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Top 6 investment property renovation tips

BMT team — Sun, 06 Feb 2022 21:56:27 +0000

The warmer months are upon us which has some of us thinking about giving our investment properties a facelift. Whether it’s a fresh paint job, flooring or a new bathroom, renovating your investment property can result in higher returns for years to come. Not only does a freshly renovated property attract quality tenants, it also puts more back in your pocket with ample depreciation deductions at your disposal. The essential step to any investment property renovation is taking a head over heart approach. Here are our top 6 investment property renovation tips to maximise your returns. Tip 1: Know your market and budget Tip 2: Be aware of 2017 legislation changes Tip 3: Understand the effective lives of assets Tip 4: Learn about depreciation incentives prior to renovating Tip 5: Take advantage of the longevity of capital works deductions Tip 6: Don’t forget about scrapping deductions Tip 1: Know your market and budget The golden rule to any investment property renovation is to know your market, know your budget. It’s important to remember here that you’re renovating the property directly for returns and tenant appeal, not your personal preference. It goes without saying, but you don’t want to spend outside your budget as this can have detrimental impacts to your cash flow. At the same time, you want to ensure the property renovation is suited to your market. For example, if your target market is professional singles or couples, you may not want to reduce the size of living areas for an extra bedroom. Meanwhile, removing a bath tub won’t be the right choice if your market is families with children. Tip 2: Be aware of 2017 legislation changes When it comes to claiming the most depreciation possible following an investment property renovation, 2017 legislation changes are important to be aware of. Under the changes, ‘previously-used’ plant and equipment assets can’t be depreciated. Plant and equipment assets are mechanical or easily removable in nature. Some key examples include floor coverings, hot waters systems, air conditioning units and light fixtures and fittings. The key factor to be aware of when it comes to linking the legislation changes with your renovation is the ‘previously-used’ provision. This means that any second-hand plant and equipment assets you install during the renovation can’t be depreciated. It may seem easier to stay at the property while the renovation is taking place so you’re close to the action but doing so can have harmful impacts to your future depreciation deductions. The previously-used provisions also apply to brand-new assets you installed during the renovation if you lived in the property at the same time, even for a short period. For this reason, it’s always recommended to never stay at your investment property during a renovation. Tip 3: Understand the effective lives of assets Every type of plant and equipment asset has its own effective life. This determines how much in depreciation deductions you can claim in each year. A key example of how important the effective lives of assets can be when renovating is in flooring. As one of the most renovated assets, depreciation deductions can vary greatly depending on flooring type. Carpet has an effective life of eight years, while floating timber flooring has an effective life of fifteen years. This means you will be able to claim more from carpet in earlier years as it depreciates sooner, while floating timber would result in a steadier flow of deductions over the long-term. Meanwhile, tiles are considered to be part of the building and therefore claimed over forty years at a low rate of 2.5 per cent. For example, $2,000 worth of carpet would be a first full year claim of $500. The same amount of floating timber would be a first full year claim of $266 and tiles would be $50. Tip 4: Learn about depreciation incentives prior to renovating There are several depreciation incentives available that can boost your cash further and sooner following a renovation. Being aware of these can help you choose assets that will compliment your returns. The first is the immediate deduction. This incentive allows you to immediately deduct any new, eligible plant and equipment asset that costs $300 or less. There is no limit to the number of assets that can be deducted, as long as they meet the given eligibility requirements. We have seen this humble deduction boost cash flow by thousands in just one year. The second incentive is the low-value pool. Plant and equipment assets that cost or are valued at $1,000 or less can be placed in the pool. Once an eligible asset is placed in the low-value pool, depreciation deductions are fast-tracked. In the year of purchase, depreciation is calculated at an increased rate of 18.75 per cent. During following years, the rate is heightened further to 37.5 per cent. Tip 5: Take advantage of the longevity of capital works deductions We have provided several tips on making the most out of plant and equipment assets following a renovation, but it’s just as important to exploit capital works following a renovation. Capital works is the structural component of the investment property. If you build a wall, tile the bathroom or install new kitchen benchtops you are doing a capital improvement. These can be deducted with capital works deductions for a forty-year period. On average, we find capital works make up 85 to 90 per cent of total depreciation claims! So its important to ensure you factor in any capital improvement you may be weighing up during your renovation. Tip 6: Don’t forget about scrapping deductions The new assets aren’t the only ones you can benefit from following your investment property renovation. The qualifying assets you removed in the process can also boost your cash flow. A process called scrapping allows you to claim the un-deducted depreciable amount from removed assets. ‘Scrapped’ deductions can be claimed on plant and equipment, in addition to structural assets . While it seems straight forward, we […]

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Lucrative assets to install when renovating

