Empowering Property Investors
destinyâ€™s client only magazine
Cash Flow Affordability
$500 0 CASH See p a for d ge 2 etail s.
- The New Imperative For Property Investors Margaret Lomas talks about itâ€™s impact on investors.
greville pabst looks at The value of valuation Kendra Strudwick tells The power of a shined goal rob balanda on avoiding investor mistakes Destination Client only Magazine 1
Invest WELL and WIN…. $5,000!
Contents 3 welcome from your Destiny Branch Manager. 4 staff spotlight Get to know CEO, David Garden.
Let’s face it – purchasing an investment property is not for the feint-hearted.
4 what’s on & Client corner Be inspired.
You’ve worked hard for it. You’ve invested time in your education. You’ve done your research.
5 feature story Cash Flow Affordability.
You’ve actually taken the plunge and made it happen! We’re pleased to invite you to be a part of the Destiny Property InveStar Competition. Every quarter, Destiny clients* who settle on an investment property are eligible to enter the draw to WIN $5,000 in cash. Yes $5,000 in cash - to be used in whatever way you like. So, if you’re a Destiny client go to www.destiny.com.au, log in to the members only section and complete the entry form. *Terms and conditions apply.
Our 1st Winner –
Graham and Roslyn Dekker! Graham and Roslyn Dekker are East Perth clients who joined Destiny 2 years ago. They have purchased two properties in that time. Here is some of their story, shared by Roslyn... “How I felt when we won the $5000 – disbelief!! Funnily enough I found out at the beach (those who know me know that this is one of my central places to be!) I had been surfing and Graham came down with the kids, so I could take them out for a paddle. He asked me what I would like to do with $5000. I laughed, thinking he was joking and asked “Did we win the competition?” Screams of excitement and joy followed!! Now the $5000 is sitting against one of our loans. It will stay there for about a year, and then we hope to take the children for a snowboard holiday somewhere. It will be one of last holidays together, before the kids start leaving home to embark on their 2 www.destiny.com.au
own adult lives. We have wanted to do something like this for a while, but being self employed, it hasn’t been achievable yet. We purchased our first property in Mildura in 2009 and our second property in 2010. I would regularly go to the East Perth office for any training and research nights that were happening. I really enjoyed meeting other Destiny clients, and learnt a lot more through the interaction and knowledge that was shared with them. The meetings gave me the enthusiasm and encouragement to keep going. Also, I enjoyed the confidence that came with knowing I was doing the same as the others, and they all seemed like a pretty intelligent bunch!”
Entries are now open for the 2nd completion period, during July, August and September 2010. If you settle on an investment property during this time, enter online!
7 property watch Client purchases over the last two months. 8 insights from WBP Property group on Valuations and their Value. 9 Client success story Clients share their stories, strategies and lessons. 10 run property on the value of good Property Management. 11 Rob Balanda shares examples of beginner’s mistakes taken from a solicitor’s casebook. 12 ruling applications on using your rent to pay off your home loan sooner. 13 Tax advice Long or short term investment - how does property depreciation change things? 13 the power of a shined goal Setting and achieving them. In compiling this magazine, Destiny Financial Solutions Pty Ltd (ABN 25 073 558 488) relies upon information supplied by external sources. Therefore, Destiny Financial Solutions Pty Ltd cannot warrant the accuracy or completeness of the information contained herein. Appropriate due diligence should be undertaken before applying any of the information to your personal circumstances. No Third Party Commissions. From time to time Destiny refers clients to third party service providers (for example quantity surveyors and accountants) based on merit. Our criteria for selecting third party service providers is quality, ethics, value and professionalism. Typically these service providers offer exclusive discounts to Destiny clients because we do not accept any referral fees or incentives. *Excludes mortgage and insurance services
Welcome, banks are now reviewing your last six months of statements – even for existing customers, and your credit score will be compromised if late payments due to insufficient funds are noted.
