally costs about $800 — $ 1200 for legal fees depend­ing on who you hire and the state you live in.

Mort­gage Insurance

This is an insur­ance that cov­ers the lender for the risk of the bor­rower default­ing on the loan. This is paid by the bor­rower and the cost depends on the total amount to be bor­rowed. The higher the amount you bor­row, the higher the cost of the insur­ance is. It can be estim­ated to be around 0.5% — 2% of the mort­gage and it is only charged if the loan is more than 80% of the property’s value.

Mort­gage Stamp Duty

This is another tax that needs to be paid to the state gov­ern­ment if you require a mort­gage to pur­chase your home. The amount of duty if the mort­gage is less than $16,000.00 is $5 and for more than $16,000, the duty is $5 plus addi­tional $4 for every $1000 or part thereof. So for example: If the mort­gage amount is $20,200, the mort­gage stamp duty is $25.

It is how­ever stated in the NSW Office of State Rev­enue web­site that as of July 1, 2013, the mort­gage duty will be abolished.

Mort­gage Applic­a­tion Fees – This fee var­ies between lenders. Some are free while oth­ers charges up to $1000. The aver­age charge for this is around $600–800.

Mov­ing Costs

This cost is often over­looked by many home buy­ers. You have two options in doing this. One is to do it your­self by hir­ing a truck and ask­ing some of your good mates to help you out. The other option is to hire a removal­ist which can cost more because it comes with insurance.

Con­nec­tion of Utilities

This is another cost that is often over­looked by many. This includes con­nec­tion of elec­tri­city, gas, tele­phone etc. If it is your first time to have an account with the pro­viders, they usu­ally require a bond and an applic­a­tion fee of about $60-$100 each. It is recom­men­ded that you find out these costs early on and when it is needed to be paid to avoid shortfall.

Build­ing Inspection

It is import­ant to ensure that the prop­erty you are buy­ing is free from struc­tural defects, elec­trical or plumb­ing faults, Asbes­tos, vent­il­a­tion issues and all other poten­tial prob­lems that can only be seen by build­ing experts. This could cost about $200-$600 but it’s worth the invest­ment. Do not take the risk of buy­ing a prop­erty without hir­ing a build­ing inspector because a coat of paint or a new car­pet can be a cover up to many problems.

Termite Inspec­tion

This is also very import­ant and most soli­cit­ors / con­vey­an­cers will advise you to get termite con­trol ser­vices because you’ll never know you have ter­mites until its too late. Termite inspec­tion costs about $200-$400.

5. Load Interest Rate

5. Load Interest Rate

Interest is the cost of bor­row­ing money and its rate is depend­ent on how the eco­nomy is per­form­ing. The Reserve Bank of Aus­tralia (RBA) is the one respons­ible for for­mu­lat­ing and imple­ment­ing mon­et­ary policy as set out in the Reserve Bank Act or Bank Charter.

RBA reg­u­larly reviews Australia’s interest rates based on the fol­low­ing factors:

1. Infla­tion rate

2. Unem­ploy­ment rate

3. Con­sumer Price Index

4. Pro­du­cer Price Index

5. Levels of Retail Sales

The main object­ive of RBA is to pro­mote long term devel­op­ment by main­tain­ing low and stable infla­tion over the medium term. When infla­tion rate is low or stable, RBA also lowers the interest rates to encour­age people to bor­row and if the infla­tion is set to rise above 3%, RBA will try to slow things down by rais­ing the interest rates.

It is import­ant for you as an investor to under­stand how the pre­vail­ing interest rates change and as you estab­lish your loan plan, it is wise to con­sider the pos­sib­il­ity of increase in interest rates in the long run and factor it right into your future payments.

