Your Money Your Call 18/07/2016 | Sky News Business
Momentum Wealth’s Damian Collins and BMT Tax Depreciation’s Bradley Beer join host Lisa Montgomery to answer viewer questions about all things property. Tonight’s episode covers topics such as interest rate predictions, listing a property in winter, and buying off the plan.
Check out the video above and transcription below.
Voiceover: Now, Property Monday continues as Margaret Lomas and her team answer all on “Your Money, Your Call”.
Lisa Montgomery, Presenter: Welcome to the Monday night edition of “Your Money, Your Call”, and you know if it’s Monday, then we’re talking all things property. I’m Lisa Montgomery, filling in for Margaret Lomas who will be back in the chair next week. And tonight, we have another jam-packed one-and-a-half hours of property news and discussion for you. And, of course, as usual, we’ll be taking your calls and answering your emails to help you make better decisions regarding your personal property investing journey. Now to kick off tonight’s program, I’m joined by our regular guests, Damian Collins from Momentum Wealth and Bradley Beer from BMT Tax Depreciation, and tonight we will be discussing a number of hot topics including interest rate predictions, listing in winter, and buying off-the-plan. As always, we invite you at home to be part of the discussion. Indeed, a very important part. You may want to comment about one of the issues of the day, or have a question for one of us on the panel. And if that’s the case, then pick up the phone and call us right now on 1300 303 435, or you can email me right now on firstname.lastname@example.org.
Welcome to the program, and welcome to the program, gentlemen.
Brad Beer, BMT Tax Depreciation: Thanks, Lisa.
Lisa Montgomery: Yes, it’s good to see you Brad, you were hosting last week so you’re kind of, like, in the other seat.
Brad Beer: Yeah, the next chair.
Lisa Montgomery: I know, what is this, like, we’ll just keep moving around the circle of this table.
Brad Beer: Next week over there.
Lisa Montgomery: That sounds like a good plan. So Margaret’s away but she will be back next week. But I think we’ve been holding the fort quite well. And I wanted to start the show off tonight with talking about the new tax year, because I know that many investors, when they approach the end of the tax year, are really scrambling to get things done that they need to get done. But are there some sort of simple tips to set you up to put you on the right foot? Damian, what do you think everyone should be doing as they enter this next tax year?
Damian Collins, Managing Director, Momentum Wealth: Well, Lisa, it’s really about thinking ahead to where you’re going to be in 12 months’ time, and in terms of are you going to be buying another property, thinking and planning ahead for that. From a tax point of view, look, there’s not a huge amount you really need to be looking at. A lot of those decisions, you might think I might prepay some expenses, but that might make more sense towards the end of the tax year when your financial circumstances are more clear. So not a lot to do. I’m sure Brad will talk about depreciation reports and the business of that. But other than that, I wouldn’t be doing too much this time of year.
Lisa Montgomery: Well, I’m sure he will. And in addition to depreciation reports, is it a time, Brad, for people to be reviewing their insurances on their property, reviewing other aspects of their relationship, perhaps with the agent that’s looking after the property?
Brad Beer: Look, I think, if I look at the sentiment of the people that do buy schedules, there is more of them that do it prior to the financial year. It slows a little bit in July and then, really, it picks up to those that are actually doing that tax return, starting to go off to their accountants and their accountants’ saying you need those schedules. But I think planning your tax year, or whether you’re buying property, whether you’ve got property, there’s a lot of things about your tax that you need to know and you need to start planning and thinking about now for this tax year. What is my tax year going to look like? You probably know roughly what your income is going to be. And really, from not just a taxpayer perspective but an overall wealth perspective, your experts in making sure everything’s put in place from now, rather than scrambling at the end of the financial year and coming to the end of that. Reviewing your agreements with your property managers and things like that, I tend to on a yearly basis. I have a lot of different property managers in different places, and always get the…once a year, is my rent up to date where it should be? Everything about your property is reviewed, not just your tax. Are the smoke alarms being looked after properly. Having your own actual look at all those things across the boards, I think, is a good thing to do throughout the year. But if tax time is the trigger, let it be the trigger.
Lisa Montgomery: Yeah, it’s a good anniversary, isn’t it, that we can look at, that is a point in time, a milestone that we can look at as the time to do that.
Brad Beer: I think things like insurance are done whenever it actually comes due, and making sure it’s right, is important. Construction cost being right is important and making sure that you’re correctly insured is important. But again, not necessarily a tax time thing, it’s something you should be thinking about all the time or when it’s required.
Lisa Montgomery: Absolutely.
Brad Beer: Depreciation is obviously important. We do have a number of those that do happen this time of the year. I guess, people are better these days, I think, from my perspective in my seven years of BMT. More of them, and we’ve probably helped that, to say you should think about these things before the end of the financial year, but I think the fact that there’s still this rush that happens afterwards, now it’s much better than it was. But the fact that people are uneducated a little about depreciation, about certain things, about their investment property in general, is something that could be better done across the board. If you’re rushing to do it after tax time, it’s probably something that if it relates to this tax return, you should have maybe been thinking about from now for next year.
Lisa Montgomery: Yeah, it’s funny, we’re a bit of a “set and forget” society when it comes to our finances, and I blame technology for that because you can set things up to come out of your account automatically, out of your transaction account your wage. Everything’s done electronically now so we don’t have that ability to touch it and see it, or as it’s coming through it’s just automatically happens, doesn’t it, Damian?
Damian: Absolutely, Lisa, and one of the things I notice with investors, too, is we talked about regular reviews…your loan, your loan reviews are really, really important.
Lisa Montgomery: Absolutely.
Damian Collins: So many times we see people come into the office and they’ve had a mortgage somewhere else for a period of time, and they get to…it’s rolled over from a fixed rate and the banks generally roll them onto this full variable rate, not the discounted variable rate. I’m amazed at how many people are paying anywhere upwards of 1% over what they could be getting.
Lisa Montgomery: Yeah, actually, I want to come back and talk to that. But we’ve got a caller on the line, and our first caller tonight’s Joe. Joe, you’re from Sydney, and you want to talk about a property. You’re putting a deposit down on a property in Fortitude Valley, is that right?
Joe, Caller: Yeah, I’ve put a deposit down already. It’s a two-bedroom, two-bath, two-car-spot unit in Fortitude Valley. I just wanted to get the panel’s thoughts on, is it a good investment? It won’t be ready till mid-next year.
Lisa Montgomery: Mid-next year?
Joe, Caller: Yeah, it’s off-the-plan. Am I doing a good thing?
Lisa Montgomery: Well, I’ll just ask you a couple of questions.
Lisa Montgomery: How many units are in the complex?
Lisa Montgomery: Twenty-four units. Okay, all right. So two bedroom, two bathroom, two car spaces. Let’s go to the panel and find out what they think about it, Joe. Damian, you first, Fortitude Valley.