Those who saw Margaret Lomas at the recent Property Expo know what a fantastic presentation she has developed for this year. Margaret has reviewed recent economic data and determined, for each state, where you should buy and where you should not! Her expanded presentation to be held on Tuesday 7th September at the Melbourne Convention Centre is not to be missed! Call Emma to book on 9488 2288. It may come as a surprise to know that banks do not care if you do not have money to pay for food. Their concern is that you pay your mortgage on time – all the time. And while late payments are usually due to carelessness rather than lack of overall funds, this occurrence may prevent you from borrowing further. As part of overall serviceability, the banks are now reviewing your last six months of statements – even for existing customers, and your credit score will be compromised if late payments due to insufficient funds are noted. If you have by chance missed a payment and are applying for a loan, please make sure you tell us why because if we provide the banks with a reason before they ask, it looks much better for you. To win the $5000 prize for the property InveStar Competition, make sure you list your investment property on www.destiny.com.au when it settles – we definitely want someone from Melbourne to win next time. Log in under “Results” to see where everyone has bought and the return they are getting. The client networking dinner on the 13th August will be fantastic and RPData are giving away a free report to all attendees.
Louise Lucas Branch Manager, BAYSIDE firstname.lastname@example.org
Are you ready?
Staff Spotlight on David Garden Position: Chief Executive Officer Hometown: Toowoomba, Queensland (hence why I am an avid ‘Mighty Maroons’ supporter) Childhood ambition: To play hockey for Australia, and live happily ever after. Favourite movie: I can’t choose just one! Here is my top half dozen: Meet Joe Black, Forest Gump, Dead Poets Society, Good Will Hunting, Patch Adams and Jerry Maguire. What I most enjoy about working for Destiny? Helping people succeed. At the core of Destiny are people – clients and staff. I really enjoy talking to people, hearing “their story”, finding out about what makes them tick. We are all unique and interesting in our own way. I am also constantly amazed at the level of commitment displayed by our team of branch managers (I am convinced that they bleed maroon and navy). I enjoy sharing this passion as we work to make Destiny the best we can. My biggest inspiration: This is a hard one – inspiration is all around me! My biggest inspiration would have to be my two beautiful daughters Meg and Grace. They inspire me with their perpetual happiness, boundless energy (except when it is time to tidy up!), love of learning and single-mindedness. My interests: I have played hockey since I was 6 years of age. I had the wonderful experience of growing up playing with a team mate who became an Olympic Gold Medallist. When he was about 11 years old, he used to play 3 or 4 games on a Saturday and practice afterwards in the dark. I now coach my eldest daughter’s hockey team (and some of them are shaping up to be future Olympians!)
Simon Rawadi from Run Property would like to address any issues Destiny clients have, so if you are pleased or not so pleased with their service, please let him know on email@example.com or 0403 200 291. Make sure you keep the 11th, 12th and 13th of February next year free – something BIG is coming. Did you know that if you purchased furniture with your new investment property but then needed to remove it to let it unfurnished, you can ‘scrap’ the cost of the furniture and make a deduction in that year. So before you remove it, make sure you have a quantity surveyor in to value what is there.
September 7 September Margaret Lomas Seminar at Melbourne Convention Centre – call Emma to book 9 September Babes plus Two Property Action Team with Jess 16 September EPE Course – new clients
Did you know? Only 27% of property investors in Australia own more than one investment property. Source: ATO
Feature Story Cash Flow Affordability
Cash Flow Affordability – The New Imperative For Property Investors by Margaret Lomas. Have you ever wondered how new food combinations like peanut butter and jam sandwiches came about? I imagine they came from people breaking traditional thinking, trying something new and forging an untested path – often in the face of criticism and humiliation. Sometimes, two things which were previously thought to be incompatible can be brought together with great success. For many years, ‘experts’ claimed that you had to be either a growth investor or a cash flow investor. They declared that growth and cash flow are mutually exclusive, incompatible – like peanut butter and jam on sandwiches together! If you already invest in property you will know, as I do, that “ideal properties” with affordable cash flows and good capital growth are out there. Reuben and I own some of them. You can find them too. Finding the ideal investment property for you As a Destiny client, you already know and understand my 20 Must Ask Questions®. Following these questions will ensure you select the right investment property for your needs. I won’t cover the 20 Must Ask Questions® again in this article. Instead, I would like to introduce the concept of “cash flow affordability” and how it impacts on investors.
