New property is better

Hi,
I’m very new to PI.
I have heard from friends that it is better to invest in new homes because you can claim depreciation - would you agree? How old must a home be to be able to claim depreciation?
I have also heard that it is best not to sell investment properties, rather use the equity and purchase more – what are your thoughts on that?
Thanks for your help.
Simon
 
Hi,
I’m very new to PI.
I have heard from friends that it is better to invest in new homes because you can claim depreciation - would you agree? How old must a home be to be able to claim depreciation?

As always, the answer is not that simple. Yes, if the home is new you can claim more depreciation. However, it probably means your purchase price is higher as well, so you are PAYING for that depreciation (and the higher rent you will probably get). Also newer homes have less redevelopment or renovation potential.

I have also heard that it is best not to sell investment properties, rather use the equity and purchase more – what are your thoughts on that?
Thanks for your help.
Simon

You sell, you pay tax, and you have to reinvest the cash anyway (minus the taxman's cut). Buy, refinance and purchase more is a very basic but effective strategy.

Simon, may I suggest you read a few of the basic property books (Jan Somers' ones to start with)? You'll find most of the basic info there.
Alex
 
I have heard from friends that it is better to invest in new homes because you can claim depreciation


I have also heard that it is best not to sell investment properties, rather use the equity and purchase more – what are your thoughts on that?

...are these friends part of TIC ?? (The Investors Club).

This sounds right up their alley - only buy really new residential stock and never sell.....and it just so happens that they have a whole bunch of it ready to sell you....funny that.
 
If you buy new properties from developers on postage stamp blocks, the ONLY thing you can do is claim depreciation, you cannot value add in any other way, your profits are at the mercy of depreciation and speculation in capital appreciation (which usually takes longer than other properties. as most developers sell them at above market values).

Personally, the only new properties I would invest in is the ones I have built myself (we have kept some of our own developments)
Tax and depreciation benefits should not be a reason to invest in the property market.
 
Alexlee, you said when you sell a property, you have to reinvest the money? what do you mean?

Also, is there a certain percentage that capital gains tax is measured by?
Ive been quietly wondering about this lately, not that Im thinking of selling, just curious to find out.
 
Pertho / W2BW,

If you sell an IP (or any other asset class) you trigger CGT, RE Agent selling costs, mortgage discharge stamp duties etc etc.

If you are selling what are you intending to use the proceeds for?? You may be better off not selling at all, there fore not triggering any of the above mentioned costs at all, nor reducing your asset base.

Instead you can borrow agianst your exisitng asset base and leverage into more investments there by increasing your asset base and CG exposure.

Hope this helps.
 
I have heard from friends that it is better to invest in new homes because you can claim depreciation - would you agree? How old must a home be to be able to claim depreciation?

Simon,

First off welcome aboard the forum, this being your maiden post.

Whether to buy new all depends on your chosen strategy.

What are you ulitmately wanting to achieve and your time frame for achieving it by using property as your chosen wealth vehicle?

The answer to those 2 questions is what determines the best strategy for you , which in turn determines what and where to buy.

In relation to depreciation properties built post 1987 can claim 2.5% buildings depreciation for 40 years.

Hope this helps
 
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Post 1985 I believe!
For buildings constructed between July 18 1985 and September 1987 buildings can be depreciated at 4%. Buildings constructed after that incur depreciation at 2.5%.

So those 1985-1987 buildings get a higher rate- but that depreciation will finish between 2010 and 2012.
 
For buildings constructed between July 18 1985 and September 1987 buildings can be depreciated at 4%.

From memory this was brought about by the Federal Treasurer at that time, Paul Keating, abolishing negative gearing which forced alot of private investors to sell off and bail out of the market leaving a lot of tenants to fall back onto the public purse for rental accommodation.

In a bid to entice investors back into the market Keating reintroduced depreciation at 4% between those dates geoffw mentioned above.
 
Thanks all for your posts.

Rick,

In answering your questions, ideally, I’d like to be able to semi-retire by the time I’m 45 and spend quality time with my family (I’m 29 now) – still maintaining a decent income stream to enjoy life. I would also like to pay off my existing mortgage as quickly as possible!!!

From what I’m reading, I shouldn’t be worrying about claiming deprecation, I should be more interested in buying a house on a decent size block that will appreciate more than new homes on small blocks.

I just know that I can’t keep hesitating about PI. I’m very keen to get into it!

Your advice is greatly appreciated.

Simon
 
Simon, welcome.
All the advice given here is great. I started with books and this forum, and would suggest the same. Do some good old self educating via the book store or local library. Ask heaps of questions, be excited, be afraid, but most of all...Do it!
cheers.
 
I just know that I can’t keep hesitating about PI. I’m very keen to get into it!

Your advice is greatly appreciated.

Simon Im in Perth and personally have a multi $Million property portfolio spread across Australia.

This is a recent post that describes my investment strategy that involves Villas & Townhouses. It may be of interest to you in achieving what you are wanting to do easily by 45 including full retirement.

The capital growth averaging (CGA) strategy I employ utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing IP per year and currently into year 7 of this 10 year plan.

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential
vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I preferr to purchase Townhouses & Villas with a 30% or greater land component thereby eliminating multi story units or high rise apartments, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Babyboomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness thus maximises cashflow.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa and/or are under gentrification. I look to where the Govt, Commercial, Retail, private sectors are injecting money. This ultimately beautifies the area and people like the looks so move in creating demand.

