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What is build to rent and how does it work?

BMT team — Sun, 29 Sep 2019 23:20:06 +0000

Build to rent may be a growing global phenomenon but it’s still relatively new in Australia. The concept was thrust into the spotlight earlier this year when the Labor party put its policies under the microscope. As a part of the 2019 federal election campaign Labor proposed taxation reforms for build to rent in Australia. In this article we will look at the: Advantages Disadvantages Taxation rules for build to rent investors Depreciation for build to rent investments Build to rent has become a common thread in mainstream media reporting, with private real estate funds, developers and industry superannuation funds declaring their interest in the new housing asset class. So, what is build to rent and how does it work in Australia? Build to rent refers to a residential development in which all apartments are owned by the developer, often a managed investment trust, and leased out to tenants. This is opposed to the common build-to-sell method, where a developer builds a residential development and sells the apartments to individuals to either live in or rent out as an investment. Build to rent is part of a growing institutionalised housing market and is particularly attractive for institutions that want reliable, steady income. UniLodge and First State Super are just two examples of institutions to declare their interest in growing the build to rent market in Australia. Advantages Like any form of investment there are both risks and rewards involved in build to rent developments. One of the advantages is the potential to create a new form of property investing in expensive cities. Investing in trusts and funds that develop build to rent property can provide a reliable source of income at a lower entry point for the individual. The management and maintenance of a build to rent development could also be more efficient, given all units are in one ownership. In some instances, the fact that units are built to be owned rather than sold off means the quality of the building is enhanced. The housing class asset can also work well for the tenants. In Australia it presents further opportunity for retirement rentals, employment housing near amenities like airports or hospitals, and student accommodation. In cities like Hobart, where the University of Tasmania’s estimated 7,000 international students are adding to a tightening rental market, build to rent could help to alleviate housing affordability stress. Disadvantages Many experts concerned with the return on investment are adamant the government needs to pitch in in order to make build to rent work in Australia. This could be reflective of the American build to rent sector which relies heavily on government subsidies to operate. Unfavourable land tax and GST are also a concern for the build to rent market. GST is a tax passed down the supply chain and paid by the person receiving the final good or service. A build-to-sell developer can reclaim this GST tax from tenants, however a build to rent developer cannot. Tenancy could also prove troublesome. Build to rent projects are likely to attract young singles and couples whose occupancy could be short-lived. Dealing with frequent changes in occupants and covering the cost of periods of vacancy should be considered. Taxation rules for build to rent investors Taxation regulation and policy for build to rent developments vary greatly from build-to-sell property and other residential real estate. Of those who support the growth of build to rent in Australia, some believe current tax policies make the housing model less feasible. The 30 per cent withholding tax rate, high land taxes and GST concerns all play a part in the build to rent debate. Depreciation for build to rent investments Build to rent projects are likely to provide substantial weekly rental returns and significant taxation benefits including property depreciation. The Australian Taxation Office allows owners of income-producing property to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. These deductions can be claimed under two categories – capital works deductions and plant and equipment depreciation. While owners of any income-producing property are eligible to claim depreciation, brand new property for investment purposes will usually provide higher deductions. The easiest way to claim maximum depreciation deductions is to have a Quantity Surveyor such as BMT Tax Depreciation prepare a tax depreciation schedule for the property. A BMT Tax Depreciation Schedule covers all deductions available over the lifetime of a property to ensure investors maximise cash flow. To find out more about depreciation, visit our website at bmtqs.com.au.

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How to make money out of property development