Before explaining cash flow affordability, let’s briefly revisit the concepts of capital growth and cash flow. Capital Growth Assuming your objective is to generate the highest capital gain possible, you may think that investing in capital cities and coastal locations is the key. We now know that this is not correct, as recent studies have shown that these areas have performed
Cash Flow Investors seeking positive cash flow properties are typically drawn to locations where the demand for rentals are highest and this can occur in regional areas and the outer suburbs of some capital cities. To ensure a minimum injection of ongoing funds, cash flow investors look for properties that ‘pay for themselves’, without a need to support a negative cash flow. Finding property which also has
“ideal properties” with affordable cash flows and good capital growth are out there...
poorly over the past 15 years. Since capital growth is directly linked to supply and demand, it is reasonable to expect that those areas with a population growth faster than the national average will experience greater levels of demand, possibly higher than supply, and so drive up property prices.
a high amount of depreciation can also contribute to the inward flow of funds, and so boost the after tax cash flow. The possible downfall with this approach is the temptation to chase cash flow at any cost, leading you to consider singleindustry towns, for example, Destination Client only Magazine 5
Feature Story Cash Flow Affordability
with slim long-term prospects for sustained capital growth. The key, of course, is going to lie in discovering properties offering the best possible growth for the highest possible cash flow, and ones which suit your personal short term needs for either cash flow or growth. Introducing Cash Flow Affordability Cash flow affordability is the equilibrium between cash flow and capital growth. It is that balancing point between achieving substantial capital growth and being able to support the property’s costs while this appreciation in value occurs. This point of equilibrium will be different for every investor. Let’s consider two investor scenarios to explain the concept in greater detail. Wayne is a single man who lives at home with his elderly parents. His living expenses are extraordinarily low and he spends his money very carefully. His total annual living expenses are only $40,000. Wayne earns $215,000 per year as an engineer. Wayne has high cash flow affordability and so he can target properties with high potential for capital growth even though they may come with negative cash flows. Having said that, Wayne’s objective is still to make these properties into positive cash flow properties in as short a timeframe as possible. This is achievable as Wayne’s substantial surplus (the difference between his income and expenses) when combined with rapid mortgage reduction principles will reduce his debt, and therefore his interest cost, quickly. This reduction in interest over time (hopefully combined with increasing rents) will create a positive cash flow. Mark and Sarah are a married couple with 3 young children struggling to get ahead. Mark earns $90,000 per year and Sarah works part-time on $25,000. Their household expenses are $100,000 per year; leaving a surplus of $15,000. For Mark and Sarah cash flow is the key consideration when investing. In total, they can only afford $288 per week (assuming they use their entire surplus to fund 6
It is that balancing point between achieving substantial capital growth and being able to support the property’s costs the holding costs of the properties, which doesn’t appear to be a smart option given their circumstances – unless they have other cash reserves). Mark and Sarah really need to acquire properties with cash flow of say, no more than $30 per week negative. Other things which need to be considered are time till retirement and risk profile. An investor with less available time needs growth more quickly, and one with a low risk profile will need to buy in areas with less speculation. All investors have different needs which must be considered when making choices about where and what to buy. Always remember that the ultimate aim is to buy a property with the greatest chance of capital growth for the highest cash flow possible. Cash flow keeps us in the market, while growth allows us to get out, or at least acquire the assets needed to make choices about our
retirement. If you do your research well, you can achieve both of these things. However, due to the nature of how values and rental (yield) growth initially occurs in opposition to each other, the first few years of a property investment may require that you choose the one which is the most important to you, and knowing more about your personal needs for cash flow or growth may help you decide which is the right property for you now. After those first years, a well chosen property should be delivering both yield growth and value growth. Investors need to be realistic when searching for properties, because it is better to purchase an ‘almost perfect’ property now, than wait for years hoping that the ‘perfect property’ will pop-up. They rarely do. Until next time, happy investing. Acknowledgement: Research conducted by Kristy Quinn
Letter from the editor
Destiny Property Watch A summary of the suburbs where some Destiny clients have purchased investment properties during the past two months. (This is not an exhaustive list.)