Damian Collins: Yes. I know that area, Joe, well. Look, we certainly think Brisbane is going to do fairly well over the next three years as a whole, that’s our market that we think will do, most likely, the best in Australia out of all the major capital cities. But, unfortunately, apartments, particularly in that new city area, are going to be going into quite a significant amount of oversupply. So I don’t think they’re going to perform particularly well at all. And, I guess, that’s the risk you take when you buy off-the-plan. It was 24 units, you said, mid-next year, so you might have purchased it, I’m guessing, a year ago perhaps, I don’t know. But look, I wouldn’t be expecting a lot of capital growth up-side on that one, Joe. I just think there’s that market, and the rental is going to be pretty tough, too, just for the amount of supply. So you might be in for a bit of a tough road, but at least you’re in a boutique complex. I think you’re better off in that rather than being in one of the much larger, around the city, 100-plus complexes, so that would be a benefit for you relative to others. But there is a bit of apartment oversupply.
Lisa Montgomery: I think that’s right, the 24 units in this complex is probably the best thing about it. But, I guess, what we’ve got to also be looking at, not just the value of the property once it settles and he’s bought it, the yield, you know, you alluded to it there. I mean, the yield, are we going to end up with a lot of low yielding properties when this glot a lot of apartments come onto the market?
Brad Beer: Look…and Lisa, I think…Joe, one thing you’ve already done it…so it’s a late question, I suppose. But, I think, from a yield perspective, one of the risks you’ve got here is you’re settling…now you’re in a boutique complex which, I agree, is probably a good thing about that. It depends what you actually paid for it, and did you pay something that means you might have some damage about that. But from yield, when it gets to that point when it’s about to be rented, there’s probably…there could be investors throughout that block, or there could be quite a few. And there’s probably quite a lot of other stock coming on the market at the time. An important thing, I think, with all rental properties that I look at when something becomes vacant is you need to fill it quickly, and you’re in a market where there’s possibly a lot of stock coming on the market for rent at that time. Every week it’s vacant, if you’re trying for that extra $20 or $30 a week, is the week of the full rent or whatever that actually is that you lose. So, if 20 are coming on at the market the same time to rent, you’ve got to be the best of the 20 and, for your numbers from a yield perspective, full is better than vacant, looking for $30 a week extra or whatever that actual number is.
So not getting…If you do have a lot there, thinking to yourself, well, filling it up, actually, is better for me. And I talk to a lot of people that have got properties, or a lot of the real estate industry and property managers that have the frustration, ‘my property managers are scared to ring me about a rent reduction because they think I’m going to be unhappy with that’. But the mentality of the investors should be “full is better”, and should be, “I’ve got to actually play the market today, not what someone told me when I bought it a year ago. I should actually get in rental,” because that becomes an irrelevant number. At the end, you’ve got to get to settlement, obviously. You’ve got…sometimes off-the-plan’s got some things with it where you need to make sure it’s delivered and, if you’re not from the area, make sure you get it properly looked at by someone from a defect perspective. Some things to consider, but it could be a good little learning curve for you.
Lisa Montgomery: Well, it might be, too, and just before we finish up on Joe’s question, just thinking, also, Damian, about when this actually does settle, there will be a bank valuation that will need to be done. And I don’t know how much deposit Joe has put down, but he needs to be working with his mortgage broker, doesn’t he…
Damian Collins: Definitely.
Lisa Montgomery: To make sure that he’s okay.
Damian Collins: Definitely. Look, Joe, I’d be talking to my broker at least four to five months out from when this is going to settle, and this is where a lot of people get stuck. They put down their 10% deposits for off-the-plan properties, and they don’t think about it. They’re just think, well, that’s what I paid for it, surely that’s what it’s worth, and when you move into markets of over-supply, valuers always get very nervous because they are on the hook to the banks for any incorrect valuations. And you do find that it could come in under. So you’d want to make sure you had some spare cash, potentially, just in case it comes in undervalue from what you pay for, because you might have to come up with more deposit.
Lisa Montgomery: Absolutely. So that’s just one, really, just to keep taking the temperature on, Joe. That’s one piece of advice, I think, that we can give to you. And it’s hard when it’s retrospective and you’ve already made that deposit.
Well, thanks for tuning in and, even though she’s not here tonight, we will still be giving away two of Margaret’s books to the questions of the week. The panel and I will choose one question from the emails and one from the calls, and those people will receive Margaret’s book, “How to Achieve Property Success”. And if you’re ready to invest, this is book will make sure you tick all the boxes in relation to the process. Now, in addition to this, I have a very special giveaway book package tonight. I’ve got “Bite Size Advice” and “Bite Size Advice 2”, and these…by the author and veteran financial services executive Paul Thomas. Now, these books are a collection of his weekly blogs, and that is that they…in short, they explain how the world works in relation to politics, business, society, and technology. Now, they’re a great read, I love them because you can kind of pick them up and put them down. You don’t have to read the whole thing. All the information is presented in bite-sized chunks, so you can use it as an anytime reference tool.
Now, these books will be given away to our next caller. So please, if you want to call us now on 1300 303 435, or email email@example.com with a question, then make sure you watch at the end of the show to see if you’re one of the lucky winners of Margaret’s books. But the next caller will definitely be getting this book package.
Welcome back, and thanks for joining me for “Your Money, Your Call” property. I’m Lisa Montgomery, filling in for Margaret. And, joining me tonight is Damian Collins from Momentum Wealth, and Brad Beer from BMT Tax Depreciation. So don’t waste any time, not a second. Call us now on 1300 303 435 or, of course, you can email us on firstname.lastname@example.org. Now we have our second caller and that’s Nick, and before Nick starts, Nick gets the book package. So he’s very excited about that, I expect. Nick, how can we help you tonight?
Nick, Caller: Thank you very much for that. I’m looking forward to reading those books.
Lisa Montgomery: Excellent.
Nick: Look, I’m just looking for some guidance. I have an investment property which is unencumbered, and I have a second one which I still have a loan on. And an opportunity is…looks like it might be coming up for a third. So what I’m looking for is to extract the equity out of the second property which I have a loan on, which could fix up my deposit, and then, obviously, the balance will be on the third one with the bank. So if I do it that way, like, the $50,000, will that be a separate loan to the one that’s on there already? Because, basically, what I’m thinking is I could sort of pay that $50,000 off, or would the bank put that on top of what I owed to make it a cumulative loan there in terms of collateralisation?
Lisa Montgomery: So, Nick, is the outstanding debt that’s on that investment property, that number two, that loan, is that for investment purposes?
Nick: Yes, it is.
Lisa Montgomery: So it was for that property. Then you’ve got your first property which is unencumbered, and then you’re looking to buy a third? Okay.
Nick: What I want to do is get the deposit…
Lisa Montgomery: Out.
Nick: From the second one, and I’m just looking how they would treat that. Is it, like, a separate loan or would they put it on…I owe $150,000 on the second one…
Lisa Montgomery: How much equity do you think…what’s that property worth, do you know, the second property?
Nick: It’s probably around early $300,000, maybe, $310,000.
Lisa Montgomery: Okay. I could answer that question but I’m going to go to Damian Collins, and he’s going to give you his answer first. Damian, what would you advise Nick to do?
Damian Collins: Nick, firstly, well done on having one unencumbered investment property, that’s great, and you only got, I think, $150,000 debt on your second one so about 50% loan-to-value ratio. So you’re on the right path there. Look, the way we structure our loans is, definitely, we do not cross-collateralise. So what you can do…and I was going to ask about your loan-to-value ratio, but you are well under that that 80% currently. And even if you took out another $50,000, that’s only going to take you up to about $200,000 on a $310,000 loan. So the reason I say it is because you don’t want to pay mortgage insurance unnecessarily when you already have an unencumbered property there. So if you took out another $50,000, basically, it can be pretty easy to have it treated separately. It can be separate splits on a loan, depending on how the lenders might do it, or you can have it as a separate loan on that particular property. So you can pay one up and down. You can pay one down over the other one. So that’s a good thing to be aware of.
