O'meara Property

It’s being reported that the Australian Tax Office will target over 100,000 landlords this year for audits so it is more important than ever to ensure that your records are complete and that the income you declare is correct and that your deductions are all relevant.

Whilst taxation falls into an area where you should get the advice of a qualified accountant or tax agent, here are a few things to get you started;

Rental income

You must of course declare all rental income received or credited to you; this includes rent on holiday homes. Whilst there is nothing preventing you from leasing your property to family or friends, you must charge a commerical rate of rent (ie. market rent) or your deductions could potentially be reduced or refused.

What’s tax deductable

You can claim as a tax deduction expenses you incur in deriving your rental income. There must be a  relevant connection between the rent you receive and your rental deductions. The following types of expenses you’re likely to incur normally have that relevant connection.

• Advertising costs to find a suitable tenant
• Agent’s commission to collect the rent on your behalf
• Capital works deductions (or building write-off deductions)
• Depreciation of approved items that you can write off
• Insurance on buildings that you lease
• Interest on borrowings to purchase an investment property
• Rates and land taxes
• Repairs to your investment property
• Security costs
• Travel costs to inspect your investment property
• Water and sewerage charges

Common traps to avoid

Australia’s tax system operates on a self-assessment basis, and the Australian Taxation Office will generally accept that what you disclose in your tax return is true and correct. However, the Tax Office conducts routine tax audits and has excellent data-matching programs to highlight people where a ‘closer look’ may be warranted. So it’s important that you comply with Australia’s complex tax laws. Stiff financial and criminal penalties may apply if you get it wrong or deliberately cheat the system.

Rental income

• Not declaring all the rental income you receive, and more particularly not declaring rental income on holiday homes you lease during the financial year

Tax deductions

• Overstating your rental expenses and claiming tax deductions for investment properties that are not genuinely available for rent
• Claiming a tax deduction for expenses relating to the private use of a property such as a holiday home and your main residence
• Incorrectly depreciating items that are not tax deductible
• Incorrectly claiming borrowing costs. These expenses are deductible over the period of the loan or five years
• Incorrectly claiming interest deductions in respect to loans that are partly investment-related and partly private. For example, you might lease the granny flat out and live in the rest of the home.
• Incorrectly claiming capital work deductions that exceed the construction expenditure
• Claiming initial repairs as repairs and maintenance costs rather than including these costs as part of the property’s cost base. Initial repairs are repairs you make to a newly acquired investment property (for example, if you paint a property you recently purchased before leasing it)

Capital gains tax

• Not declaring capital gains you make on sale of investment properties, holiday homes and vacant land you own
• Incorrectly calculating the amount of capital gain or capital loss you make on sale
• Incorrectly claiming a main residence exemption that’s not your fair dinkum place of residence

The advantage of a ‘Property Manager’

By appointing a property manager and having them handle all income and expenses you end the financial year with a detailed report which allows your accountant or tax agent to easily assess your overall position and not risk missing anything. They can quite literally sit there with the financial year statement in one hand and your mortgage statement in the other and complete a thorough examination of your property tax situation in no time at all.

Disclaimer

Readers must bear in mind that the information printed above is general in nature. This information is in no way designed or intended to replace the advice of a qualified accountant or tax agent.

Reports this morning from ‘Australian Property Monitors’ predict a more than ten percent rise in rents in Sydney throughout 2010. In short, it appears that the Tomaree peninsula will see similar increases as stock levels fall and costs for investor to hold properties increase.

The interest rate rises of late 2009 and the predicted rises through 2010 means that investors will be very keen to maximise the rent they achieve throughout 2010. Falling stock levels of properties to rent, particularly family homes has increased competition considerably and will ultimately lead to increases in rent prices. We’ve included below a few tips for investors to maximise their returns this year.

• Ensure your property is attractive to great tenants – if the property needs repainting or recarpeting, do it;
• Adopt the attitude that saving money by not maintaining the property costs you much more in the long term;
• Speak with your accountant or tax adviser about whether there are tax advantages to renovating your property; the answer to this question will depend on your overall financial position and requires specialist advice;
• Have all expenses ie. council, insurance, repairs paid from your funds by your managing agent so that everything shows on your statements and nothing is forgotten at tax time;
• Ensure your property is professionally managed; do they conduct regular routine inspections and provide a written report with pictures? do they assess the rent regularly?;
• Take your agent’s advice on the rent to ask for a vacant property. If you don’t trust their advice they shouldn’t be managing the property for you and getting a tenant today at 5% under what you’d ‘like’ normally beats getting a tenant in a months time.

For professional property management advice please feel free to contact me on 02 4980 4400 or email jane@omeara.com.au

Many home owners who extend or renovate their homes make money when they sell, while others wonder why they have trouble getting their money back. What are the main things to consider before embarking on a renovation or extension?