6. Land­lord Insurance

6. Land­lord Insurance

It is import­ant to have a Land­lord Insur­ance if you are rent­ing out a prop­erty. This will give you peace of mind and pro­tect you when unfor­tu­nate things or acci­dents hap­pen to your invest­ment prop­erty. You’ll never know when acci­dents might occur like van­dal­ism or dam­age caused by the ten­ant, the build­ing burns down and you need a fund to rebuild it or if the renter decides to leave unex­pec­tedly before the lease ends and you can’t find another ten­ant to replace them right away. The policy may stip­u­late com­plete repair or replace­ment or it can also be covered only up to a cer­tain dol­lar amount that you have chosen.

Basic cov­er­age for Land­lord Insur­ance includes:

1. Dam­age caused by the prop­erty owner

2. Dam­age caused by tenants.

3. Defined events like Fire, Theft, Storm and earthquake.

Things that are not covered by Land­lord Insurance:

1. Dam­age caused by neg­li­gence of the owner to main­tain the property.

2. Flood or tidal waves

3. Erosion or soil movement

4. Dam­age from tree roots or insects

5. War

There are a num­ber of “Insur­ance Riders” or optional cov­er­age that is also good to add to your policy to make it more bene­fi­cial to you as a Land­lord. These are:

1. Legal Liab­il­ity Clause

This pro­tects you as the land­lord if found liable in the event of injury or death of someone in your property.

2. Con­tent Insurance

If you have fur­nish­ings inside the units that you rent out or if you store some of your belong­ings in the property.

3. Rent Guarantee

You can have your rent covered in cases where you can­not col­lect rent because your prop­erty gets dam­aged severely by fire or earth­quake or simply the ten­ant defaults.

The premium for this insur­ance is hard to estim­ate because it var­ies greatly depend­ing on factors like:

  • The insur­ance pro­vider you choose
  • Loc­a­tion of the property
  • The cost of recon­struct­ing the property
  • The kind of ten­ants in the property
  • His­tory of claims
  • The age of the property
  • Type of prop­erty (full con­crete, detached, ter­raced etc.)

What are some things you can do to ensure that you get the best quotes for your Land­lord insur­ance coverage?

1. State the cor­rect re-build cost

Rebuild cost is not the same as the mar­ket value of the prop­erty. It is good to seek help from an exper­i­enced builder to get at least close to the accur­ate cost of recon­struct­ing the property.

2. Buy one policy to cover all your properties

If you have more than one rental prop­erty, it is good to check if you can have one policy to cover it all. It is con­veni­ent to just have one renewal date and it can save you money too.

3. Choose the right tenant

Choos­ing the right ten­ants for your prop­erty can also give you sav­ings on your Land­lord Insur­ance premi­ums. Choose ten­ants that have pro­fes­sional occu­pa­tion rather than those on income sup­port. Vacancy rate also affects your insur­ance premium.

4. Get adequate pro­tec­tion for your property

Simple things like get­ting qual­ity door locks and win­dow locks or hav­ing fire extin­guish­ers on stra­tegic places to installing secur­ity alarm sys­tem and fire pro­tec­tion sprink­lers can greatly lower down your land­lord insur­ance premium.

7. Coun­cil rates

7. Coun­cil Rates

These are charges col­lec­ted by the local coun­cil from the respect­ive prop­erty own­ers in their area. Coun­cil rates con­sist of two parts. The first part is the charge for the “muni­cipal and garbage ser­vices”. This is a stand­ard charge paid equally by all prop­erty own­ers regard­less of the value of their prop­erty. The second part is called “gen­eral rates”. This on the other hand is com­puted by mul­tiply­ing the prop­erty value to what they call as the “Rate in dol­lar” which is based on the council’s budget for com­munity ser­vices divided by the value of all the prop­er­ties in the coun­cil area. To illus­trate, if the given “Rate in dol­lar” is 0.002142 and the prop­erty value is $300,000, the gen­eral rate would be $642.60.

8. Water Rates/Charges

8. Water Rates/Charges

Wat6. Land­er cor­por­a­tions have two kinds of water charges. The first is the “Water rates”. This is the ser­vice charge for the facil­it­ies that brings the water from their plant to the prop­erty. The second is the “Water con­sump­tion” which is the charge for the water used in the premises.

