My husband and I have recently read Steve’s book “0-130 etc” and are keen to get started. We haven’t been able to find a single property that makes a positive cashflow using Steve’s methods of not including tax benefits or depreciation in the equation.
We have had two “positive cashflow property advisors” come to see us from 2 different organisations, and both have told us that we need to include depreciation and tax bracket benefits in order to make it a positive cashflow. I tried explaining to my husband that this is only beneficial if a) you are purchasing a new-ish house, and b) only while he is still earning a salary to offset his tax. My questions are: 1. Am I correct in those two assumptions? 2. Should we include the depreciation or not? 3. Where on earth should we be looking?! I have spent hour after hour looking and it is driving me nuts!!!! Help! Thanks, Natalie
kjw,
i have +ve IPs and we don’t including depreciation cost to make them positive. not sure what other people do out there,. i look at non cash deduction as a bonus.
As to where to look?? ….have you read Steve’s new book “$1 000 000 in property in one year”?
it gives you great insites of techniques people use to MAKE properties positve cash flow.All the Best
JohnKJW,
There are a lot of buz words out there that I don’t understand my 18 year old son informs me. I have not read the book but my idea of a positive cash flow property is one that covers its own cost and leaves a little over in cold hard cash. Then of course the capital gain is the icing on the cake.
To work out a positive cashflow you need to only look at the cashflow items and one of those items may be your tax refund cheque if the property is negatively geared for tax purposes. You may well ask how can a property that is negative for tax purposes leave you with money in the bank. This is where depreciation comes in. Depreciation is tax deductible but does not cost you any cash at the time. For example assume:
Rent $15,000
Less
Repairs, Agent Fees, Rates Insurance etc 4,000
Interest 10,000
Depreciation 2,000
Loss for tax purposes 1,000
If in Max Tax Bracket refund will be 485Now the cashflow calculation
In
Rent 15,000
Tax refund 485Out
Repairs, Rates, Insurance, Agent fees etc 4,000
Interest 10,000Net Cash Inflow $1,485
Problems are:
1) Need a big deposit to get interest so low relative to rent or look to remote areas where little or no capital gain.
2) The building depreciation will reduce your cost base when you sell if purchase the property after 13th May 1997
3) To be in the maximum tax bracket you need to earn over %70,000 this year after deducting the rental loss. Next year the maximum threshold is $80,000.Julia Hartman
[email protected]
http://www.bantacs.com.auNatalie, my business provides Tax Depreciation Schedules and even I don’t factor depreciation into my calculations when evaluating a property. I like investments to stack up without depreciation coming into it.
Tax Depreciation Schedules
Australia wide service
1300 660033
[email protected]
http://www.depreciator.com.auI agree with JL, depreciables are the cream in the equation. When evaluating +CF, I always look at rent versus outgoings. If this is positive, it is then a bonus to maximise your tax benefit by claiming the depreciation schedule.
Also, I have found that a Quantity Surveyor [QS] is the way to go. My understanding is that the ATO will only accept a full depreciation schedule from QS. We bought a townhouse in a complex and he claimed all manner of things that were in the common areas, even the swimming pool!!
We are about to put our PPOR on the rental market as well, a QS will calculate the depreciation schedule for us and then we will claim this at the end of the tax year. People talk about CGT and depreciation issues over the long term, my theory: don’t sell – don’t pay CGT.
At the end of the day, if the there is +CF just go for it!
[cap]
What is going on with these green words linking to other pages. I object to my posts being altered in this way as it appears I recommend the link! Please remove the links or remove my post.
Julia
Hi all,
The auto linking of defined words for site advertising within subscribers/contributors posts is unauthorised by contributors, and could be confused with subscriber links, and also construed as the subscribers advertising or advertising specifically endorsed by subscriber.actually I quite like the links. I have even used a few times. At worst, I find them funny when they are out of context.
yes you need to lighten up…. I read a book recently that really sucks…hmm what was the name of that NEW BOOK ??
actually I should add here that the last new book I read was Trump… it was ok.
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
Hi All,
I find the debate about whether or not to include Depreciation in my calculations in assessing positive cash flow properties very intriguing. I would love to not include it, but unfortunately it is not possible unless you invest your own money into the venture. Tonight I have been looking at three different proposals ranging in rent return from 5.32% – 5.87%. From my calculations I need to put in something like 40-50% of the cost and include the depreciation just to be cashflow nuetral. Am I missing something???[blush2]
One of the problems with calculating cashflow is the interest rate element. A lot of property investors are highly geared which means that slight increases in rates will significantly impact their cashflow. Paying off an “interest-only” loan will serve to reinforce the situation. Rent and general outgoings are relatively predictable and somewhat constant. Fixing the interest rate is an option but you may end up paying more if rates remain low. It is all about risk when it comes to gearing. The more you borrow the higher the risk.
The other issue with depreciation is that when it comes to paying Capital Gains Tax, all the losses you’ve been claiming as depreciation over the years is factored into the final CGT amount. So what the tax-man giveth with one hand he taketh with the other.
Ideally you should not include depreciation in your cashflow calculations. The reason you’ve been having trouble finding a property that makes a positive cashflow is that rental yields are way too low right now. Either rents have to go up or prices have to come down.
Originally posted by OSienna:The other issue with depreciation is that when it comes to paying Capital Gains Tax, all the losses you’ve been claiming as depreciation over the years is factored into the final CGT amount. So what the tax-man giveth with one hand he taketh with the other.
Hi Osienna,
There have been a few changes to CGT and depreciation in recent years and one of the changes specifically addresses this point – If an investment property purchased after May 13, 1997 is sold, depreciation eligible to be claimed on the building must be factored into CGT calculations whether it has been claimed or not.
This ruling is not well known around the traps and there are accountants who are yet to pick up on this point despite the ATO’s Guide to CGT 2003/04 has this ‘rule’ explicitly stated “you must exclude from the cost base of a CGT asset the amount of capital works deductions you claimed or were entitled to claim in respect of the asset”
And then a little further for good measure ‘the amount of the capital works deductions you claimed or were entitled to claim for expenditure you incurred in respect of an asset is excluded from the reduced cost base.’
As such it would seem that from a taxation perspective alone you might as well claim the depreciation available to you anyway.
Notwithstanding these comments the obvious question is ‘how will the ATO determine how much you should have claimed if you didn’t?’
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping.
KJW,
To specifically answer the questions you posed;
1. No you are not.
2. No you should not for screening purposes, but obviously yes for actual accounting purposes once you have bought.
3. Instead of starting the question with a ‘where’, swap that word for a ‘what’.It’s probably driving you nuts because you are confining your search into too narrow a band.
Are you containing your search to normal / median / average residential houses within easy driving distance of where you live ?? If so…and you are not prepared or not comfortable to broaden the scope, I’d get comfy in that straight-jacket, it’s probably going to be on there a while.
Cheers,
Dazzling
“Go hard or go home”
Hi Dazzling,
I have been looking for positive cashflow properties for a while now and can’t find many that are cashflow positive. I look locally, interstate(mainly)and in the country.The only positive cashflow properties I find are ones in country towns with a very low population. The risk is then in finding tenants and the capital growth is going to be very low if not non existant.
For us novices where do you suggest we broaden our scope?
Thanks[confused2]
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