Firstly, ask yourself whether improvements will make your house significantly better than the others in your street. The best-house-in-the-street phenomenon is often an unhappy one as the values of the other houses in the street affect the upgraded one – after all, this is not a street where purchasers will be looking to spend the higher prices the vendor is after. Those who renovate above and beyond the level of surrounding homes are less likely to get good capital appreciation when they sell.

Furthermore, do the changes you are making really improve the home? Many home owners simply increase the cost of their home without necessarily adding to its value, because some alterations don’t improve the standard of the property enough to compensate for their cost. Others leave a mishmash of disparate styles, or serve only to emphasise the datedness of the original house, or are too personal in their application to have wide appeal and so end up worth less than they cost.

It is not even uncommon for home owners to sacrifice one feature to gain another, thereby adding cost but not value. Frequently reported examples of this sort of expenditure include turning a bedroom into a dining room or a garage into a rumpus room.

Ideally, extensions should be seamlessly integrated with the original home. Many three-bedroom homes don’t “work” once a fourth bedroom and family room are added – the original rooms may be too small to balance the extensions. Furthermore, bad design resulting in poor natural light or an inconvenient floor plan will be reflected in the sale price of the property. Many of these problems could be avoided if architects were consulted before the work was undertaken. “Saving” on the cost of an architect is nearly always false economy.

Sometimes renovators over-capitalise by deviating from their budget during the course of their renovations. Many homes and locations don’t justify the top-of-the-range appliances and fittings some renovators choose. And if renovators run out of money before completing the work or have to skimp on the finishing touches, the overall effect can be disappointing and limit the ultimate selling price.

Home owners concerned about investment potential should also think twice before making changes for their own unique needs. Above all, major work should not be carried out if homeowners plan to sell in the near future. Sometimes a homeowner will ask a question such as: “I am planning to sell in a year but the house could do with a new bathroom. Should I undertake the work?” It could be argued that the home owner will get the benefit of using the new bathroom for the year until the property is sold, but unless they are in a location or marketplace or price range where the cost of the bathroom will be easily absorbed in the overall capital increase during the next year, it would be pointless to renovate the bathroom only to sell it. Prospective buyers may want an entirely different bathroom, or a bathroom that is very new might make the kitchen or other areas of the house look as if they need work.

The state of the market can also be an important factor in the overall cost-effectiveness of renovating a property. In a buyers’ market, such as we are currently experiencing in most parts of Australia and New Zealand, it often makes sense to take advantage of someone else’s hard work and expenditure rather than embark on costly and time-consuming renovations of your own, unless you are so attached to the property that you can’t bear to leave it, or unless you live in an area or type of home where there is always strong demand and low supply. Trading up in a buyers’ market should actually produce a financial advantage as you inevitably ‘save’ money when you purchase a more expensive house on a slow market. (For example, do your sums and work out why a 10% ‘loss’ on a $500,000 home that you are selling is less than a 10% gain you make on the $750,000 house you are buying which is also ‘losing’ its owner 10%). Trading up makes even more sense in areas where First Home Buyers’ Grants are raising the price of the kind of house you might be selling but not affecting the cost of the home you are planning to purchase.

At the same time, quality of life is also important and the good news is that if people stay in a property long term the cost of idiosyncratic changes will usually be absorbed in most locations experiencing growth. The question of whether they would have made more money by making different choices often simply doesn’t come up.

Homeowners wanting to maximise the investment potential of their homes should consider consulting an estate agent with whom they have a good relationship before making improvements. In many instances, agents aren’t called until the work is nearly completed and it’s too late to choose a different path. Builders can tell you what your renovations will cost but only an experienced, well-referenced estate agent can tell you whether the value is worth the cost sufficiently to justify the expenditure.

Long term successful investors employ pro-active property managers rather than just any property manager so that long term and short-term goals are merged into an overall strategy. What does this mean?

It’s understandable that an investor’s most immediate need is maximise income and minimise expenses. Most investors are borrowing money and they and their managers become obsessed with immediate return because it’s often crucial to the ongoing survival of the investment. The worst case scenario, stated simply is: no rent = no income = no loan re-payments = no investment.

For experienced investors, however, income is one part of an overall strategy. Most have three main aims: optimum income, optimum expenses and a focus on capital appreciation. They choose an agent who will optimise their income-to-expenses ratio over the long term and who has expertise to look after the big picture.

For example, when the floor coverings in an investment property need replacing, buying the cheapest carpet will certainly minimise expenses at the time of expenditure; however, if the carpet doesn’t wear well the saving may turn out to be less cost-effective in the long term than a carpet that was a bit more expensive but lasted twice as long.