The water cor­por­a­tion charges the owner for the water rates assessed in the prop­erty as well as the water con­sump­tion unless oth­er­wise stip­u­lated in the ten­ancy agree­ment that the ten­ant agrees to pay them. Water costs can be shared by the owner and the ten­ant in a per­cent­age fig­ure depend­ing on the nego­ti­ations made at the begin­ning of the ten­ancy. It is fair for the ten­ant to ask the owner to share in the water costs if the former is asked to water the garden.

9. Strata Rates

9. Strata Rates

Owner’s cor­por­a­tions some­times need fin­an­cing for build­ing main­ten­ance and repairs, legal cases, build­ing applic­a­tions, renov­a­tions and fire upgrades as well as new cap­ital works.

These needs are partly caused by the law that requires owner cor­por­a­tions to con­form with their duty to prop­erly main­tain their build­ing to a safe and live­able stand­ard. It is also due to the require­ments of insur­ance companies.

The only options avail­able for owner cor­por­a­tions before were to raise spe­cial levy or wait for the sink­ing fund to accrue enough funds, whilst the build­ing con­tin­ues to deteri­or­ate, build­ing costs increased, legal liab­il­ity increased and tenant’s qual­ity of life deteriorated.

Strata fin­ance allows own­ers to do the much needed work imme­di­ately whenever neces­sary. It’s a true user pays approach.

The fol­low­ing are the advant­ages of strata financing:

1. Nego­ti­ate more com­pet­it­ive build­ing con­tracts because the fund is read­ily available

2. Removes the risk of cost increases

3. When the prop­erty is sold, repay­ments for strata fin­ance is passed on to the new owner

4. Cov­ers own­ers from the risk of legal liability

5. Takes the hassle away of indi­vidual own­ers seek­ing altern­at­ive funds

6. It does not affect indi­vidual owner’s credit ratings

7. Have the work done today as needed and enjoy the bene­fits right away.

10. Build­ing Insurance

Build­ing insur­ance cov­ers the struc­ture of your home includ­ing the gar­age, out­build­ings and peri­meter walls as well the per­man­ent fix­tures and fit­tings such as the baths, toi­let and fit­ted kitchen.

It gen­er­ally cov­ers dam­age due to fire, light­ning, explo­sion or earth­quake, theft, riots, van­dal­ism, storms or flood­ing, sub­sid­ence, fall­ing trees, car hit­ting your home, and leak­ing water or oil.

Build­ing insur­ance is not com­puls­ory but if you have a mort­gage, your lender will require you to have one whether it is a primary home or invest­ment and if you’re a land­lord, it would be wise to take out a build­ing insur­ance too.

The amount of cover you need should be equal to the cost of rebuild­ing your home includ­ing the cost of demoli­tion if needed, clean­ing the site, and archi­tects and build­ers fees.

Build­ing Repairs

Tak­ing care of the main­ten­ance in your build­ing is very import­ant for the prop­erty own­ers. Main­ten­ance is gen­er­ally defined as the work that is done on a routine basis to keep the build­ing in good work­ing condition

Main­ten­ance and repair is a com­plex pro­cess. It requires good com­mu­nic­a­tion with your handy­man, con­tract­ors, ten­ants and ten­ant asso­ci­ations. The owner must have act­ive par­ti­cip­a­tion together with every­one in the build­ing to be able to con­duct routine main­ten­ance work, handle emer­gency repairs and to plan and imple­ment long-term improve­ments in the building.

When mak­ing repairs, it is neces­sary to have a plan to prop­erly man­age the work that needs to be done. Make a thor­ough sur­vey of the prop­erty and take note of the things that needs to be repaired. It is import­ant to sched­ule the repair in proper sequence because you don’t want to be doing major elec­trical or plumb­ing work that requires par­tial destruc­tion of ceil­ing or walls after you just fin­ished doing the plas­ter­ing or paint­ing jobs.

