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Property Newsletter – March Newsletter
March 9, 2017 | 
Author Can you profit from flipping property?
Judging from all the property “reno” shows on TV, property flipping seems like easy money. But can you actually make a profit from flipping property?
The short answer is yes, you can make money from flipping property. However, it’s not as easy as it’s made out to be on reality TV, and there are a number of issues investors need to be aware of.
Firstly, the risk is much higher when flipping property.
If you’re considering flipping property, you need to be able to stick to a budget, and have a good understanding of costings.
For example, if you allocate $20,000 to renovate a property, do you know how much it will cost to repaint the interior or update the kitchen cabinetry? What about installing new blinds or replacing rusted gutters?
Unfortunately, if you don’t get the numbers right you could be facing a cost blowout, which will impact your bottom line.
You’ll likely have to choose which areas to spend the money as well – so would you receive a better rate of return by upgrading the façade, or should you focus on spending money in the alfresco area instead?
Once you start renovating you might discover more issues that need to be rectified or repaired, which could also lead to cost overruns.
There is also the risk that market conditions could change. If you acquire a property to flip in an upcycle, the market may have turned by the time you’ve finished the renovations and advertised the property for sale. This could create significant financial trouble as you may be forced to sell at a loss.
There are also the high imposts you have to consider when buying and selling property, such as stamp duty, capital gains tax and selling agents fees, which all eat into your margin.
While there are the risks with budget blowouts and market conditions changing, the fact of the matter is that flipping property is extremely time consuming, having to source quotes, choose fixtures and finishes and liaising with trades etc.
Unfortunately, most of us don’t have the time required to flip property because we have our careers to focus on.
That’s why, for the very large majority of investors, flipping property isn’t a good option.
It’s a better idea to buy high-quality properties that will grow in value over time and hold them for the long-term.
This way investors can still grow their wealth through property, but have the time to focus on their careers and enjoy their weekends off.
For more information on the buy-and-hold strategy, download Momentum Wealth’s new podcast series, The Property Investing Masterclass, which explores the fundamentals of residential and commercial property investing that every investor should know, regardless of age or experience.
Should I engage a builder or a designer for project plans?
Many builders offer in-house project design services, but is this the best option, or should investors engage an architect or designer for plans?
While it might seem more convenient to use one company to complete your design plans and build your development, the truth is it could cost you more in the long run.
Generally it’s best to engage an architect or building designer to draw your project plans, rather than going to a builder direct.
By utilising an architect or a designer, you will own the copyright to the plans, allowing you to tender the project to several builders to secure the most competitive bid (i.e. best price and contract conditions).
On the other hand, if you engage a builder to complete the plans, typically they will own the designs – therefore you can’t compare quotes from other builders.
If you decide to not build with that company, then you’ll be forced to pay thousands of dollars to buy the plans, or worse still, the builder may not sell them to you, meaning you’ll have to start from scratch.
When searching for a designer, make sure they have an understanding of your budget and experience with similar types of projects to yours (i.e. a duplex, multi-storey townhouses, apartment complex etc).
Just because the plans for a project have been drawn, doesn’t necessarily mean the project can be built.
There may be limitations to what’s possible, either technically or financially, so it’s important to engage a designer with experience with similar projects so they can produce designs that are practical and within your budget.
For more information on property development, download Momentum Wealth’s new podcast series, The Property Investing Masterclass, which explores the fundamentals of residential and commercial property investing that every investor should know, regardless of age or experience.
What’s the difference between survey strata and built strata?
Strata titles are common in Western Australia, particularly for specific types of dwelling stock, such as villas and apartments. But what’s the difference between survey strata and built strata?
Strata titles allow buyers to gain ownership of part of a property but share ownership of other areas of that complex.
Property types that are often strata titled include duplexes, villas, townhouses and apartments, and you’ll often hear that they’re either survey strata or built strata.
Quite simply, survey strata is surveyed by a licensed land surveyor and the land boundaries are shown as survey marks on the survey-strata plan – this does not define any buildings.
Built strata is the original form of the strata scheme and typically comes in 2 forms – those established prior to June 30, 1985, and those established after.