The other thing I would mention, it’s been great that you’ve paid off, clearly, off one investment property, and you say you want to pay down the other one. Now, we haven’t discussed your personal circumstances. I’m always a big fan for financially disciplined people of putting money in an offset account. So if you’re a great saver, which it sounds like you are, I’d be looking at…and you’re pretty comfortable, that if you put it into a bank account you won’t spend it, I would be looking at offset accounts. And the reason for that is, once you pay off investment debt and you want to get that money back again – let’s say you want to buy your own private home, or you want to take a holiday – the difficulty is that, if you borrow again to use it for private purposes, you’ve created non-deductible debt. If you had it sitting in an offset account against the deductible debt, then, if you draw money from the cash bank account, even if it’s an offset account, you’re not impacting the deductibility of your loan. So I would certainly be recommending looking at offset accounts rather than paying down loans. And certainly, definitely, don’t cross-collateralise. Get the increase on your second property, and use it even if it’s the same lender – it may well be if they’ve got the best product – but don’t have the cross-security for both properties, have them stand alone.
Lisa Montgomery: So Brad, when we’re talking about cross-collateralisation here, sometimes it’s difficult to unwind that arrangement if you’ve got a poorly performing property and you’ve got three tied up in one loan arrangement, so it’s difficult to extract that from that underperforming property, from that arrangement. I always just look at just doing some sums here. Looks like Nick has got about $90,000 worth of equity, if that property is worth $300,000. We really want to keep him out of mortgage insurance. What would your advice be?
Brad Beer: Well, I guess, what I’d do personally as opposed to advice…
Lisa Montgomery: If he cross-collateralises…
Brad Beer: No, actually, I’m a firm believer…I agree with not cross-collateralising, because what it does – like anything – is really take away your flexibility. It takes away your ability to make your own decisions. The bank gets to make decisions with things that are crossed against each other. I actually, in my whole portfolio, did it once because, at the time, I didn’t have the equity to do anything else. So I didn’t actually have the option, which is not you. And then, actually, I had one property out of the two that I crossed that actually performed pretty badly and one that performed pretty well. But it took away my flexibility to probably…as I do like to do, I do refinance and I do re-borrow that equity where possible so that, when this opportunity comes up, rather than having to go and ask the bank for that money to see if they’ll loan it to me at that point, I borrowed it in the past from that property, borrowed that equity, sat back in offset account so that I’m not paying interest on it, and I’ve actually already freed up the cash when I didn’t necessarily need it. And then you’re really standalone looking for that other property. So I have made the mistake but…it wasn’t a mistake, I knew at the time, I didn’t actually have an option.
I do really like…and I think, for you, you’ve got a fair bit of equity in properties there. We didn’t look at the value of the other property, but finding out about that…and I think the equity is a little lazy for you in your properties, and the concept of looking at a longer term, I guess, plan for your future with someone that really understands the benefit to you and your personal situation of things like offset accounts, of what is it going to look like in one year, five years, and ten years for you. If you actually use that equity to advantage and keep that risk down to the point that you’re actually comfortable with, that all needs someone who’s qualified to give you some of that advice as opposed to…and that really understands your financial situation to give you some financial advice on that. So I’d probably go and get some of that, I’d say.
Lisa Montgomery: Because the mortgage really is a tool for wealth creation. It’s my thing, I always bang on about it. And you really need to have somebody who can show you how to use that tool as a tool for wealth creation, and to structure this next loan correctly for you. It may be that there’s a dual property security here with the one that’s unencumbered and the one that you’re purchasing to keep you out of the mortgage insurance threshold, which is 80%. And so, that might be something that you’ll end up doing, but you really do need to get that quality advice, Nick, so that you…some of it might be in the “Bite Size Advice” that I’m going to send to you. But definitely through a qualified mortgage broker that’s actually got some history in structuring property investments and portfolios, that’s really what you’re looking for.
So, so far, great night, but we have so much more lined up. It’s time for a quick break, but we’ll be back soon. If you do have a question for us, call us and join the queue on 1300 303 435, or email email@example.com. You never know, you could win the question of the week. We’ll be right back.
Well, if you just tuned in, there’s still plenty of time for you to call and join in the discussion. Tonight, Damian Collins from Momentum Wealth, and Brad Beer from BMT are here and ready to help you. So call us now on 1300 303 435, or you can email us on firstname.lastname@example.org. And our next caller is Pulsi. You’re from Sydney, and you’re after the growth prospects for Brisbane, is that right?
Pulsi, Caller: Yeah, that’s right.
Lisa Montgomery: Okay, tell us what you’re planning on doing.
Pulsi: I’m just a property buyer and just looking for what is the prospect of Brisbane. Everyone says that Sydney and Melbourne is untenable, what are the risk factor to continue at this time, and what’s the best advice if I have to buy at this time.
Lisa Montgomery: Okay. Have you done any research on what type of property that you might want to be buying like a unit, or you might be looking at apartment or perhaps a house? Are you looking at anything in particular?
Lisa Montgomery: A unit, so you’re looking at a unit.
Lisa Montgomery: Okay. All right. Look, I’ll go to the panel and let’s see what they come up with. Damian?
Damian Collins: Pulsi, yes, I think, certainly Brisbane is…overall is likely to outperform Sydney and Melbourne over the next three years, and so good on you for considering outside your home market. A lot of people always like to stick in their own home market when they’re buying an investment property. I guess, the other issue you’ll have is you haven’t mentioned a price there, Pulsi, but certainly you mentioned units and, as we’ve already discussed in the show, I would certainly be keeping well away from that inner-city high-rise, large apartment developments because they’re going to have a substantial number come on in the next couple of years. So be keeping well and truly away from that.
Look, some of the areas that we like, Nundah and Chirnside. Nundah is a good location, 8-9 kilometers from the city on the train line. And Chirnside is one of the strategic areas for the Brisbane City Council over the next 30 years, a lot of infrastructure and things happening in those locations. So obviously, another thing you need to be thinking about, how you’re going to buy remotely. Certainly, you might want to think about using a buyer’s agent up there, someone who can be on the ground looking for that great investment property for you, and help you with all the inspections and other things you need to arrange, negotiating the contract, etc. So certainly be thinking about that, but keep looking at Brisbane for certain, but keeping away from those inner-city high-rise apartments.
Lisa Montgomery: Yeah, that’s a good piece of advice. What do you think, Brad?
Brad Beer: Well, I probably concur on…If you look at all the reports that are coming out at the moment, there seems to be a fair bit of concern about inner-city apartments, and it’s not just Brisbane. It’s probably across a lot of the capital cities. I think the concept of buyer’s agents, as you say, or enough research itself to find the pockets of areas that actually have the things that probably have a bit more potential to grow, where you don’t have, maybe, a major amount of competition with inner-city high-rise apartments – there’s plenty of talk that maybe there’s too many of those coming out of the ground at the moment – means you’re probably prospect for growth out of those things is probably got a bit of a longer term ability. And we’re talking about, how do we make sure the yields – if there’s lots of them coming at once – actually stay there.