Set­ting repair pri­or­it­ies is equally import­ant to prop­erly man­age the repair budget. There are gen­er­ally three pri­or­ity cat­egor­ies that most repair works fall into. These are:

Emer­gency build­ing repairs

These are con­di­tions that can be a threat to health or safety

Pre­vent­ive repairs

These are con­di­tions that when left unre­solved, it will lead to emer­gen­cies, lead­ing to major dam­age in the build­ing and will cost more if the work is postponed.

Cos­metic repairs

There are repairs that only improve the aes­thet­ics of the building.

Here is a list of the things you need to sur­vey when mak­ing a repair plan:

- Exter­ior walls

- Roof

- Base­ment

- Boiler room and boiler

- Stairs and stairwells

- Doors

- Inter­com

- Win­dows

- Light fixtures

- Plumb­ing

- Wir­ing

11. Vacancy Rate

10. Vacancy Rate

Vacancy rate is the per­cent­age value of the num­ber of units in a rental prop­erty that has been vacant or unoc­cu­pied in a par­tic­u­lar time. It is a use­ful met­ric in eval­u­at­ing the prof­it­ab­il­ity of a rental prop­erty. High vacancy rate means that the prop­erty is not rent­ing well while low vacancy rate means strong rental sales. It is com­puted in a yearly basis and vacancy rate and occu­pancy rate should add up to 100%.

11. Man­age­ment Costs

Prop­erty man­age­ment are the stew­ards that main­tain your prop­erty. It is import­ant that you do not base your decision on whichever agent charges the low­est fees because it reflects the kind of ser­vice that they may provide.

Although the price is very import­ant, your main con­cern should be to determ­ine what ser­vices they can provide that is tailor-fit to your needs.

In order for you to have a clear idea on how much it would cost to man­age your prop­erty you should make an appoint­ment with the agent to dis­cuss their fees and service.

nco Rate

12. Income Tax Rate

Income tax in Aus­tralia is levied upon three sources for indi­vidual tax pay­ers. These are from per­sonal earn­ings such as salar­ies and wages, busi­ness income and cap­ital gains. A cap­ital gain is part of the income tax sys­tem rather than a sep­ar­ate tax. It applies to indi­vidu­als, com­pan­ies and other entit­ies that can leg­ally own an asset. Sale of assets which have been held before Septem­ber 20, 1985 (Pre CGT assets) is exempt from cap­ital gains tax.

Income tax from indi­vidu­als is taxed at pro­gress­ive rates while the income of com­pan­ies is taxed at a flat rate of 30%. Cap­ital gains are only sub­ject to tax at the time the gain is realised.

Income tax is based on assess­able income which falls under two broad cat­egor­ies namely: ordin­ary income and stat­utory income. When assess­ing the amount of ordin­ary income, only the profits are coun­ted based on a notional basis.

13. Tax on Loss

Tax loss occurs when the total deduc­tions you can claim for the year sur­passes the amount of assess­able and net exempt income for that same year. Tax loss for indi­vidu­als includ­ing sole traders and part­ner­ships and trusts can be car­ried for­ward indef­in­itely and be deduc­ted in future years against income but it has to be util­ised at the first oppor­tun­ity. There are some deduc­tions how­ever that can’t be used to cre­ate or increase in a tax loss, these are the following:

1. Pay­ment of retire­ment allow­ances, pen­sions and gratuities.

2. Con­tri­bu­tions made to deduct­ible gift beneficiary

3. Pay­ments under con­ser­va­tion covenants

4. Per­sonal super­an­nu­ation contributions.

Aus­tralian res­id­ents com­pute their tax loss based on their income includ­ing those that is derived out­side of Aus­tralia and their deduc­tions. For­eign res­id­ents on the other hand, com­pute their tax loss based on their income in Aus­tralia and deduc­tions incurred in earn­ing that income.

Tax loss and Cap­ital loss

These are tax losses based on two dif­fer­ent things. Tax loss hap­pens out of your income and deduc­tions for the year. Cap­ital loss hap­pens when you dis­pose a cap­ital asset for less than its tax value. Cap­ital loss can only be off­set with cap­ital gains. It can­not be off­set to income.

