Hi,

Sorry – didn’t know that Jo was also posting so apologies for the repeating…

If that is your strategy then keep going, and learning, as experience is the best teacher.

Just two points to note:

1. Be sure to add more in perceived value than actual cost. Sometimes the line can be blury, but if you lose perspective then it’s easy to lose money.

For example, on one early reno project I did I added a lot of fluff under the pretext of making the house more homely (such as coat hooks). In hindsight I think I lost sight of what added value and what was an unnecessary extra. I think finding the line comes from experience.

2. It’s more likely that a large portion your works will not be immediately deductibe, but rather need to be capitalised into the cost of your property. Just be careful of this as if you are relying on a big tax refund to fund ongoing works then you may be caught short.

Warm regards,

Steve McKnight

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Hi Sarah,

Thanks for your post and welcome to the website!

You have an interesting problem, but don’t forget that you can apply for exemption to the rules (not sure what chance you would have…)

Otherwise, I suggest checking out the weekend property section to the West Australian as when I last thumbed it through it was chockers with ads from developers.

Regards,

Steve McKnight

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Hi,

In recent times there seems to be a point of distinction between positively geared and positive cashflow (especially after Margaret Lomas’ books)

Positively Geared

A positive cashflow outcome after the tax effect of non-cash depreciation tax deductions has been factored in.

That is, a pre-tax negative cashflow situation that is turned into an after-tax positive cashflow outcome because the tax benefit of the depreciation tips it over the line.

Positive Cashflow

Simply more cash received than cash paid – ignoring the tax impact of depreciation and not distinguishing cah inflow and traditional revenue, or cash payments and accounting expenses.

For example, in my case, I treat my entire P&I loan repayment as a cash outflow (under positive cashflow), where as for acocunting purposes I’d only include the interest component.

Having said that, I’m not sure how positive gearers treat the principal part of a loan repayment since most of the models I have since promote interest-only loans.

Sorry, it seems to have turned out to be a complex (and perhaps academic) way to explain the difference, but it’s kind of needed in the interests of accuracy.

Regards,

Steve McKnight

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Hi,

Just wanted to add to remember that the CGT discount is not available to companies, and works slightly differently for Super Funds.

Also, did some quick surfing for you and found the ATO guide to Capital Gains. Click here for the link.

Regards,

Steve McKnight

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Hi,

Terry has provided a good reply, so this may be somewhat overkill…

If you have not claimed those costs in the past then you may be able to add them to the cost base of the asset (you’ll need specific advice).

In repsect the amount of tax you’ll pay… first thing… I assume that your partner’s name is not on the title? If it is then there may be some legal complications.

Assuming it is not, and that you have it in a trust, here’s what happens:

1. The capital gain needs to be show in the trust tax return (i.e. after you have worked out the appropriate amount).

2. The gain is then distributed to the relevant beneficiaries, who are then taxed at their appropriate marginal tax rates. Provided the entity is an individual or super fund, then they should be able to access some form of the CGT discount. Distributions to a company do not qualify for the CGT discount.

May I suggest that you get some advice re: tax planning prior to selling, as a few hundred dollars spent now may save you several thousand in tax, and once you have sold then you lose some of your flexibility.

Best wishes,

Steve McKnight

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Hi,

I’ll try to answer this from two perspectives:

1. Investing Theory

You only undertake a reno when you add more in perceived value than actual cost.

2. Tax implications

While you need to get specific advice for the circumstance, my general tax knowledge (i.e. what I haven’t yet erased!) is that there needs to be a nexus between earning income and the repair.

As such, repairs done soon after buying are usually deemed part of the cost of the property, yet repairs done ‘in-between’ tenants should be deductible – either outright or else via depreciation.

So, to answer your question… provided the cost relates to earning assessable income, then depending on the timing it will either need to be:

A. Capitalised (i.e. added into the price of the asset) and then, depending on the item, potentially depreciated; or else

B. Claimed as a deduction.

Hope this helps. If you want to read further info, then the ATO website that talks about this issue is a good source. Click here for the link (and scroll towards the bottom of the page for the heading ‘repairs’).

Bye,

Steve McKnight

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Hi,

Thanks for making this good and interesting post.

Generally speaking, I am not a fan of serviced apartments as they are more of a solution than they are a problem.

Practically, this means that it is the management agency that stands first in the profit queue by charing a (usually) above-market rate to run the investment.

As for positive cashflow returns, just be on the lookout for hidden costs and unrealistic growth and other projections used to smooth over the figures.

You may actually find that it is cheaper to pick up a second hand serviced apartment than to buy a new one – so i’d be investigating that angle.

Finally, I urge you to consider the uniqueness of the investment you may be acquiring. It is scarcity that drives growth, so there needs to be something identifiable (beyond the usual marketing blurb) to flag your investment to achieve above market returns.

Thanks again for your post and welcome to the forum!

Regards,

Steve McKnight

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Hi Darls,

Thanks for making your thought provoking post.

I hadn’t realised that the majority of the products (i.e. everything except the books) had an audio component. It is this way in an attempt to provide extra value to the purchaser.

I’ll make it a point to back now and think about (and certainly cost) how much it would be to have a transcript made for those who have hearing difficulties.

Thanks for your input.

Regards,

Steve McKnight

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Hi,

Thanks for your post. What I’m talking about are deals that may seem unusual or creative, and once upon a time would have been accepted by speculators, but now are seem as too risky.

However, for investors with the right skills and attitude, these deals are as profitable now as they were in the boom, as the result is made rather than bought.

A good example is a development project. Not long ago just about any novice investor could have puchased a suitable block of land as, since the broader market rose, made a proft.

Now though, more skill is involved as the profit must be made in the value add in the deal rather than relying on broad cap. gains to drive prices higher.

Hope this helps.

Regards,

Steve McKnight

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Hi JoD,

Welcome to the forums and thanks for your post!

Congrats on taking the plunge, but don’t let the pace of the market force you into a hasty decision. One possibility is to agree to buy, but to add a ‘subject to a building inspection to the purchaser’s satisfaction’ into the purchase contract. That way you’re not delaying showing your intention (i.e. sitting idle while someone steals the deal), nor are you locked in completely to the contract.

Some very quick calcs for you:

Cash Down

Deposit (say 20%) = $40,400
Closing Costs (say 5% of purchase price) = $10,100

Total Cash In = $50,500

Rent

Per annum = $18,192

Expenses

Management (7%) = $1,274
Interest = $11,312
(say 7% and I/O for ease of calc)
Other costs per you = $6,995
Insurance (say) = $500
Repairs (say) = $500

Total expenses = $20,581

Est. Cashflow = -$2,389

On these numbers it looks to be a borderline deal, especially when you factor in 100% occupancy for the rent. Also, if you do P&I loan repayments, or load up the debt further, then your cashflow will almost certainly be more substantially negative.

As such, IMHO, buying as a +ve cashflow deal (not inc. deprecn) makes it ‘on the line’ at first glance.

Check for ways to reasonably / creatively increase rent, or else is there another use for the property to increase profitability?

Nice to see you on the forums. Don’t be a stranger!

Bye,

Steve McKnight

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