So outside of, probably, CBD, I think, the fact that you’ve decided on a unit at such an early stage, I think, probably, sometimes concerns me. Why are you limiting yourself to a unit? Is there a particular reason? I think whether it’s a unit or a house or a townhouse, probably has more of a dependency to me on the area you’re buying, and what the people in the area actually want to live in now, and what you believe is the case into the future. So, maybe broaden the horizon to the thought of the area, the reasons that are going to drive growth in that area, and then what the people in that area want to actually live in, are some of my thoughts.
Lisa Montgomery: And it’s transport, too. I mean, we’ve looked at some of these outer suburbs. I mean, Margaret talks a lot about the outer suburbs of Brisbane, particularly up toward Deception Bay, Redcliffe, those areas where the transport infrastructure is improving. It’s really looking at those sorts of things, and it probably would pay, Pulsi, to get a copy of Margaret’s “20 Must Ask Questions” before you actually go up and start to make some decisions. Pulsi, I would advise you to go into the Destiny website and have a look for Margaret’s book, because those “20 Must Ask Questions” are really going to help you.
Okay, onto our next caller, and that’s Paul, Paul from Melbourne. How can we help you this evening?
Paul, Caller: Good evening. Thank you very much for the call. The question revolves around my current situation with…I have five unencumbered properties, of which two are commercial and the other three are residential. They are currently geared…modestly geared at around 65-70%. I’ve been trying to have a look with an accountant and a financial planner, generally, and I’m getting some general advice, not specifically to my cause or my case just yet, but I’m heading in the right direction. Trying to make a decision about a high gearing strategy with low interest with the current market interest rates that we’ve got, and then use the surplus because there’ll be a large surplus and a viable credit line to go into, potentially. And I was just hearing some talk about the Brisbane market, potentially, and Margaret Lomas likes the Logan and the Logan Shire area to my recollection. So, potentially then, investing the line of credit that I might have from the lender, and then hopefully be able to get into the next stage of my investment cycle. I’m in an age now where I’ll be having some good superannuation benefits subject to the liberal government letting us have a few flexible options, hopefully, and…
Lisa Montgomery: Well, we’ll wait for that, Paul, I think.
Paul: Wait for those. They are on the to-do list as well. So at this point in time, the real question, the core question is, is it a wise strategy – for me in my 50s – to do something like a broad refinance over those properties and then, perhaps, use the line of credit? Should be reasonable, Lisa, the line of credit.
Lisa Montgomery: Well, let me just ask a few quick questions…
Paul: Yes, please.
Lisa Montgomery: Couple quick answers. So you’re saying to me that you’ve got five properties, two commercial, three residential…
Lisa Montgomery: And they are unencumbered, you don’t have a loan on them at all.
Paul: Currently unencumbered, but I do some other minor business debts that I’ve sort of incurred. Not dramatic but…and that could be something I could apply some of the monies towards in this low interest environment. Hopefully, we’re looking towards the Reserve Bank possibly reducing rates again.
Lisa Montgomery: Well, that’s what they say, potentially in August.
Paul: Potentially in August.
Lisa Montgomery: So the other question I’ve got for you is, where are these properties situated around Australia?
Paul: Yes, one property is…the two are here in Melbourne locations, one in Templestowe.
Lisa Montgomery: Templestowe, yeah.
Paul: Another one in Greensboro. There’s a little story with Greensboro, it’s an amazing mortgaging option.
Lisa Montgomery: Well, it sounds like you got a good deal. And what about the others? Are they all in Victoria, I guess, is my question?
Paul: They are all in Victoria.
Lisa Montgomery: Okay, so…
Paul: Yes, they are, and there are some land tax issues there that I should be aware.
Lisa Montgomery: Yes, well, you are aware because you mentioned it. So I’m going to go to the panel now, Paul, and see what they will advise you to do. Okay, to you, Damian, first.
Damian Collins: Paul, look, I’m always a fan of taking debt when the opportunity is there; again, only if you are a person who can manage their debt, not spend the money. I’m always someone who thinks, take the loan, you don’t have to spend it. You don’t have to use it, but at least it’s there when it’s available. Often people go and apply for debt when they need it, and so they might not be in the situation where they can actually find it. So again, you need to definitely be someone who’s going to manage their money well, you don’t want to go and get into debt. Look, lines of credit are pretty much…unless you’re utilising them for daily transactions or far more frequently, pretty passé now in property investing. I used to use them years ago. But for your typical investment property, they don’t redraw facilities unless you’re paying up and down multiple times, many times in a month. A line of credit, for the price you pay, a higher interest rate doesn’t seem a good value to me. So I have only one which I use in my business, secured against the house and funds in and out. But other than that, all mine are standard investment loans with redraw facilities.
One of the couple of things you might need to be aware of is that, certainly with residential properties, you can generally go and get a loan for a 30-year period of time, set and forget, you’ll never get any questions from the bank. If you’re going to make the payments, you generally won’t ask for any review or have any changes on that particular investment property. Commercial world is a bit different. They tend to do more reviews in those properties, so it’s not like you can just get a line of credit or loan facility against the commercial property. They may well tie it to a lease review time and then, at that time, you will be reviewed. Now, just be aware, of course, if – for some reason – your circumstances have changed and you can’t pay back that loan, the bank might ask you to contingency plans or make you sell that particular property. So, not as simple on commercial properties as it is residential.
In terms of is it a good strategy for you, well, obviously, we can’t answer that question without…you gave us a lot of detail there, Paul, but you need to go and seek your own independent advice. You mentioned you’ve spoken to accountant and planner. Look, it is a low interest rate environment. Do we think property is going to run away in the next couple of years? Nationally, no. Brisbane might do the best, but I’d be certainly going and talking to my accountant, talking to your advisor and saying, “Well, here’s my five or ten-year plan,” and you need to be comfortable with that amount of debt and what you’re proposing to do.
Lisa Montgomery: Look, I think you just hit the nail on the head. What’s the plan, what’s the endgame here for Paul, and I think that you have to establish what that’s going to be, Paul, and then work back from that in relation to whether you do gear these properties and borrow more money to buy another property. This new property will have to fit within the scheme of your strategy. And I’m not really sure that just picking Brisbane out of the hat is because…even though Margaret’s very learned about these places, or picking Logan out, whether that’s going to be the right strategy for you. Brad, what do you think?
Brad Beer: I think the most important thing I would pick up from that, Paul, is you talked about having some advice that wasn’t specific to you, and I think you need some advice from someone who is qualified, that is specific to you, whether or not…The concept of borrowing money against existing property to use to invest in more property, I don’t have an issue with. I think, providing it fits with you when you get your specific advice your risk profile and things like that, it’s definitely a strategy that will help you to get into more property. I don’t think, in your 50s, you’re necessarily too old to invest into more property at all, having not been there. But, I think, specifically from someone qualified to help you with more of that five and ten-year plan, as opposed to, “I’ll just get some money and maybe buy some property, I suppose,” is probably what I would suggest.
