Price vs Depreciation

K

kaz1974

Hi everyone,

I have a bit of a dilemma and its driving me nuts so your advice would greatly be appreciated.

I keep being told that I should buy a brand new place for maximum depreciation and to reduce my tax as I earn 6 figures. Howevever the sums dont quite add up. I've found some very nice investment units in Sydney close to major hospitals, schools, and a railway right on the price I am prepared to spend (between 300K - 400K). The places are generally finished construction around 1999 - 2001.

Both new and 2nd hand hand will roughly appreciate in value and return a similar rental income. Would you spend $50K - $70K more to get a brand new place and get more depreciation or purchase a place several years old and save the $50K - $70K???

Please advise ... help much appreciated :)

Kaz
 
Personally I would look at the older places. You will get depreciation on all properties, including the 2.5% construction write off on all places built after 1987. If you are on a really big income and in the top tax bracket then depreciation will effect you more, but if like most you are around the 30% mark the numbers will not make paying 70k more attractive at all. Personally I am on a lowish income at work so I buy the oldest places on the biggest piece of land in the area that I can afford. I find the renovation and high land component more than makes up for small depreciation in both rent (the renovation gives me a chance to put the rent up) and capital growth (more land appreciating plus possibility of development later). Units are fine if you want to invest in an area where that is all that exists or that is all you can afford. There are some good cash flow programs out there or you can work it out yourself, you need to know how much the property will make or cost you each week.
 
Sometimes new is also more tenant friendly and appealing.

7 year builder warranty also helps sleep at night (assuming sound builder).

This is a buyers market, you will strike a better deal with a developer than a vendor.

You might even buy new cheaper than some used (definately in some areas).
 
For me, I would never buy a new investment property,
purely because of the premium costs involved, someone is making a big profit from you and you will no doubt lose a little of that in the long run,

the building depreciates and land moves up,

The newest I would buy and have bought is 14 years old, still in good condition, room for improvement for rents, market value paid, etc

Yes, new properties are definitely more attreactive to tennants, although the down side is, they have to pay a premium for them too but most of the time, theyre contribution wont be a good yield in terms of how much you paid on the property. not at all.

you have to remember that most tennants dont have alot of money and they want to keep as much as they can so the mediun tennant cant afford to rent your brand new place, so you will find it harder to rent the property also.

I like to keep investing simple, do the numbers, would you prefer to pay too much for a property thats brand new and is hard to tennant with low rental yields and good depreciation?

or

buy an average property at the mediun price that rents well, has good yields attatched, has room for improving rents, is easy to sell on? etc etc.
 
Depreciation = money you are losing through age and wear and tear.

You can claim this against tax which helps your holding costs. Its not free money because for every $1 you depreciate your purchase price is also assumed to have decreased by $1 for CGT calculations when you sell. The tax man will have his poud of flesh in the end.

Nobody should want decpreciation. However since every property depreciates over time its nice to be able to claim those loses in the short term (rather than wait until you sell).

If a sales person is telling you that you have $30k of depreciation claims in the next 5 years, thats not a good thing ! What he is saying is that your property will be worth 30K less in 5 years!

They are selling mutton (a loss) dressed up as lamb (a good thing). The individual property they are selling may, or may not be a good buy. Just dont be fooled into thinking the depreciation is a positive feature.
 
Dis said:
Depreciation = money you are losing through age and wear and tear.

You can claim this against tax which helps your holding costs. Its not free money because for every $1 you depreciate your purchase price is also assumed to have decreased by $1 for CGT calculations when you sell. The tax man will have his poud of flesh in the end.
Click to expand...

Not exactly. You deduct depreciation at your marginal rate but get to discount CG by 50%. Also, you don't have to pay CGT until you sell.

Dis said:
If a sales person is telling you that you have $30k of depreciation claims in the next 5 years, thats not a good thing ! What he is saying is that your property will be worth 30K less in 5 years!
Click to expand...

The building might be depreciating, but the area and land is going up.
Alex
 
Thanks :)

Thanks to all who replied ... I will go through with my purchase of a 2nd hand unit thats several years old and save the $50K as my deposit for my 3rd place

Kaz
 
Don't they say never to let saving tax be the motivation for buying property. Depreciation benefits are only icing on the cake, they don't make or break the deal. Choose a property based on merit, the older one should have problems ironed out and an extablished rental history.

Cheers
Pulse
 
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