I have found this works well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cashflow will be serviced via Rental income, the Tax man, an LOC and/or Cashbond structure.

For ease of calculation lets say we buy a property for $250k, so in 10 years its now worth $500k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 250K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB - nope only joking!

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value ($1M) yet again - so you complete the entire cycle once again. Infact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth to spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well thats the Basic Big Picture of CGA. Once its set up its a self perpetuating, TAX FREE Income Money Machine.

Simon, I hope this has helped to spread some more light onto whats achievable through property.
 
Thanks Rick. That’s awesome!
When you say “with a 30% or greater land component”, does that mean for example, if the land size is 300m2, the townhouse/villa occupies at least 90m2?
A couple of other questions:
1. Did you ever build yourself, or did you buy off the plan?
2. Did you find you were ‘out-of-pocket’ a bit at the start of your venture?
3. Do you have a property manager?
4. Is there any general rule for rental income? For example, if I buy a place for $230k, should the rental be about $230 per week?
Thanks heaps!!!!
 
When you say “with a 30% or greater land component”, does that mean for example, if the land size is 300m2, the townhouse/villa occupies at least 90m2?

By 30% I mean the land component of the "total lot" including building footprint.

1. Did you ever build yourself, or did you buy off the plan?

I have never built myself. I have preferred to buy near new (0-7 years) at or below fair market value.

2. Did you find you were ‘out-of-pocket’ a bit at the start of your venture?
I've been basically cash flow neutral to slightly out of pocket. Nothing to really be concerned about. In the beginning the majority of the holding expenses have been covered by the tenants and the tax man. These days I just capitalize any holding expenses due to me exhausting my tax liabilities.

3. Do you have a property manager?

Yes all of my properties are managed by a PM.. I prefer to employ PM's to look after the day to day operations of my properties with IN my portfolio, which frees up my time to work ON building my portfolio. They advise me of current market conditons, are up to date with the tenancy act, collect my rents, pay my bills etc etc and at the end of the month electronic transfer the rents direct into my bank account and forward me a month statement. All this for a fully tax deductable fee.
IMHO money well spent.


4. Is there any general rule for rental income? For example, if I buy a place for $230k, should the rental be about $230 per week?

I look towards a 6 yield. If I cant find it intially I will look towards creating it by value adding . ie install AC, Secuity , Dishwasher etc.

When starting out I been used a ball park formula for working out my yields. It equates to 6.5%. Multiply the achievable weekly rent by 800. What ever that figure comes to is the top price to pay for the property. ie $250/w X 800 = $200,000.

Simon I hope this helps.
 
Thanks Rick.
So, do you use the same property manager for all your properties?
Also, do you go through the one lender with all ur properties?
And how do you determine where to buy property interstate?
One last question:
To purchase my first investment property, I will use the equity in my current home. To purchase the second IP, say in a years time, do I use the equity from the first IP? And so on…

Cheers.
 
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So, do you use the same property manager for all your properties?

No. I have a porfolio spread across Perth & Brisbane.

Also, do you go through the one lender with all ur properties?

No I have different Bank/lenders.

One last question – how do you determine where to buy property interstate?

Thats an all day question, but very quickly I check out the areas that have historically provided the the returns I am looking for. And I look for where the population is migrating to and look at the underlying property supply factors for the area.

Hope this helps.
 
Hi Rick,

I edited my previous message but it must have been after you read it. There was one last thing I am unsure about.

To purchase my first investment property, I will use the equity in my current home. To purchase the second IP, say in a years time, do I use the equity from the first IP? And so on…

Cheers.
 
Hi Rick,

I edited my previous message but it must have been after you read it. There was one last thing I am unsure about.

To purchase my first investment property, I will use the equity in my current home. To purchase the second IP, say in a years time, do I use the equity from the first IP? And so on…

Cheers.

When I first started out into my 2nd and third I just cross collled then released the additonal securities as the props increased in value.

Today I use a Investment LOC secured against my PPOR for deposits and costs.... Later on I will release my PPOR as security and switch it across on other property that has had substancial growth.

Hope this helps.
 
Thanks all for your posts.

Rick,

In answering your questions, ideally, I’d like to be able to semi-retire by the time I’m 45 and spend quality time with my family (I’m 29 now) – still maintaining a decent income stream to enjoy life. I would also like to pay off my existing mortgage as quickly as possible!!!

From what I’m reading, I shouldn’t be worrying about claiming deprecation, I should be more interested in buying a house on a decent size block that will appreciate more than new homes on small blocks.

I just know that I can’t keep hesitating about PI. I’m very keen to get into it!

Your advice is greatly appreciated.

Simon

The size of the block should'nt be an issue if you have no plans of redevelopment in the future. Most of the new houses built these days are on smaller land to cater for the younger and working generation. They usually prefer larger homes on smaller blocks because they don't really wanna be botherd with mowing the lawn and things like that. They want more time for work and family. As I said in one of my earlier posts: Dont look at the product. Look for the potential in that area and location.

Also depreciation and tax benifits is only there to help you service your loan. The main thing you should be aiming for it capital growth because that's what's going to make you rich and help you become financialy free by 45.
 
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