Lisa Montgomery: Yes. Yeah, look, I think that some specific advice there would be absolutely critical to you making the right decisions. You’ve made some fantastic decisions to date if you’ve got those five properties, and in the main they’re unencumbered. I think that that’s a great position to be in. But whether you need more, there’s nothing wrong with that concept, but whether you actually need more to fit in with the plan, I guess that’s the question.
Now, to some news. Confidence in Australia’s property market is at its lowest point in more than three years, as the aftermath of the federal election campaign and restrictive taxation arrangements weigh heavily on the sector. Released last week, the June edition of the ANZ Property Council surveys revealed consumer and industry sentiment around Australia and real estate is at its lowest point since December 2013. The survey takes into account current conditions as well as future predictions to determine the level of confidence around real estate, with a score of 100 on the index considered to be neutral. The confidence index came in at 128 from the June survey, and while that’s still a positive reading, it’s dipped three points since the previous survey. “The uncertainty created by the longest election campaign in half a century,” don’t we know it, “and the recent state government decisions to increase property taxes are taking a toll,” said Ken Morrison, Chief Executive of the Property Council of Australia.
So, gentlemen, it’s interesting, we were talking about a lot of the conflicting information that we’re hearing out there in the marketplace, about whether confidence is high, whether confidence is low. What’s your take on it, Brad?
Brad Beer: I think the election is probably a very big driver of this situation. It’s uncertainty. The election – or elections, actually – we can see in the numbers of depreciation levels in our numbers sometimes. It drives sentiment unnecessarily. People actually sit on their hands. Whether it’s something that’s affected by the election or not is seemingly irrelevant. Now, property was in the election as a bit more of a discussion this time than it probably often is. So therefore, I think people are more likely to sit on their hands a little bit more with anything to do with property which, I think, we have actually seen. I probably agree with the Property Council that the things like the rising of taxes here and there, state governments that have probably treated property as the coffer of their ways to make more money, attacking foreign investors and charging them more to probably try to curb that. Just, revenue rising for state governments is probably really going to affect people’s sentiment, really going to affect people’s decision making in property, and they’ll tend to sit on their hands. And that is really what that is saying.
Lisa Montgomery: Yeah, it’s interesting because it used to be that consumer sentiment and confidence was, like, you know, you turn a slight knob on the cash rate down 25 basis points, and everyone seems to be happy, Damian, and confidence is restored. But confidence now is a much more complex algorithm, isn’t it? Like, it’s a whole bunch of things, and the 24-7 news cycle really propagates that to a certain degree, doesn’t it?
Damian Collins: Well, it does, Lisa, and as you mentioned, now when the rates go down people go, “Oh, there’s something wrong with the economy…”
Lisa Montgomery: That’s right.
Damian Collins: What’s going on, they’re having to cut it. Look, I think there’s a combination of factors. A lot of people…I was amazed at how many people thought negative gearing was going to be retrospective. I guess people sort of just get sound bites and not tune into election campaigns, what’s happening. So a lot of people thought Labor’s changes were going to be retrospective so that impacted confidence. And I think the other thing that is also mentioned, there’s been some slaps on very high stamp duty rates put on the Eastern States, in particular for foreign investors. Again, a slap, an extra tax on property, that doesn’t help with confidence. But, look, overall, the confidence level was 128 and neutral is 100. So it might be the lowest level in three years but we’ve come off a pretty high level so…
Lisa Montgomery: Yeah, haven’t we?
Damian Collins: I don’t think we need to be…
Lisa Montgomery: Panicking yet.
Damian Collins: Investors are slashing their wrists just yet.
Lisa Montgomery: That’s true. Well, thanks for tuning in tonight, but it’s time for a break, and when we return you’ll have another chance to get a hold of a copy of Margaret’s book, “How to Achieve Property Success”, but you’ll have to ask a question and have it selected. So call now on 1300 303 435, or you can email us on email@example.com. Back shortly.
Well, welcome back to the Property edition of “Your Money, Your Call”. I’m Lisa Montgomery, and joining me this evening is Damian Collins from Momentum Wealth and Brad Beer from BMT Tax Depreciation. I’m sure you have a question for us, so grab that phone and dial 1300 303 435, or email us on firstname.lastname@example.org.
And we have another caller, and it’s another Paul, and this Paul is from Sydney. Paul, how can we help you tonight?
Paul, Caller: Good evening, panel. I’m looking at venturing into self-managed superannuation fund. The question is around land tax. I guess, from a New South Wales perspective, properties that are purchased within the fund, does the value of this property affect the tax free threshold?
Lisa Montgomery: Right, okay. Now, when you say that you’re venturing into an SMSF, that means that obviously you’re looking to buy property within your self-managed super fund.
Lisa Montgomery: That’s right. So, do you have other investment property which is not in that fund?
Lisa Montgomery: Okay, and you would probably have a number of properties, is that right or…? Do you have a number or is that…?
Paul: I got a couple, yeah.
Lisa Montgomery: Just checking, okay. I’m going to go to Damian. Damian’s our expert on this. So, Damian?
Damian Collins: I’m putting my reformed accountant hat on. But Paul, generally, an SMSF is a separate entity, so I’m not 100% familiar with all the land tax issues in New South Wales, but a self-managed super fund is separate entity like a discretionary trust, like a company, that’s all separate to you. So the taxation of that would be based as a separate entity. It would be similar, I would imagine, as if you set up a company. But look, I really think the best thing to do is, before you make any investment decision, certainly seek advice from an accountant, or perhaps, if it’s a simple question, the actual state revenue authority at New South Wales might be able to have that clear answer there for you on their website. But as a basic premise, the self-managed super fund is treated as a separate entity to you for legal and also taxation matters.
Lisa Montgomery: Anything to add to that, Brad?
Brad Beer: Paul, I think the reason for buying the property with the self-managed super fund is maybe something you want to question yourself, more question of the same accountant that you maybe get some of that advice from, someone that probably doesn’t have that property for sale, making sure that it actually suits your overall financial situation. I suppose…I think a lot of self-managed super funds actually get set up because it seems like a simple way to get a property away. It’s more difficult to finance, it’s got less flexibility; doesn’t mean it’s not right for you, either. But just question the reasons around why it’s actually done, because it is probably a bit more expensive to administer and a few things like that on the way through. But depends on what your mid- to long-term plans are, I suppose, with that property.
Lisa Montgomery: Yeah, it’s one of those things, isn’t it, with self-managed super funds? A lot of the time, what I see is that people will establish them, take funds out of other superannuation organisations, and put them in and let them sit at cash, because they don’t really know what to do with it once they get into it. They’re obviously diversifying into property, which you can do now through your SMSF. But you are right, Brad, it is sometimes difficult to get the finance on those properties.
Brad Beer: And I think more difficult now than it probably was in the past. The ability to renovate’s not there, develop’s not there. The flexibility when property is purchased through a self-managed super fund is just not quite the same. Just make sure you’re aware of what that really is.
Damian Collins: The big one about the super funds is the fact you can’t gear against the growth. That’s how most investors who have got large portfolios get there. Most of us never save, maybe, past our first or second deposit. From there, it’s all the growth in those properties. And the big thing for people to know is that when you go to sell property to a self-managed super fund, you can only borrow to acquire that asset. You can’t…If that asset goes from half a mil to a mil in value, that’s fantastic, but that equity you can’t access by borrowing. You have to sell it and start again and, of course, it would be capital gains will be the lower rates within that super fund. So people need to be aware of that. It’s really…We certainly don’t give advice on this space because…
Lisa Montgomery: No.