BMT team — Thu, 29 Aug 2019 01:55:17 +0000

A growing number of investors are choosing to renovate their investment properties each year. Master Builders Australia has forecast homeowners and investors will spend $8.8 billion annually on renovations over the next five years. Renovations can increase rental yields and improve cash flow however there are many important factors to consider before getting started. One of the most crucial aspects to consider is the effective life of depreciating assets. In this article we will look at: The effective life of depreciating assets Effective life of depreciating assets for flooring Effective life of depreciating assets for window covers Important depreciation legislation The effective life of depreciating assets Plant and equipment assets are items which are easily removable from the property such as carpet, hot water systems and blinds. The effective life is used to work out the asset’s decline in value for which a depreciation deduction can be claimed. Each asset also has a rate of depreciation which helps to determine the deductions an investor can claim over the asset’s effective life. Investors can claim depreciation deductions for more than 6,000 different assets recognised by the Australian Taxation Office. With so many assets to choose from, it’s important to understand how variations in effective life can alter the depreciation deductions available. We look at flooring, window covers and lighting to help you choose the most valuable assets when renovating your investment property. Effective life of depreciating assets for flooring Carpet has an effective life of eight years. Using the Diminishing Value (DV) method, a rate of 25 per cent is used. If a landlord installs carpet worth $4,000, they will be eligible to claim $1,000 in depreciation deductions in the first full financial year. However, if they install floating floorboards or tiles of the same value, the available deductions will be $533 and $100 respectively. In this scenario, an investor who installs carpet will be able to claim the highest depreciation deduction, while the investor who installs tiles will be eligible for the least. Effective life of depreciating assets for window covers Blinds have an effective life of ten years and a DV rate of 20 per cent. If a landlord purchases blinds worth $3,000, they will be eligible to claim $600 in depreciation deductions in the first full year. If they install curtains of the same value, the first-year claim would increase to almost $1,000. On the other hand, if the landlord decides to purchase plantation shutters, which have an effective life of forty years and a DV rate of 2.5 per cent, the first year deduction would be just $75. With this in mind, curtains are the most valuable asset from a tax perspective. It’s important to note that blinds and curtains may be eligible for low-value pooling. Low-value pooling is a method of depreciating plant and equipment assets which have a value of less than $1,000. Any plant and equipment assets with a value of less than $1,000 can be included in a low-value pool and written off at an accelerated rate to maximise deductions. Items can be depreciated at 18.75 per cent in the first year and 37.5 per cent each year thereafter. Important depreciation legislation It’s important to note that legislation passed in November 2017 brought about major changes to residential plant and equipment depreciation claims. Under current legislation, owners of second-hand residential properties who exchanged contracts after 7:30pm on 9th May 2017 cannot claim deductions for previously used plant or equipment assets. If an investor lives in their rental property while renovating, any newly installed assets will be classed as previously used. Therefore, the investor is potentially risking their tax benefits. Unless there is good reason, investors who are planning on installing new plant and equipment assets should make these additions after they move out of the property and it has been listed for rent. The 2017 legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties. With this in mind, brand-new property generally holds the most lucrative value for investors from a tax perspective. Capital works deductions for structural assets such as new walls, kitchen cupboards, toilets and roof tiles are also unaffected by the legislation changes and can still be claimed by owners of income-producing properties. When removing structural assets there may be remaining depreciation deductions available. A process known as scrapping can often be applied, allowing investors to claim these deductions in the year the items are removed. To find out more, contact a specialist quantity surveyor to organise a tax depreciation schedule before starting renovations.

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How to work out your renovation budget

BMT team — Sun, 13 Jan 2019 22:14:33 +0000

How often do you hear of planned property renovations going over budget? Many renovators spend more than they originally planned. This could be due to unexpected problems arising, a change of mind mid-way through the project or as a result of poor planning and not having a proper renovation budget in place. If you don’t plan your renovation budget the process can become stressful. So, before you start envisioning your dream, estimate how much you can afford to spend and then break it down into individual sections so that you can figure out how much money needs to go into each part of the project. By doing this, you can then determine the quality of the finishes you can afford. Creating a realistic renovation budget rests on how accurately you estimate your costs. Follow our quick tips to help you work out your renovation budget, before you break out the tools. Decide of the size of your renovation The size of your renovation has a big impact on the final cost. Start with a list of absolute essentials and then the ‘nice-to-haves’ and prioritise your list. Be prepared to compromise at some stage if money becomes tight during the renovation process. Avoid over capitalising Begin with an understanding of values in your area. A good starting place is to establish the likely sale price or valuation price after the renovation has been completed. Look for similar properties in your suburb which have already been renovated using real estate portal like homesales.com.au. Use a budget calculator There are some helpful renovation and building calculators out there. They’ll give you a rough estimate of costs and help you plan. The handy BMT Construction Cost Estimator could be a useful guide before you start getting quotes. Get three quotes from tradespeople You should always get at least three quotes from builders or tradespeople. You’ll be surprised how much they can vary from tradesperson to tradesperson. To find quality tradespeople, look online and read individual reviews or ask friends or family for recommendations. Plan a contingency into your budget Add 10-20 per cent to your final budget. Overspending is very common during building projects. Unknowns equal risks. Part of determining contingency is planning for the worst. By identifying risks such as poor weather and scheduling issues, you will get a better idea where the contingency budget might go, which will give you an idea of how much you might need. You can never do too much research The internet has a surplus of helpful information and instruction on renovating/home improvement, budgeting and investment property renovation tips. It will become your most use and valuable resource. To discover whether there are any depreciation-related implications to renovating an investment property, read our recent blog ‘Can you claim tax deductions when renovating an investment property.’

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