Please The selection of appropriate investment properties is typically based on a combination of property specific attributes and location, therefore the suburb listing below may be of some assistance. WA Kwinana, Boulder, Bunbury, Brookdale
d purchase e v a h u If yo roperties p e s e h t veStar one of n I y t r e p r Pro ENTER ou $5,000 n i w o t ion competit y.com.au n i t s e d . at www
SA Elizabeth x 2, Andrews Farm, Sebastopol, Elizabeth Downs x 2, Salisbury, Davoren Park, Christies Beach NSW Muswellbrook x 3, Kelso, Moree, Gunnedah, Worrigee, Pelaw Main, Wagga, Orange, Tamworth x 3, Dubbo x 2, Cessnock x 2, Glenmore Park, Mayfield, Cardiff, Inverell, Mayfield East, Tolland VIC Sale, Mildura x 6, Melton, Mount Clear, Edithvale, Jackass Flat, Delacombe, Maddingley, Carlton, Mernda, Echuca, Portland, Bendigo, Dennington, Elwood, Grovedale, Kurunjang, Mornington, Pakenham, Richmond, Sebastopol, Shepparton, St Albans Park, Warrnambool, Morwell QLD Ipswich, Eagleby x 3, Drayton, Glenvale, North Lakes, Warner, Oxley, Varsity Lakes, Woodridge x 2, Toowoomba TAS Bridgewater x 3, Newham, Clarendon Vale NT No properties purchased ACT Greenway
Please note: If you purchased an investment property during the months of Jun - Jul and the suburb in which it was located is not listed above, please email firstname.lastname@example.org with details of the property to ensure inclusion in a future edition of Destination. Please be aware that this list only includes areas where clients have actually purchased property. There are likely to be other areas which are “untapped”, therefore you should not limit your searching to only these suburbs. Disclaimer: The geographic areas mentioned above are not a recommendation to purchase in the area(s). No research into the viability of purchasing an investment property in these areas has been conducted by Destiny® Financial Solutions Pty Ltd. It is your responsibility as a property investor to conduct the additional research required to ascertain the economic viability of the area(s). Past availability of suitable investment properties within the areas listed is no indication of future availability. The information contained within the Destiny® Property Watch column is provided as a guide only, and may not be applicable to your specific circumstances. Always seek professional advice from your Destiny® representative before undertaking any form of property investment. Destination Client only Magazine 7
The Value of a Valuation
The Value of a Valuation What does a professional valuer look for? Greville Pabst explains. Many people know the basics of what can impact the value of their property - overhead power lines and busy roads versus sea/tree views and a short stroll to the local coffee shop. To gain a better idea of how to improve the value of your property, it is worthwhile taking a look at what a professional valuer looks for when inspecting a property and how they arrive at the valuation figure. The field of property valuations is often described as an art and not a science, as it takes into consideration so many tangible and intangible aspects of a property and its surrounds. Valuations are a professional opinion based on available evidence; valuers do not set new benchmarks. They must be guided by what has sold recently, that is, within the past three to six months. The valuation process starts with a physical inspection of the property. The valuer walks around and through the property taking measurements and note of the number and type of rooms, fixtures and fittings, and improvements. The valuer then employs three methods to further analyse the property in order to come up with a value range: direct comparison, summation, and capitalisation of net income methods. The direct comparison method involves researching recent sales of 8
similar properties in the immediate surrounds, referred to as â€˜comparable salesâ€™. The subtle and not so subtle differences are taken into consideration to determine the extent to which these comparable sales can be used as a guide to the value of the subject property. In this way, apples are compared with apples and necessary adjustments can be made for the bruises. The summation method is the land value plus the depreciated value of improvements, which comprises the dwelling plus ancillary features such as garage, pergola and swimming pool. Land value takes into consideration size, shape, topography, slope, location and surrounding infrastructure and amenities. The value of improvements incorporates the style, age, architectural features, layout, number and purpose of rooms, and renovations in addition to the overall appearance and condition. The combination of these two methods allows the valuer to arrive at a valuation range. It is then up to the skill and experience of the valuer to consider any risks associated with the property or its location to be able to refine the valuation figure. The valuer may also check these values by way of capitalising net income. This involves applying an investment yield to assessed market
rental of the property to derive the current market value. This method is commonly used when valuing investment properties. Another important tip is to ensure your valuer has the skill and experience required to provide you with an accurate and reliable valuation. Only use a qualified and licensed valuer who maintains membership of the Australian Property Institute. Valuations are required or useful for many purposes including property financing and refinancing, accounting applications such as calculating stamp duty, GST or capital gains tax, rental determinations for investment properties, and family law purposes. An independent valuation before you buy or sell a property can help you negotiate the best price, reduce your risk and save you money.