Damian Collins: We don’t have financial planning license, but for our clients who generally use them, they’ll generally be in that, sort of, 50s, generally getting towards the tail end of their journey. They’re looking to buy an investment property, salary sacrifice, pay it off and then, when their retirement, it will then give them an income stream. But look, there’s a lot to think about and you really need to seek professional advice.
Lisa Montgomery: Absolutely, lots of layers to the onion when it comes to SMSF, Paul, so good luck.
So we have another caller now, and it’s Mario from Melbourne. And you’re calling about Frankston North, Mario. How can we help?
Mario, Caller: Just would like to get the panel’s opinion on it. It’s a lower socioeconomic area but it’s got a lot of potential near the beach, near the train. Basically, hoping it’ll be a turnaround.
Lisa Montgomery: So really, it’s undergoing gentrification, or is it not as yet undergoing gentrification, North Frankston?
Mario: I’m not sure, that’s what I would like to ask the panel.
Lisa Montgomery: Well, why don’t we go to the panel and ask them what they think? What do you think of Frankston North?
Damian Collins: Mario, I do like Frankston, the whole surrounding region. It’s had, in the Victorian context, a bit of a stigma about it. It’s had a lot of social or state government housing in the area for a long time. There was particular areas that were considered no-go zones, and they weren’t quite that bad, of course. So as you mentioned, there’s a lower socioeconomic – generally – level of people overall, but Melbourne is a rapidly growing city. Currently it is the fastest growing population city in Australia of all the major capital cities. And long term, it’s…I was just down there over the weekend and late last week, and they’re talking about Melbourne at 10 million people, and it’s now 4.5 mil, thereabouts.
So what we continue to find is that those areas that have provided some lifestyle amenity, which is near beaches and so forth, will be more and more in demand. And also transport, a very big one. As we get…become a more and more congested city, you’ll find public transport certainly an important factor. And now we also have the Peninsula links that makes getting anywhere around that whole Frankston area…I was actually just down there, actually, over the weekend, went from Melbourne down to Mornington Peninsula, and it’s freeways all the way, so a lot easier to get around.
So, look, I think, overall it will do…in terms of the Melbourne context, I don’t think Melbourne will do a lot in the next couple of years. But I think if you’re in for the long haul, if you want to be in Melbourne, I think Frankston North, you will do perfectly fine.
Lisa Montgomery: Well, I think so, too. And given that we have to go to a break, Brad, you might have to sit on what you might want to add to that, but we will be back.
So it’s time for us to take a very short break, but when we return you’ll have another chance to ask your questions by simply calling us, like so many have tonight, on 1300 303 435, or emailing us on email@example.com.
Welcome back to the Monday night Property edition of “Your Money, Your Call”. I’m Lisa Montgomery, and joining me on the program is Damian Collins from Momentum Wealth and Brad Beer from BMT Tax Depreciation. We still have time left for you to call with your comment or question, and you may even be this week’s book winner. So call now on 1300 303 435, or email us on firstname.lastname@example.org. And we’re going to go to our first email of the night. Believe it or not, the show’s been going an hour and we haven’t answered one yet. And it’s from Carlo, and Carlo asks, “I’ve recently purchased an investment property whereby the previous owner has provided me a copy of the depreciation schedule. Am I able to use that or do I need to get my own?” Well, I mean, I’d be silly to come to you, Damian…
Damian Collins: Wrong guy.
Lisa Montgomery: Over here. Brad, BMT Tax Depreciation.
Brad Beer: Carlo, the depreciation schedule you’ve been provided has been done for a previous owner. So really, you should get that reassessed for you. Now, some of the numbers written down value on the building allowance, some should be applicable because we would either estimate or come up with a construction cost at the time the property was actually built. The value on items won’t necessarily be correct for you. You don’t know what they’ve claimed, what they’ve done. I suppose it also depends on the quality of the depreciation schedule that’s been produced the first time. Is it good, is it bad? Reassessment for you is probably necessary and, for tax reasons, if you do get audited, the other one wouldn’t stack for you because it hasn’t been done for you. There’s some scope to look at it to maximise for you as well, so make sure that’s done because that’s kind of the important thing; it’s your investment, not the previous owners’ investment now.
Lisa Montgomery: Yeah, that’s true. Did you want to add anything to that, Damian?
Damian Collins: Only that, Carlo, I always recommend getting a depreciation report. In fact, our clients use BMT, and give Brad a free plug there. But, look, we always…and I remember very clearly when…many years ago when I got one of my investment properties, it was an old style house and I thought, oh, this could be a waste of money but I’ll still get one anyway. And guess what, the depreciation person found that there had been an extension done, and found me about $75,000 of additional deductions. So I’m of the opinion that you should always…every investor should get one. I’m still surprised at how many don’t for the small cost, which is tax deductible, and certainly can be a big saving. As Brad said there, you’ll pick things up in at a different cost base potentially from them. So yes, you certainly want to – for many reasons – go and get your own depreciation report.
Brad Beer: If I could add one thing to that “you should always get one”, the quantity surveyor is they’ve got some sort of idea, based on the address of the property, we can probably see now the photos of it and find a bit of information and ask you a few questions. We should really be able to, and we can, get an indication to make sure it’s actually going to be beneficial before we go ahead and spend your money. Like we say, “Twice the fee or it’s free, guaranteed.” We should ask enough questions and back our own professional ability to make sure it’s actually worth it before we ask you to spend your money, and we can do that very easily.
Lisa Montgomery: That’s great, plus modern technology allows you to see pretty much everything now, doesn’t it?
Brad Beer: Look, we’ve done a lot of depreciation schedules, so if the quantity surveyor doesn’t have an idea or hasn’t…from some photos and some basic information of the property, can’t get a rule of thumb of what they think it should be, maybe you should ring another one.
Lisa Montgomery: It’s true. Before we move on to the next email, I just wanted to have a quick chat about interest rates because we are still in this downward curve of rates. And I was just looking the other day at what the cash rate was when we began this downward trend, and it was 4.5% in November 2011. And then, rates have steadily gone down from there, to the point where now we’re at 1.75%, and that’s a 2.75% drop. It’s interesting, what I’m actually seeing at the moment, and I don’t know whether you guys are seeing it, too, but we’re seeing a lot of jockeying for position in the owner-occupier space, right down at that cheapest loan percentage. And we’re also seeing the fixed rates, some incredible rates for fixed rate, really; fixed rates under 4%, which are fantastic. And I’m just thinking about investing, investment property, fixed rates. I’ll go to you first, Damian. What do you think about taking out a fixed rate loan when you are an investor?
Damian Collins: I’ve got fixed rate loans on a few of my properties, and I guess it’s a bit of a gamble. The security you get from having exactly what you’re going to be paying on that property over the next period of time, that’s the benefit you get. But the tradeoff is, if the interest rates go down further, you miss out on some of that. So I’ve tended to fix for two-year timeframes if I think it’s a reasonable bet; at least I know where my payments are likely to be. Look, I think…and the reason that the fixed rates…I look at the future’s market and the interest rates of future’s market, and they’re still pricing in over the next 13 months more rate cuts. And you see it with CPI, record low levels, wages growth; negligible in many cases. So the forecasts are that there’s just nothing on the horizon…suggests – with worldwide rates still coming down and negative rates through Europe – that there’s nothing in the forecast that suggests the rates in Australia are likely to go up any time soon. And we think they’re cheap but, compared to the rest of world, we’re actually not that cheap. The rest of the world have even got lower rates.
