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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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Dual income property – one property, two rents

BMT team — Thu, 27 Jun 2019 00:18:50 +0000

Dual income properties have become a popular investment strategy in recent years. Increased property prices have forced many out of the market, causing a surge in demand for alternative living arrangements. Dual income properties provide an innovative solution for investors to meet such market demands. A property is classified as dual income when the owner generates two incomes by way of separate rental agreements. In this article we will explore: Dual income property types Advantages and disadvantages of dual income properties Dual income property case study – granny flat Seek an expert and save more Dual income property types Common dual income scenarios include granny flats, duplex units and dual occupancy properties. A granny flat is a secondary dwelling generally situated in the backyard of an existing property. Often studio sized, they are relatively affordable while still offering strong rental returns. When a secondary dwelling such as a granny flat is income-producing the owner is entitled to substantial depreciation deductions, even if they are currently occupying the primary residence on the property. Common areas between the granny flat and the owner-occupied property such as driveways, pools and barbecues may also entitle the owner to additional depreciation deductions. Read our article to find out more about the advantages of building a granny flat. Unlike a granny flat, a duplex refers to two residential properties that share a common wall. If duplexes are built on the same land title, they can be owned and sold as a pair. If they exist on separate land titles, investors can own and sell each duplex individually. Dual-occupancy properties are like duplexes in that they consist of two dwellings on the one plot of land, but they don’t necessarily have to be adjoining. Dual-occupancy properties, also known as shared living, have single title ownership. This means there’s only one set of rates and no body corporate fees to consider. Whether it be a granny flat, duplex or dual occupancy property, a dual income investment can offer flexibility and opportunity to suit a range of investor needs. In addition, dual income property owners are entitled to substantial depreciation deductions. Advantages and disadvantages of dual income properties One of the main benefits of a dual income investment is the flexibility it offers. An investor may choose to lease both properties, live in one while renting out the other or even sell one or both properties. All options are highly profitable and can help maximise an investor’s cash flow. Another advantage is that investors don’t have to subdivide land to maximise its value. Unlike subdivided land, duplexes and granny flats don’t have additional holding fees, insurance costs and council rates. While there are many benefits, dual income properties also have downfalls. The first is navigating council legislation and getting approval. Not all councils allow the building of dual income properties so it’s important to understand these rules and regulations. If you do get council approval, the initial cost of building a dual income property may also fare higher because you’re essentially building two homes. For example, the cost of building a set of duplexes will be higher than constructing a single unit. However, given that dual income investments have the ability to generate two revenue streams, they typically make up for this outlay. Dual income property case study – granny flat An investor decides to build a granny flat on their block of land. The granny flat features a split system air conditioner, rangehood, hot water system, curtains, ceiling fans and a solar powered generating system, all of which have considerable depreciable value. The table below details the first full year and the cumulative five year depreciation deductions available to the property owner. It’s important to note that these items are just some of the assets that can be depreciated. The owner would also be eligible to claim capital works deductions for the building structure. As the table shows, the investor can claim $6,549 in depreciation deductions in the first financial year and a further $27,529 in the first five years on these plant and equipment assets. If the granny flat is situated on a block featuring another investment property, the investor can expect to claim thousands of dollars more. For example, in the 2017/2018 financial year BMT Tax Depreciation found residential property investors an average of almost $9,000 in the first financial year. If we apply this to our case study, the investor’s total claim could be more than $15,000. These deductions will help boost the investor’s cash flow and reduce their taxable income. Seek an expert and save more If you own or are considering building a dual income property, you can increase your tax return by organising a tax depreciation schedule with a specialist Quantity Surveyor. Tax Ruling 97/25 states quantity surveyors such as BMT are one of the only professions qualified to estimate construction costs for depreciation. A BMT Tax Depreciation Schedule helps to ensure you maximise the cash return from your investment property each financial year. The schedule fee is a one-off payment and will include deductions for the forty year lifetime of a property. The fee is 100 per cent tax deductible. To find out more about how depreciation can help you save when owning a dual income property, Request a Quote or speak to our expert team on 1300 728 726 today.

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