About WBP roup Property G
is t FAPI FRICS Greville Pabs BP W ctor of CEO and Dire , providing a up ro G ty Proper rvices pr of operty se ty complete suite er op e from pr Australia-wid ory st vi ad ty er d prop valuations an al property to commerci ch operty resear pr t, s. managemen le du he sc eciation and tax-depr
Client Success Story
“we purchased our first property in January 2009 followed by our second in April 2009...”
We first visited Alex at Destiny Castle Hill in August 2008. Our aim at the time was to develop a financial plan, other than superannuation, and become less reliant on full time employment. We also wanted a plan we could stick to and which would not hinder our day to day lifestyle. Alex discussed with us the opportunity to build a property investment portfolio using the equity we had in our own home. I had read lots of property investing books from various authors but I wasn’t convinced that their methods were for us. However, after reading every Margaret Lomas book, I felt comfortable with her philosophy and systematic approach to creating wealth. In the beginning, we found it difficult to settle on a region to focus on. The thought of making those first calls to agents was also daunting. After lengthy investigation online in different areas, we purchased our first property in January 2009 followed by our second in April 2009 – both sight unseen. Illness during the next 12 months hindered our progression. However, we’re now back on track and have just signed up for our third property. Diversification has been part of our strategy. Our first property was an 8 year old, 3 bedroom plus study home in Mildura, regional Victoria. The second was a new 4 bedroom plus study home in Point Cook, a suburb of Melbourne, and our latest one is a 3 bedroom townhouse off the plan in Oxley, a suburb of Brisbane. This will be a new experience for us. We changed tact slightly from our original plan of buying more properties at lower value, as two of our investments are new. However, our total borrowing is similar. Our aim is to have a balanced portfolio of both positive cash flow properties with some high growth investments whilst ensuring we can service the loans. A key factor of this strategy is obtaining tax variations from the ATO. We look forward to continuing to grow our portfolio with the help of Alex, Sandra and the team at Destiny Castle Hill.
Clients of Destiny, Castle Hill
Destination Client only Magazine 9
The Run Down on Property Management
The RUN Down on Property Management with Rob Farmer.
my rent and because they are working in an area they always know the rents better than I do. It amazes me just how often landlords miss out on rent. At RUN, when we take over a management from other agencies, we very often find landlords are 10-20% below market. For example, recently we took over a management where the landlord was missing out on $17,160 per annum on her 3 properties! Why is being a property manager a challenging job?
What makes a great property manager? The most commonly asked question I get as CEO of RUN Property, Australia’s largest property management company is “what makes a great property manager”? The truth is a great property manager is hard to find, so understanding what makes a good one is a problem half solved. Why is a property manager so important? As a passionate property investor myself, I know how challenging it can be to balance the multitude of things in my life as well as keep focused in building a profitable property portfolio. With property investing, part of my strategy is always having a good property manager. They ensure my tenants are looked after, the appropriate legal documents are in place, maintenance is performed professionally and of course my rent is collected and tax records are kept. One of the most important things a property manager does is negotiates
Being a property manager can be a difficult job. Sometimes the landlord and tenant have different needs and finding a mutually beneficial outcome can be a challenge. However this is not always the case. Also, there is a lot to know and a lot to manage – all at once! For example, a typical day of a property manager could involve dealing with a complex maintenance issue, preparing and presenting a case for tribunal, conducting inspections and interviewing a prospective tenant on behalf of a landlord. What should we really be looking for in a property manager? It is a sad fact that in Australia, the property management division of a typical real estate company is the ‘poor cousin’ to the sales division. Real Estate agencies are often owned by real estate sales people, who are good at sales but they don’t have the operational management and attention to detail required in property management. It is for this reason that the property manager doesn’t get the support, systems and training required to help them do a better job. If they go on holidays or get sick, who is looking after your property whilst they’re not? To me, the answer is that we need both a good property manager supported by a professional property management company – this is a powerful combination.