Capital growth is usually the most important of the investor’s three aims and it is often overlooked by property managers with a narrow focus on management rather than investment. If investors hold their property for any length of time (which most successful investors do) capital growth becomes the most wealth-producing part of the overall investment strategy. Only a good property manager will keep the big picture in view and advise the investor about events impacting on the growth of their investment. When selecting an agent to manage their property, investors should assess whether the agent is qualified to give this kind or advice and make sure the management programme includes regular inspections and written reports (with photos & advice).

So why does the relatively humble Australian residential property investor continue to end up at the top of the investment heap?

Investment income
With prices at the bottom end of the cycle, rental returns are at probably the maximum you’ll see for many years.

Cost of borrowings
With 5 year investor mortgage loans available at around 7% and with rate rises being telegraphed pretty clearly by the Reserve Bank, there is a clear cut path to locking in costs for the next market cycle.

Demand
Continuing population growth, increases in immigration, first home buyer subsidies, historically low mortgage rates, state government stamp duty packages and continuing stock shortages say it all really.

The simplest law of economics states that when demand exceeds supply prices will increase.

Add value and keep control
When I buy shares in BHP Billiton (fine company that it is) I have zero ability to change the way they do business. When I buy a unit or house I know exactly what I have to do to increase both its rental value and ultimately its resale value.

Location
There are libraries full of data about each and every post code in Australia. You have access to council, state and federal government data that may impact the value of your investment. You also know how much each post code averages in both rental yield and capital growth.

Although we seem to be heading towards economic recovery faster than everyone expected, some market commentators are still predicting rough weather in the next few years as many corporate and sovereign debt issues have yet to be resolved.

Either way just keep quietly investing  in quality residential property. You’ll be richer for the experience.

We’ve all heard how over the past year the first home owners grant has greatly increased activity in the lower end of the real estate market which has in turn led to increases through the middle range of the market as many people ‘trade up’. Premium property has so far seen little increase in activity and may present the ideal long term investment for those keen to take a chance.

Prices on top end properties are very competitive at the moment through the Port Stephens/Nelson Bay area and there is plenty of stock available which has led to pretty substantial price reductions over the past six months. Waterfront properties are slowly starting to move again showing, in my opinion the first signs of the top end recovery but properties in the $700,000 to $2,000,000 range have remained very slow, particularly units and a search on www.realestate.com.au shows over 150 properties available in that price range. In many cases these properties have seen reductions in their asking prices of 10% to 20% over the past year and will regain that ground plus much more once the market moves again.

For those that have the financial ability to buy now and hold these sort of properties over the next few years I’m convinced that there are going to be some pretty impressive capital gains to be had.

With the interest rates low and the property market showing signs of picking up it may be a good time to consider purchasing either another or your first investment property.  One important item to keep in mind when purchasing an investment property is to get a rental appraisal from a well experienced Property Manager (not a salesperson)!

If you are looking at an investment property the sales consultant would normally provide you with a set of rental figures, whether it is for permanent, holiday or commercial property.  This may be either verbally or in writing.  If there is a current tenant in the property it may be a copy of the existing tenancy agreement.  Sometimes the current market rent can be totally different.

If a salesperson has given you the figures they could be slightly inflated or the rent may have not been fixed to market rent at the commencement of the tenancy agreement.  It could also be due to the person providing the appraisal being inexperienced either in the field or the area.  Whatever the case, because these things happen it is a great idea to obtain an independent rental appraisal prior to exchange.  It is a normal occurrence to arrange a pest and building inspection, why not get an independent rental appraisal at the same time (from an experience property manager).

Verbal estimates of salespeople can be misleading.  This may be because salespeople vary considerably in their property management expertise and they also won’t have a general awareness of rental values at certain times. 

If there is a current lease on a permanent/commercial rental or forward bookings for a holiday property you should definitely look at the current rent that is being charged.  However, this may only give you a historical figure.  As such, it may not truly reflect the current market value.

The next item to consider when looking at prospective investment properties is how easy will the property be to lease?  What is the likelihood of actually getting quality tenants in the properties current condition and at that particular time to the year?  How easily a property will lease is affected by numerous factors. Some of these include the condition, age and location of the property, amount of similar rental properties in the area and the style of tenants in the area. 

The last item and one that is often not considered is to take into account tenant turnover.  A home suited to a family will often have fewer turnovers than an apartment in a large block.  This is due to the fact that if a family settles in a home they are more likely to stay for a number of years, rather than uproot the family and move on at the end of the fixed term.  Compare a home to an apartment and the style of tenant changes to a single person or a couple.  These type of tenancies are normally shorter and the tenants would more often move as either their situation may change or they find something newer or in a better position that they extend their budget to afford.

If you are looking at purchasing an investment property in the area please give me a call.  I have been a Property Manager in the area for over 12 years and can certainly give you an honest, obligation free appraisal in writing.  This appraisal will be based on my experience, recent rental figures and also the time of year.