So again, one of the key things to be thinking about, though, with a fixed rate is once it’s fixed, they are potentially hard to get out of. You can…Some of the loans will let you make additional payments up to a small amount, and I’ve seen some pretty brutal break costs. I remember going back to when a client came to see us, and we hadn’t set up the loan for them, they’d been somewhere else and got fixed – back in the GFC time – at 9.5% fixed for five years. And they came to see us, it was about a $400,000 or $500,000 debt, and the break cost, I think, we figured out was $65,000, so pretty brutal. So there are the sort of things you want to be thinking about. Are you committed to that property and that loan for that period of time, because the break cost can be very substantial.
Lisa Montgomery: And Brad, while we’re still seeing standing variable rates coming down, you’re looking at these fixed rates, very tempting, isn’t it? But are you a fan of fixed?
Brad Beer: I’ve always been a non-fan of fixed, pretty much. The one thing a fixed rate does give you is a little bit of certainty of how much that is actually going to cost you. I’ve been burned by the fixed rates; not really badly. I fixed in some loans back way when, and I was sitting at 7.5%, 7.6%, around the start of GFC on a few properties that…and I was getting new loans at 4.99%. So for that period of time, I got burned by those a little, and I’ve always been a bit shy since.
It does give some certainty. My break costs, I remember – at the time – looking at those, and they were a bit ridiculous, were ridiculous in the context of the size of the amount of additional interest. So I actually let them ride because I didn’t have that much time left to go. We are very low and in the future will stay low for some time, so I guess the important question is ‘have I gone and locked any of mine in lately or am I starting to’, and the answer is no. Although, I do think, at record low, we’re not record low compared to the rest of the country. If you need some certainty, if you’re concerned about what happens afterwards at some point, and afterwards being a time that you are prepared to lock in for, then it has a certainty associated with it. There’s always the option of locking part of your interest in, I suppose. So you’ve got some certainty on that, knowing that you have no ability to possibly pay off or put in to offset some…so it does mess with offset accounts as well, fixing rates sometimes. But I’ve been burnt, and I think once I do the analysis a lot of the time…overall, most of the time fixing doesn’t necessarily win, because the bank fixes at a rate that they believe they’re still going to make money out of, don’t they?
Lisa Montgomery: Of course.
Brad Beer: Yeah, a bit of analysis.
Lisa Montgomery: So someone wins, either the borrower or the bank. So who do you think that is most of the time?
Damian Collins: Most of the time, you’re absolutely right, the bank gets it.
Lisa Montgomery: That’s right. But the other thing we have to consider, too, is if you do fix in…and what a lot of people don’t realise is that rate will then go onto a variable rate. Now that could be any variable rate, not necessarily the lowest rate that’s being offered in the marketplace from that institution, and that’s a really…I think what we should be looking at as borrowers is reviews very regularly, that our loan hasn’t actually gone out of that competitive band. And you’ve seen that happen, haven’t you?
Damian Collins: Definitely. So most of the banks will roll their fixed rates on to a standard variable, not the discounted. The standard variable rate that you quoted, no one really should be paying that because you can get far cheaper…
Lisa Montgomery: Absolutely.
Damian Collins: Maybe 0.7%, or even, in some cases, more than that is a discount. So rolling on to that, that’s where I’ve read that banks make quite a substantial profit from that, because they’re not going to call you up and say, “You can get a cheaper rate if you just ring up and call.”
Lisa Montgomery: No.
Damian Collins: They’re happy to take your money. So generally, the first thing you do is, I would say…Look, if you’ve rolled into a higher rate, call the bank up and say, “Look, here’s the deal. If you don’t give me a lower rate, I’m leaving. What are you going to do for me?” And their retention teams might offer you a pretty sweet price. If not, go elsewhere.
Lisa Montgomery: Well, I know you do that all the time, Brad Beer, don’t you?
Brad Beer: Look, I refinance a bit. I think, though, like you’re looking at many other things about your investment and your property…and I haven’t been as good sometimes at making sure that you’ve re-asked the bank – and I’ve got them spread across multiple lenders – the bank or the broker, to actually…are they re-asking that question appropriately. I went through a situation recently where the banks actually put up some interest rates, which they did across the board. And it was…Funny enough, my brother financed some things with the same thing. He said, “They’re stinging me,” and I said, “Well, I’ll go and ask the question.” Because of that, I asked the question, they reduced all mine and they reduced all his. But I had quite a few more and they’ve been… I’d been increased over and above unnecessarily. But when I went asked the question, they actually moved it and reduced that. And if my brother didn’t tell them to do that on that particular one, I probably might not have done something. But should the onus be, at some point, as a good broker, to actually be making sure that you’re doing the best for the client on the way through, and I don’t know the answer.
Lisa Montgomery: Well, that’s the brilliance of using a broker because if you…I never used to have this mindset. But the brilliance of using a broker is that they do have access to a number of products. And they should be able to place you not just into a low rate environment, but also a product that’s going to tick all the boxes in terms of is it going to help you build your portfolio, is it going to fit the needs and the circumstances that you have. It’s not just a rate, it’s a whole bunch of other things, too. Right?
Damian Collins: Absolutely.
Lisa Montgomery: And also, provide you with the guidance that you need. So that’s what the broker should be doing. But the retention teams in the lending industry are growing, and it’s very easy just to make a call. Because we have had…whereas we’ve had that 2.75% drop in the cash rate, that hasn’t all been passed on to borrowers. And in fact, there’s been some additional out of cycle increases by the big four banks. So you could be completely out of that competitive band.
Brad Beer: And it’s interesting how that happens, isn’t it, that you actually get changed, it doesn’t get passed on, and there’s cost of financing. Sometimes there’s reasons behind that.
Lisa Montgomery: Well, that’s right.
Brad Beer: What sometimes, probably, I feel is a little unfair with the lender or the bank is the new loan always has the new introductory rate, the cheaper rate to come across, etc. I’m an existing client, I’m paying my interest every month, and you charge me more money when I’m actually a good person, good client, paying my money all the time, I’m paying my interest.
Lisa Montgomery: And that’s rule number one – before you make the call to get a discount off your rate – is to check out what they’re offering new borrowers. If you check out what they’re offering new borrowers – on the homepage of their website, that’s where it’s going to tell you – then that’s really the benchmark that you’re hitting for. There should be a prize for loyalty, shouldn’t there, Damian?
Damian Collins: Yeah, absolutely. It’s interesting, I’ve had a few clients who said, “Well, look, we can actually negotiate with your current lender a lower rate,” they’re that unhappy that they have been gouged or maybe not informed they could get a lower rate. They said, “No, I want out of here. I just want to get out of this.” So some people get a bit burnt by the banks and decide that they want to go somewhere else.
