Benefits of building a new investment property

BMT team — Wed, 19 Feb 2020 00:00:41 +0000

When you use a property for investment purposes, you want it to increase in value, or appreciate, over time. So why consider depreciation? While the value of the property hopefully rises during ownership, the building structure and assets within it will experience natural wear and tear. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation deductions for this natural wear and tear. These deductions can be claimed under two categories – capital works deductions and plant and equipment depreciation. Capital works deductions refer to the building’s structure and items considered to be permanently fixed to the property such as kitchen cupboards, doors and sinks. Residential homes in which construction commenced after 15 September 1987 are eligible to claim capital works deductions at a rate of 2.5 per cent over forty years. Plant and equipment assets are items which are easily removable from the property such as carpet, hot water systems and blinds. These assets have a limited effective life as set out by the ATO and can generally be depreciated over time. While almost all property investors will be able to claim depreciation, those who build a new property will usually claim higher deductions. Benefits of building a new investment property There are two main tax benefits to building a new investment property: Unlike an owner of second-hand real estate, an investor who builds a new property is not affected by legislation changes passed in November 2017. These changes eliminated the ability to claim a deduction for previously used plant and equipment assets found in second hand or previously owner-occupied residential investment properties. Owners of new property are still entitled to claim depreciation deductions for all eligible plant and equipment assets found within their property. The owner of a new property is eligible to claim a deduction for the entire cost of the building structure over forty years. Owners of existing property can only claim the remaining years available. The table below shows the first full financial year depreciation deductions and the five-year cumulative depreciation deductions for a new build and a second-hand property, both valued at $570,000. The newly built property is entitled to a first-year deduction of $10,516, while the second-hand property offers $6,738. Over the five years, the new property will allow the owner to claim $48,543 and the second hand will provide more than $28,000. While the second-hand property still offers lucrative deductions for the owner, there are clear benefits to owning a new investment property. Along with depreciation, there are several other benefits of a newly built investment property. A new home will attract an abundance of tenants seeking low maintenance, neat and tidy properties with urban convenience. As a result, the property is likely to provide consistent weekly rental returns and a low vacancy rate depending on the location and current market. When you are building an investment property from scratch, you’re also able to cater to the current market. Research what rental properties are performing well, considering the floor plan and key features that tenants are willing to pay a premium for. This could help you earn higher rental income and increase the value of the property over time. Depreciation case study: building an investment property Let’s analyse another example to highlight the importance of claiming depreciation as an investor. John builds a three-bedroom investment property for $600,000. From the property, he earns a rental income of $545 per week or a total income of $28,340 per annum. Expenses for the property such as interest, rates and management fees total $39,067. The following scenario shows John’s cash flow with and without depreciation. BMT Tax Depreciation found John $11,200 in the first financial year alone. Without depreciation he was paying an annual outlay of $6,758 per annum or $130 per week. By claiming depreciation, John reduced his outlay to $2,614 per annum or $50 per week. That’s a difference of $80 per week, or $4,160 for the first full financial year. To find out how much you could be claiming each year, Request a Quote or contact BMT on 1300 728 726 today.

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8 Steps for Buying Investment Property

BMT team — Sun, 02 Dec 2018 22:01:21 +0000

So, you’ve found your dream home or perhaps you’ve decided to enter the property investment market. What are the next steps in making that dream become a reality? Step 1. Determine your budget The first step towards home ownership involves a little self-examination. You will need to assess your finances and determine how much you can afford to repay. To help assist you, PropCalc, is a handy application which provides you with the real cost of owning a property, based on specific information about any property in question. Step 2. How much can you borrow? Now that you have a better idea of the total amount you can devote to your future mortgage repayments, you should now be able to determine how much you can borrow. This amount will vary from lender to lender and many banks do offer online calculators that allow you to determine your borrowing limit. Having found the best possible deal, it’s time to apply for a home loan, attend a loan interview and get approval. Make sure you have all the necessary documents ready for your lender or broker. Procedures do vary from lender to lender, but it is likely you will be issued with either a ‘home loan guarantee certificate’ or a ‘pre-approval certificate’. This means that your home loan has been or will be approved when you find the property you want to purchase (subject to a few conditions). One of the main conditions is often a valuation of the property to ensure a buyer isn’t paying too much for a property. Loan approvals don’t last forever. They typically are valid for around six months, but sometimes up to twelve months. Step 3. Exchanging contracts The next step after you’ve finally found the right property following all your research and weekends viewing properties will be signing the contract of sale. Neither you or the seller is legally obligated to go ahead with the sale until a written, signed contract is exchanged. The contract usually details: Property address Names of the parties involved (you and the seller) Selling price Terms and conditions Special inclusions in the sale Date of settlement Exchanging contracts is what it sounds like. Both you and the seller sign a copy of the contract then swap them so they are both signed. You also have to pay the deposit at this time. Step 4. Get legal representation While the contract is usually prepared by the seller’s Solicitor, your Solicitor or Conveyancer should check that everything is in order before you exchange contracts including: Zoning, heritage or title restrictions don’t clash with your intended use of the property That all property rates and taxes are up to date Help arrange for building and pest inspections Step 5. The cooling off period If you have bought through private treaty rather than at auction, that is you’ve made an offer to the seller and it’s been accepted, you may enter a cooling-off period after the contract is exchanged. During this period you can cancel the contract but there may be a penalty. This is normally 0.25 per cent of the purchase price. Step 6. The period between exchange and settlement The time between exchange and settlement is genuinely about six weeks, although this can change if both you and the seller agree to extend or reduce it. This is the time when you should: Arrange the balance of the purchase price. That is, finalise the finance and sign the mortgage documents Insure the property. You don’t want something to happen to the property during the settlement period and find out too late that it’s your responsibility to pay for. BMT Insurance works with some of Australia’s most experienced providers to help you select suitable and cost effective home insurance for your new home At the same time, your lender will: Arrange for a valuation of the property Step 7. Settlement at last Settlement of the property is when the rest of the purchase price is paid and the keys are yours. You may also need to pay stamp duty at settlement. Congratulations. You are now the proud owner of your new home or investment property and you are officially in the ‘property market’. Step 8. If you have purchased an investment property, organise a depreciation schedule A depreciation schedule prepared by BMT Tax Depreciation helps to maximise the cash return from your investment property each financial year. To ensure that you claim the maximum depreciation deductions, a BMT Tax Depreciation Schedule will last for the life of the property or for forty years, as specified by the Australian Taxation Office. BMT also provide a free, easy to use tax depreciation calculator, which can assist you with an estimate of available deductions for any property. Alternatively, you can contact one of our expert staff on 1300 728 726 for a free estimate of available deductions.

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Benefits of building a new investment property

8 Steps for Buying Investment Property