What are the 5 attributes of a great property manager? 1.People person – a property manager is dealing with people every day, so having highly refined people skills and being a good judge of character is very important. 2.Good negotiator – whether it is a rent review, negotiating the right deal on maintenance or a tenancy issue, being a good negotiator is imperative. 3. Keep calm under pressure – all the good property managers I know are amazing under pressure. They can effectively juggle multiple tasks and keep calm. 4. Eye for detail – being a property manager is definitely a job with lots of detail. A great property manager understands the detail and is very good on follow-up. 5. Understands property, the market and property investing – this is one of the most difficult things to find in a property manager. A property manager who invests in property is worth their weight in gold! One of the reasons I love investing in property is that there are things you can do to increase both the value and yield of your investment. A great property manager is an extra pair of arms and legs to help you create more profitable outcomes.
At Destiny, we have special RUN representatives who look after Destiny clients. if you would like to find out more about RUN please call Sanja 0433 058 466 or Simon on 0403 200 291.
Avoiding Investor Mistakes
Avoiding Investor Mistakes We all pay dearly for our investment mistakes. Is there a cheaper, less painful way of educating yourself so that you avoid some of the pitfalls that are waiting out there for the unwary? Advice from Rob Balanda. There truly are many traps for young players, and even middle aged players too in the investment game. Here are some real life examples of beginner’s mistakes taken from a solicitors casebook. Absorbing and understanding the mistakes made by others will go a long way to helping you avoid the same errors. As Warren Buffett, the world’s greatest investor, says “The market, like the lord, helps those who help themselves. The market unlike the lord however, does not forgive those who know not what they do.” Buying a property with a tenant (always check the Lease) A client purchased a house to live in with his family with settlement in 30 days time. The Contract provided stated that the sale was subject to a lease which had 3 months left to run. Unfortunately the selling agent was not the same company as the letting agent and there was not a genuine free flow of information between the two agencies. The selling agent (and the buyer) accepted the seller’s advice that the lease only had 3 months left to run and did not ask the letting agent for a copy of the lease document. One month after settlement (and 1 month before the supposed end of the lease) my client presented himself at the house that he bought to make arrangements for the tenant to vacate. He was confronted with a hostile tenant who advised him that not only did he have another month to run, but he had just exercised his option to
extend the lease for a further 12 months. It was then that this client consulted my firm and we obtained a copy of the lease. It confirmed the tenant’s advice that it contained an option. The option was clearly drafted and provided that the tenant had the right (but not the obligation) to extend the term of the lease for a further 12 months at the same rental. A well informed and educated investor will always call for a copy of the lease to check the representations made by the seller and the seller’s agent and in particular to check whether the lease contains any options. Options are nearly always for the benefit of the tenant. That is, it is the
Time IS of the essence – a “sudden death” concept A long established client of mine signed a Contract to purchase a vacant block of land subject to finance approval. The Contract went on to provide that the deposit was payable “on approval of finance”. The Contract was a standard Contract utilised in Queensland which provides, in all cases, that time is of the essence. Finance was ultimately approved and advice in writing given to the seller’s solicitor late one afternoon. The deposit was then paid by the buyer the next day. The seller seized on the failure of the buyer to pay the deposit on the same
The seller seized on the failure of the buyer to pay the deposit on the same day that finance was approved and terminated the Contract of Sale. tenant’s call about whether they exercise the option to extend the lease, and no input or approval from the landlord is required. If a copy of the lease is not available at the time you sign the Contract, make sure you include a clause that makes it compulsory for the seller to provide you with a copy of the lease and ensure the Contract is subject to you approving the terms of this lease. Alternatively, make the Contract subject to checking that the lease matches the representations made by the seller and the seller’s agent.