Chan Naylor Team — Tue, 11 Oct 2016 04:38:26 +0000

When I get clients wanting to see me to discuss how they can become a Property Developer you know the property market is doing ok. However, what I explain to them is that it is not as simple as just finding a site, then building and selling then finally sitting back and wait for the money. The risks are high and a lot of things can go wrong which may mean you could lose money. So it’s just not that simple. Let me share with you a model on how a Property Developer can make profits without having to construct the dwellings and then sell them. Although there is risk throughout, construction is where the majority of the risk lie. During the period it takes to construct property, prices could come down, delays in building due to weather and other building costs could go up, interest rates may go up… all of which can eat into your profit and potentially turn it into a loss. Six steps to profit by not developing I have a long standing client who follows a property formulae year in and year out through good and bad markets. I know it sounds obvious but too many Developers who believe that the profits are made when you sell the end product. It’s not… in fact it could be the opposite and if you structure the deal correctly the profits are made when you purchase. My client makes his profits when he buys the site. His formulae is not that complicated although it takes experience and know how 1/ He has a reverse agency arrangement with many local Real Estate Agents to incentivise them on referring opportunities before they go to market, similar to a Buyer’s Agent agreement where you pay the agent to source the property on your behalf. It’s all about filling the funnel with opportunities and eventually out of the funnel will spit a gem. When the market is strong there are plenty of buyers and you need to get a competitive edge by getting first bite of the cherry 2/ When he assesses the deal, it’s always done on the basis of taking the project right through to completion (construction and sale) even though his aim is to on-sell the site prior to construction 3/ The settlement of the land is always subject to a successful development application, he will always work with options on purchase or offer to pay the vendor more to incentivise him to stay around and share in the success… the trick here is the way the deal is structured as it reduces the risks of not getting a Development Application (DA) 4/ He is always looking for sites that have a twist… Perhaps council are negotiable on how many units can be built on the site, perhaps future transport links are planned, what he is looking is to maximise the potential of the site for the next person in the food chain. He only has a certain sized parcel of land if he can squeeze more units that improves profits for the next person this makes the land more valuable 5/ He invites like-minded investors to join his team and invest and these people can contribute in their own way for example he has an Architect, Builder, Accountant, Real Estate person. All these people bring something to the table. He then corporatises the process to ensure transparency and he has the sounding boards of experience 6/ Finally he generally on-sells the site once the DA is approved and understands that there has to be a margin available for the next person, I have seen him follow this strategy time and time again and although he doesn’t make or take the margins on construction he is quite comfortable to take less return but at the same time less risk. This also gives him the ability to move quickly into the next project. He has lower margin but higher turnover The above model has been simplified for this article and there is a lot more detail with each step but it’s just another example of a Property Development system (there are many systems) as with any property development there are still risks associated with this model but it’s an interesting concept to keep in mind, property development at this level requires specific skills and experience. My suggestion is if you are seeking to get into this type of business ensure you have the right people around you to advise and hold your hand through the process and always remember the success of the project is determined on purchase so take your time to ensure you strike and structure the right deal. Please always seek professional advice on your individual situation before embarking on such ventures. For further information about how Chan & Naylor can help assist you visit www.chan-naylor.com.au or phone 1300 250 122.

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Five ways Developers can benefit from property depreciation

BMT team — Thu, 06 Oct 2016 03:21:43 +0000

For anyone in the property investment game, tax depreciation is a vital tool in improving cash flow and maximising returns on an investment. Not just for investors, property depreciation is something Property Developers should take advantage of as well. Ultimately, it can be used as a sales tool to make a project more appealing to investors, improve the affordability of the project and help it sell faster. Here are five ways that property depreciation can assist Property Developers. 1. Appeal to savvy investors Investors love numbers. In order to determine if a property will be a viable investment, any savvy investor will want to crunch all the figures thoroughly before considering a purchase. Depreciation is a significant cost they should take into consideration in order to accurately work out the true cost of the property. Without depreciation estimates investors will be ill-informed and for developers, this could mean the difference between making a sale or the investor turning to another property with more concrete figures readily available. 2. Provides more detail for off-the-plan sales A qualified Quantity Surveyor can provide tax depreciation schedules for existing properties as well as estimates for those still in the construction stage. As outlined in Tax Ruling (TR) 97/25, Quantity Surveyors are recognised on the list of professionals deemed qualified to provide construction cost estimates. Construction cost estimates establish the depreciation potential of a property, and these figures and projections can improve buyer confidence in off-the plan purchases where there is no physical property for investors to inspect. To receive an estimate for a future or current project, developers simply need to supply a Quantity Surveyor with the purchase price list, a copy or draft of the strata plan, a schedule of finishes, basic floor plans and any associated marketing material. 3. Depreciation increases the affordability of the project Any new development will be more affordable when you factor in the property depreciation deductions that can be claimed. A depreciation estimate will outline what returns the owner can expect in the first year of ownership (often $5,000-$10,000 for a residential property), and every following year of the asset’s life. By showing owners these real figures, they can see their immediate and long term returns and not just focus on the initial upfront costs, thus making the project more affordable. 4. Get more depreciation from newer properties Depreciation deductions can be claimed for both new and older properties, but newer properties benefit more. Depreciation is made up of two components – capital work deductions (relating to the structure of the building, such as floors and ceilings) and plant and equipment assets (removable assets within the building such as furnishings). As set out by the ATO, the owner of a brand new property is eligible to claim the full deduction for the entire cost of the building structure over forty years. Owners of properties that are not brand new can only claim the remaining years available. In addition, new properties usually contain plant and equipment assets that are higher in value. This increases the depreciation deductions available for the owner. Therefore, investors who purchase a brand new property will be able to take advantage of the full forty years of capital works deductions, thus making tax depreciation beneficial for all new developments. This benefit is one which developers can communicate to buyers who might be tossing up between a new development and an existing property. 5. Make it easier for the buyer and improve your service Give potential buyers an easier and smoother decision making process. As mentioned previously, investor buyers will want to know depreciation estimates in order to make an informed purchase. Take some of the hassle out of the buying process for interested investors by providing these estimates in the sales package and having this information readily available. This way, they won’t have to go out and organise it for themselves and you remain the main point of contact for the development, improving your customer service offering and expertise. Depreciation estimates are available for both residential and commercial developments. Any developer wanting to learn more about property depreciation and how it can assist in selling their project should visit the Property Developers page on our website, or call our expert team on 1300 728 726 for obligation free advice.

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