Depre­ci­ation

Depre­ci­ation, when claimed by the investor can increase cash flow and reduces debt to save on interest costs over the term of an invest­ment loan that poten­tially enables the investor to add to their prop­erty port­fo­lio sooner.

An invest­ment prop­erty is made up of three com­pon­ents and each of these is treated sep­ar­ately for depre­ci­ation purposes.

- The land

- The building

- Plant and equipment

Plant and equip­ment includes car­pets, ovens, cook tops, drapes, heat­ers, dish­wash­ers and oth­ers who has been pur­chased for the sole pur­pose of gen­er­at­ing rental income.

The rate to be used for depre­ci­ation is sub­ject to con­struc­tion date. For res­id­en­tial build­ings are as follows:

Before July 1, 1985 — Nil

July 18, 1985 – Septem­ber 15, 1987 — 4%

After Septem­ber 15, 1987 — 2.5%

External struc­tural improve­ments like retain­ing walls, pav­ing and gates has a dif­fer­ent con­struc­tion sched­ule rates as follows:

Before Feb­ru­ary 27, 1982 — Nil

After Feb­ru­ary 27, 1982 — 2.5%

There are gen­er­ally two meth­ods being used in com­put­ing for depre­ci­ation: dimin­ish­ing value and prime cost. It is in the dis­cre­tion of the investor and the account­ant which one to choose.

Dimin­ish­ing value

this method assumes that the decline in value each year is in con­stant pro­por­tion with the remain­ing value and res­ults to a pro­gress­ive smal­ler decline over time.

Prime cost

Using this method, you can claim a fixed amount every year. This method involves mul­tiply­ing the ori­ginal asset cost by the depre­ci­ation rate every year.

You need the ser­vices of a qual­i­fied quant­ity sur­veyor to come up with the depre­ci­ation sched­ule for your investments.

14. Neg­at­ive Gear­ing and Pos­it­ive Gearing

Neg­at­ive gear­ing is an invest­ment strategy that refers to pur­chas­ing a rental invest­ment with bor­rowed funds and the mort­gage expenses exceed the rental income, there­fore incur­ring a loss. The losses can then be deduc­ted to other assess­able income like wages or busi­ness income of the investor. The res­ult is either a reduc­tion in tax pay­able or a big­ger tax refund.

Why neg­at­ive gear­ing is con­sidered an invest­ment strategy?

The main reason why investors use neg­at­ive gear­ing as a strategy is to reduce tax­able income while at the same time build­ing wealth through cap­ital growth. Neg­at­ive gear­ing is a long term invest­ment strategy and is pop­u­lar among the high-income earners who are look­ing for ways to build wealth.

Pos­it­ive gear­ing is basic­ally when the rental income of a prop­erty pur­chased through bor­rowed funds exceeds that of the expenses and is there­fore sub­ject to income tax.

15. Cap­ital Growth

Cap­ital growth is referred to as the increase in value of an asset or invest­ment over a period of time. Cap­ital growth should be the main object­ive when invest­ing in prop­er­ties in order to achieve fin­an­cial inde­pend­ence. This holds true in any eco­nomic condition.

A com­par­ison between High income yield and Cap­ital Growth

A high income yield pro­duced by a cash-flow pos­it­ive prop­erty might be very inter­est­ing but to illus­trate the point that cap­ital growth is bet­ter, here is an example.

Sup­pose you pur­chase a prop­erty that is worth $500,000 that yields 10% pa and the growth is at 5%. After 20 years, that prop­erty will be worth $1,326,649 and provide a yield of $66,332 pa.

But when you put cap­ital growth as the main object­ive and pur­chase a prop­erty in a well selec­ted urban area that has lets say 10% pa cap­ital growth and the prop­erty is worth $500,000 with a yield of 5%. After 20 years the prop­erty will be worth $3,363,750 and provide a yield of $168,187 pa.

 

seven hills real estate agent NSW
Cnr Federal Road Prospect Highway Seven Hills NSW 2147 Australia