day that finance was approved and terminated the Contract of Sale. I advised the buyer that failure to pay the deposit “on approval of finance” - that is, on the same day that finance was approved, was fatal, and in future she should allow herself some leeway in the time she has to pay the deposit. For example, agree that it is payable “within 3 working days of finance approval”. Robert Balanda is a partner of MBA Lawyers QLD and author of the ‘Made Simple’ series of products. Destination Client only Magazine 11
Ruling Applications on Using the Rent to Pay Off Your Home Loan Sooner BY Julia Hartman. The ATO has denied a taxpayer a deduction for capitalized interest on a Line of Credit (LOC) where the deposit, rates, insurance and interest only repayments were drawn from. In this case the rent was used to pay off taxpayer’s private home. The ATO’s opinion is covered in Private Binding Ruling authorization number is 1011345133229. The denial of the deduction was based on the fact the LOC was secured by the home loan and when it was necessary to increase the limit on the LOC the bank would be approached to reduce the limit on the private home loan and increase the limit on the LOC. Even though there was no floating cap or formal agreement with the bank that as one loan decreased the other could increase. Nevertheless, the ATO found that the loans were linked by common security. Thus comparing it to the linked loan in Hart’s case where it was found that it was a scheme caught by Part IVA as having the dominant purpose of a tax benefit. One thing that is clear from this is that the issue is far from certain and an application for a private ruling on your particular circumstances is absolutely necessary if you are using rent to pay off your home. Mind you this ruling actually says much more than that. It is drawing a far wider conclusion that if you have a LOC secured against your home, and intend to increase its limit when you have more equity because the home loan is reduced by more than the minimum repayments, then you could lose deductibility on the interest on the capitalised interest on the LOC. This is certainly a bizarre outcome, and is far from the end of capitalising interest and using the rent for other purposes. It is all about what the ATO considers your dominant reason to be, which is why you need to get a ruling on your particular circumstances. It is also evidence that no matter how much another private ruling appears to fit your circumstances, you should not rely on it but instead apply for your own, knowing there are no guarantees. For example PBR 94265 looks to be much the same circumstances as this ruling yet a tax deduction was allowed for the capitalised interest.
Julia Hartman is the founder of Ban Tacs Accountants. Julia also writes for Australian Property Investor magazine and is co-author of Saving Tax on Your Investment Property. www.bantacs.com.au 12
It is also an example of no matter how much another private ruling appears to fit your circumstances you should not rely on it but instead apply for your own, knowing there are no guarantees.
Tax Property Depreciation
Long or Short Term Investment – How Does Property Depreciation Change Things? When investing in property for a short or long term, it is important to understand the effects of property depreciation and how it can change an investment. The Australian Taxation Office (ATO) allows investors to use two alternative methods of depreciation. 1. Diminishing Value Method - accelerates depreciation deductions quickly 2. Prime Cost Method - spreads the deductions out over time. The long term intentions of the property investor will determine which depreciation method will be most suitable for them. An investor must decide to use only one method; each method effects the long term cash flow position in a different way. Under the Diminishing Value method the deduction is calculated as a percentage of the balance you have left to deduct. The deductions will be higher in the first five years and diminish over time. This is because you are claiming a greater proportion of the asset’s cost in the earlier years of the effective life. Under the Prime Cost method the deduction for each year is calculated as a percentage of the cost per year - this results in a more even spread of deductions over a longer time. It depends on your investment strategy as to which method is best for you. You will need to consider how long you intend to hold the property and if you are going to need higher deductions now or in ten years time. Your accountant is the best person to discuss this with. If an investor purchases a property for the purposes of a short term investment and plans to sell it in approximately five years time, the Diminishing Value method would be a more attractive option to take, as it provides higher returns over the earlier years. If the owner was intending to retain ownership for a longer period of time then the Prime Cost option may be more suitable, as it provides a constant long term projection of what the investor’s tax deductions will be. Our experience shows that most investors employ the Diminishing Value method on both long and short term investments as depreciation deductions under this method are cumulatively higher over the first five years of ownership, when they need the deductions most. Take the table (above right) as an example of how the Diminishing Value method compares to the Prime Cost method in deductions obtained per year for ten years. Remember to discuss these options with your accountant. Every property investor’s situation is different and your accountant will know which method is best for you.
