Depreciation

[bundydog]

Hi all,
I am having trouble getting my head around the depreciation of house and other assets of an investment property. I haven't yet purchased my first IP but have done about a year of research on suburbs all over Australia and I am very close to taking the plunge having narrowed it down to 3 suburbs.
My problem is that the areas I can afford all have houses that are built well before 1987 and alot are ex housing trust or similar. My other problem is that I can only afford about $20 a week out of my pocket to comfortably support the purchase, and I'm not sure what % return I need to do this including all the depreciation that I am allowed on a property of this vintage. The areas I'm looking at all get around if not over 5% - 6% return excluding all the fees involved.
Don't know what to do next. Is there a way of guess-timating the depreciation so I get a closer figure?

Thanks

 

[alexlee]

If you need depreciation to make up your cashflow to allow you to hold the property, may I suggest that you're running too close to the edge? $20 pw isn't much. If your cashflow is that tight any repairs might drive you over the edge. A simple toilet fix could cost $100.

I'd go through your budget again instead. See if there are any other expenses that can be cut.
Alex

 

[bundydog]

so do you think I shouldn't be relying on depreciation and should be able to make up the shortfall without it, and if I get some depreciation then it is a bonus. damn, that makes it hard.
$20 a week is very very easy for me, but I wanted to start out small and see if it was achievable. But without depreciation I could be up for $200 a week and that is definatley not possible.
Might have to change my strategy

 

[alexlee]

so do you think I shouldn't be relying on depreciation and should be able to make up the shortfall without it, and if I get some depreciation then it is a bonus. damn, that makes it hard.
$20 a week is very very easy for me, but I wanted to start out small and see if it was achievable. But without depreciation I could be up for $200 a week and that is definatley not possible.
Might have to change my strategy

I think it's difficult to estimate depreciation, especially when you've never bought property before. If you're depending on these estimates to make up your cashflow, and since you're not likely to get the depreciation report done until you settle, if it comes in below your estimate you're in trouble.

You're saying depreciation gives you $180pw CASHFLOW? That sounds like a lot. That's $9,360 per year, and at a marginal tax rate of 30% would imply depreciation of $31,200 a year. Are you sure you haven't put in the gross amount of depreciation into your cashflow calc? You only get back depreciation x marginal tax rate in cash back.
Alex

 

[bundydog]

I earn 100k a year so don't know what bracket that puts me in, but I have been trying to use a depreciation schedule I found on the ATO website, I have been doing it all on paper and it's doing my head in. Are there any calculators you can recommend that would make my life easier. And yeah, I had stuffed up on the calculations, thanks.
Lokks like I need to do alot more research on waht I can and can't afford.

 

[DavidMc]

Alex has given you some good advice. I'd revisit the calculations. Perhaps try Somersofts own PIA program to work out the cashflow for you?

I posted some same depreciation amounts for my properties on another thread. Shouldn't be too hard to find with a search. A brand new 4 bed + study H&L package in the Fountain Lakes of Melbourne had $7.5k depreciation in it's first year. That's about as good as you can expect.

On $100k pa I'm sure you could afford more than $20pw

 

[alexlee]

I earn 100k a year so don't know what bracket that puts me in, but I have been trying to use a depreciation schedule I found on the ATO website, I have been doing it all on paper and it's doing my head in. Are there any calculators you can recommend that would make my life easier. And yeah, I had stuffed up on the calculations, thanks.
Lokks like I need to do alot more research on waht I can and can't afford.

You're on 40%.

Indicative numbers for a 'normal' property:
Rent 5.0%
Mgt -0.5%
Interest -7.6%
Rates -0.5%
Body corp -0.5%

Net -4.1% after tax of -2.5%. What this means is that for a $300k property, say, you should lose AFTER tax around $7,500 a year.

This is VERY rough, but gives you a ball park figure.

Redo your budget. Unless you have a ridiculously large number of dependents, if you're on $100k you should be able to afford $200pw. You're making something like $1,300 AFTER tax a WEEK.
Alex

 

[bundydog]

Thank you Alex and Davidmc, you have given me some good insights, I will have a look at some calculators and redo my figures.
As for being able to afford the repayments, I am only on $63 000 as base wage and my overtime gets me to $100k, I have 2 kids and a wife who likes to spends alot
Looks like I have to pull in the reigns
Thanks again