Lisa Montgomery: Well, that’s right, and it’s not implicit in the correspondence that they send to you. It used to be. But now, some correspondence, when a rate is going down or going up, it will just have what the repayments are changing to. It’s not going to tell you exactly what the percentage is that it’s going to. So you will have to actually physically go and look that up or make a phone call to find that out. And so, if there’s a 25 basis point reduction in cash rate, you may not be getting all of that, but by looking at your document you might think that you are. And so, that’s really where you have to be second guessing and double checking, I think anyway…
Welcome back to “Your Money, Your Call.” I’m Lisa Montgomery, filling in for Margaret Lomas, and it’s been a great night tonight with wonderful callers and emailers. And I’ve had an expert panel which includes Damian Collins from Momentum Wealth and Brad Beer from BMT Tax Depreciation. Now, our lines are closed for tonight, but we have time for a couple of last questions so let’s get to them.
So we have a great question, actually, from Matthew, and he asks, “I’m looking to invest in a property worth a maximum of half a million dollars within South Australia. What areas do you feel would be the best for long term capital growth?” Now that’s a really broad question. I know that we talk a lot about South Australia on this show, certain areas of South Australia. Adelaide’s had moderate growth, not tipped for any substantial growth anytime soon. But what do you think, Damian? If you had a half a million dollars, what would you do?
Damian Collins: Matthew, for the half a million dollars, I wouldn’t actually put it in Adelaide. But you mentioned that you do want to go into South Australia, and I guess…one of the things that we look at in assessing the capital cities – and even regional towns – is really got to go back to fundamental demand and supply analysis. So in terms of the capital city, what you’re looking for is a capital city that’s got strong population growth, and South Australia or Adelaide doesn’t have particularly strong population growth. It’s well below the growth rate of Sydney, Melbourne, Brisbane, and Perth, which are the other four major capital cities so that’s not a good sign. The other thing I look at is what are the industries that will likely sustain that city. And obviously, manufacturing at the moment is still in decline. We got the car industry shutting down over the next couple of years. And a few other bits and pieces. So nothing is standing out to me as any particular industry or comparative advantage that South Australia has in terms of property investing.
And then obviously, even those industries that are there, are they high paying? Because it’s great that tourism is going well and growing on the Gold Coast, for example, but all those wages pay about $50,000 a year, not enough to generate people being able to afford to buy a higher-priced property. So, sorry if I’m sounding negative on South Australia, and Adelaide in particular. If you’re going down to South Australia, I’d be going to Adelaide. Look, the good thing is that the prices are particularly relatively very inexpensive compared to, certainly, Sydney and Melbourne. People would be shocked at what you can get. And I try to stick around…given it’s a low growth, low population growth, I try to stick around Glenelg and areas with some amenity. Obviously, they have light rail system down that way. And now $500,000, you won’t get necessarily a house but you might get a villa or townhouse or apartment, perhaps not right on the beach. I’d be looking down there.
The other one is down the south, maybe Bedford Park, might be one of the meetings about 440 down there. I think that’s got some potential there as well. But look, overall, it’s one of those things. When you’re in a market that all prices are growing, if you make mistakes it sort of covers them up a little bit. But when you’re in a market that’s pretty tough to get growth overall, if you make a mistake there you’re going to find you’re in pretty much a very flat period of time. So you need to do a lot homework before you get into that market.
Lisa Montgomery: Interesting, isn’t it? You know, Brad, Margaret continually talks about the Onkaparinga Shire down towards Christies Beach, down at those area is where the train line now is in. It’s interesting though, because we still haven’t seen any momentum happening. For your money, what should Matthew do?
Brad Beer: Probably similar to Damian. My money, at $500,000, I don’t think Adelaide is the first place I’d go. And Onkaparinga, I know Margaret has been strong on it for some time. I think the ability to subdivide or develop in that area has been something that’s been attractive to her, which I think is definitely something that has the ability to be attractive as part of your overall portfolio and a quick way to probably make some equity, and we’re in a lower price point to get into these things and make them happen. Trying to develop in areas where the end value is a little bit tough also brings its challenges, I think, sometimes. I think the amount of industry, etc., as Damian pointed out, happening in Adelaide isn’t exciting me right now. There’s now more probably negative towards that than positive. And I think there’s other capital cities I probably would look at first.
Lisa Montgomery: It’s interesting, isn’t it? I don’t think…we haven’t said anything positive, have we really?
Damian Collins: Sorry, Matthew.
Lisa Montgomery: To help you out, Matthew, we do apologise, but we think that there will be growth absolutely in South Australia and Adelaide, but it’s not coming anytime soon. That moderate growth is sticking there. Interestingly, Hobart is one of those capital cities that’s tipped to be moving, as well as Launceston over time. So that’ll be interesting to see what happens down there, just saying.
Now here’s another good question from Penny. She is from Melbourne and she’s asking about depreciation, and she writes, “I purchased a two-bedroom, very old house on a half a block last year. The cost was $400,000. Renovations are new kitchen, polished floor, painting, replacing some windows. Total cost, $30,000. The rent is $19,000 per year. I’m 64 and earn $30,000 per year. Is it tax effective to use a depreciation method schedule? If using depreciation, can I use 10% on the electrical appliance and polished floor?” Okay, Brad?
Brad Beer: Well, look…
Lisa Montgomery: Complex, right?
Brad Beer: Yeah, complex but not too complex. Penny, the property itself will have some depreciation available. I’ll probably address the second part of your question first which is, “Can I use 10% on appliances and polished floors?” Different items within a property have different depreciation rates. Ten percent is not necessarily the right rate for those items. We come up with a part of the construction cost and apply a 2.5% rate to that, and different items in the property have an effective life that comes back to a percentage. And you can find that effective life on an app called “Rate Finder” that we’ve actually built to come up with some of those rates. But generally, it’s probably good to get the expert to look at those deductions.
Your situation with your income where it is, one thing we haven’t got there is the gearing on that property and what your tax situation looks like. Depreciation is going to create some tax deductions. But, if you don’t need them, they’re no good to you. With a $30,000 income then, if you’re already in a negative situation on the rest of the property where you’re paying out some expenses and you’ve got some deductions, you may not be paying much tax on that income. Depreciation adding to that as another deduction is not going to help you. However, if you don’t have much gearing and your expenses are low in relation to that property, and therefore all that rent would add to your income and be deductible, depreciation is going to help you. The rest of those numbers, you should be able to work out fairly easily. Your accountant will help you with that. Depreciation definitely will apply and there definitely will be some there, if you actually need the deductions.
Lisa Montgomery: Yeah, it’s really complex, isn’t it, for a lot of people, the depreciation piece, but hopefully that’s helped Penny with her decisions. But it is, it’s complex, isn’t it?
Brad Beer: Yes. Look, what you can claim for what can be quite complex, but you just need to know whether the deduction is going to help
Lisa Montgomery: Is going to help, that’s right.
Well, that brings us to the end of tonight’s show. Many thanks to my two wonderful expert guests this evening, Damian Collins and Brad Beer. They will be back on the show again very soon. Thanks also to all our callers and emailers, and tonight our question of the week goes to Joe who called about Fortitude Valley, and Carlo who emailed about the depreciation schedule. So if you would both like to email me on email@example.com, I’ll send you your books. You can follow me on Twitter, @lisaknowsmoney, all one word, and make sure you tune in next week for another great show. Of course, Margaret will be back in this chair, along with another two expert guests. In the meantime, have a great week.
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