Year One Year Two Year Three Year Four Year Five Year Six Year Seven Year Eight Year Nine Year Ten
Diminishing Value Method
Prime Cost Method
$8,658 $8,930 $6,948 $6,197 $5,103 $4,408 $4,118 $3,744 $3,513 $3,368
$6,606 $6,126 $6,126 $6,126 $6,124 $4,813 $4,720 $4,718 $4,718 $4,708
Figures based on a purchase price of $400,000; older property
n. Mgt) eer (B. Co B y le d ra B r of n is a Directo epreciatio D BMT Tax r 728 726 o tact 1300 n o n c a r se a fo le P m.au .bmtqs.co visit www . ic rv ide se e stralia wClient Au Destination only Magazine 13
Spotlight on Lithgow, NSW Located on the western edge of the Blue Mountains, Lithgow is 140 kilometres from Sydney. The Lithgow Local Government area totals 4551 square kilometres from the Capertee and Wolgan Valleys in the north, Little Hartley in the east, Tarana in the south and Meadow Flat in the west. Until recently Lithgow was perceived to be an inland mining and industrial centre, however recent developments have seen Lithgow recognised as an important tourism destination, heritage centre and a desirable residential area.
Two thirds of the city area is given over to World Heritage Listed National Park, making Lithgow an important leisure destination for Sydney residents. Lithgow has unlimited opportunities for outdoor activities such as bushwalking, mountaineering, camping, orienteering, hang gliding, horse riding, off road 4WD, fishing, sailing and water skiing. In addition to the major urban centre of Lithgow the city of Lithgow has 12 villages with mining or farming backgrounds. These smaller centres have proven to be attractive rural residential areas. According to the 2006 Census, there were 19,756 people resident within the region. Lithgow City has consolidated its position as a regional centre attracting a range of retail, commercial, industrial, educational and professional services serving Lithgow and its environs and a potential catchment of over 230,000 incorporating the Blue Mountains and Central Western Sydney residents.
Lithgow offers a truly unique lifestyle and is at the start of an exciting transitional period looking to harmonise its urban, industrial and rural qualities 14
Main statistics for Lithgow: Population approximately 20,000 Unemployment is around 8.5% 24.3% of the population are renters Median household income is $738 per week Median price of units $158,000 Median price of house $200,000 Rental yield approx 5.8% Vacancy sits at 0.7% Lithgow offers a truly unique lifestyle and is at the start of an exciting transitional period looking to harmonise its urban, industrial and rural qualities which are unmatched in the Central West. Lithgow is truly a city looking to the future and embracing the challenges and opportunities it faces in order to pursue its vision of sustainable economic development and community harmony.
Letter from the editor
The Power of a Shined Goal
by Kendra Strudwick of Results Coaching Systems.
Here is a riddle for you: five frogs are on a lily pad and one sets a goal to jump off, how many frogs are now left on the lily pad? There are still five, because setting a goal and achieving a goal are two entirely different skills. Let me share the secret of successful goal setting with you, which I believe lies more in the design than the execution. In my experience, successful investors set visionary goals i.e. goals that begin with the end in mind and that clearly communicate a vivid picture of what success looks like. I refer to these kind of goals as ‘shined goals’, because they are so bright that they literally light the way forward. Shined goals are centered on an individual’s values, not necessarily their objectives. For example, what is it that your property portfolio is actually achieving for you in life? In most cases it will be something along the lines of financial freedom or fun time with your family. Therefore a goal of: 5 properties added to my portfolio within the next 4 years when shined, could become: Number 5, I’m alive! or Free to play during the day! What are the keys to setting a shined goal? Below are the essential criteria that will transform any goal from standard to premium. If you ensure that your goals meet these criteria then just like the premium fuel you put in your car, the journey will be quicker, smoother and much more energy efficient. 1. Specific – Your goal statement needs to be succinct, specific and have a single focus. Seven words or less. 2. Measurable – Make sure you are able to track and measure progress in a tangible way. 3. Timeframe – Your deadline - when do you want to achieve this goal by (this doesn’t necessarily need to be stated in the goal, simply defined) 4. Visionary – Capture the essence of what you will see/feel once you have achieved your goal? The more vivid the picture the more powerful the goal. 5. Yours – that it absolutely inspires you. Some people set goals in order to please others and don’t necessarily have 100% buy-in themselves.
In the next issue of Destination... staff spotlight Meet Destiny’s Marketing Manager. feature story by Margaret Lomas. roperty watch Client p purchases over the last two months. Client success story Clients share their stories, strategies and lessons. WBP Valuers Article Run Property Article MBA Lawyers Article Ban Tacs Accountants Article BMT Tax Depreciation Article Results Coaching Article Update on the Homebuyers and Homesellers Protection fund research spotlight
Destination Client only Magazine 15
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