Prior to this date, built strata lots could only be within a building (i.e. ownership was only for everything inside the dwelling). However after this date, part of the lot could also be the land outside the building and may also include the building structure. (i.e. the exterior of the building including external walls)
As an investor considering buying a strata-titled property, it’s crucial to read and understand the strata plan.
The strata plan provides lot ownership information and relevant by-laws that set out what you can and can’t do with the property, as well as what you technically own.
For example, when buying a built-strata unit, do you own the associated car park and/or courtyard? The answer to this will have implications on insurance, maintenance (i.e. who’s responsible for these areas) and permission to alter exterior surfaces of buildings etc.
By-laws will vary from complex to complex but could include:
- Lot owners can’t amend the exterior of the property (e.g. solar panels, Foxtel dishes, roller shutters, tinting windows etc)
- Floor tiling is not allowed
- Pools and spas in common areas only allowed for those 16 years or older
- Lot owners may not reallocate their car bays
- No clotheslines on balconies
These are just a few of some of the possible by-laws set out in a strata plan.
Before buying a property it’s best to always refer to the strata plan yourself.
For more information on property management, subscribe to Momentum Wealth’s new podcast series, The Property Investing Masterclass, which explores the fundamentals of residential and commercial property investing that every investor should know, regardless of age or experience.
Major mall upgrade to boost suburb’s amenity
This south-of-the-river suburb is packed with amenity, and its offering is only going to be enhanced with a slated $750 million redevelopment of a local shopping centre.
Booragoon is located in the City of Melville, approximately 9.5 kilometres south of the Perth CBD.
Its neighbouring suburbs include Ardross (north), Mount Pleasant and Brentwood (east), Winthrop (south) and Alfred Cove and Myaree (west).
The population of Booragoon is 5,461, with a median age of 43 years.
The median house price is $880,000 with the dwelling stock comprising 79% housing, 17% semi-detached and 5% units.
While Booragoon has predominantly been low-density residential houses, new rezoning for medium and high-density stock around Garden City Shopping Centre, Riseley Street, Marmion Avenue and Leach highway will encourage a more diverse range of grouped and multiple dwellings.
Booragoon features high-quality amenity including the Melville Aquatic Fitness Centre, Booragoon Lake Reserve, Len Shearer Reserve and Booragoon Primary School as well as the Garden City Shopping Centre.
Both Canning and Swan Rivers are within 2km of the suburb as well.
In what will become another major drawcard for the area, Garden City is scheduled to undergo a $750 million redevelopment commencing in late 2017.
The upgrade will take about 3 years to complete and increase retail space by 43,000sqm with the number of stores rising from 190 to around 400.
Part of the redevelopment will include a comprehensive main street casual dining and leisure precinct, new cinema complex, assortment of fresh food and large format international fast fashion retailers and flagship stores.
Looking into the long term, Perth’s transport plan for 3.5 million residents identified Booragoon as a key secondary centre where new rail infrastructure will connect Booragoon north under the Swan River to Queen Elizabeth II Medical Centre and the University of Western Australia, as well as south to Murdoch Station.
This slated transport project would vastly improve the accessibility of Booragoon in the coming decades.
The suburb is bordered by Davy Street, Almondbury Road and Coomoora Road in the north, Norma Road in the west, Leach Highway in the south and Rogerson Road in the east.
Its main arterial roads include Kwinana Freeway, Leach Highway, Riseley Street and Marmion Street.
The suburb also features the Booragoon Bus Station, which is located at Garden City Shopping Centre.
32% of workers identify as professionals (19.9% WA, 21.3% nationally), while 15% are managers and 14% clerical and administrative workers.
For more information on how to find an investment-grade suburb, download Momentum Wealth’s new podcast series, The Property Investing Masterclass, which explores the fundamentals of residential and commercial property investing that every investor should know, regardless of age or experience.
Deals and Don’ts – Redcliffe, St James, Greenwood
Deals
Redcliffe Purchase price: $545,000 Purchase date: October 2016 Block size: 809sqm block Specification: 3 bedroom, 1 bathroom house built in 1979, zoned R20.
Deal: This property represents a deal as it is located nearby the soon-to-be built Redcliffe Train Station, which is part of the Forrestfield-Airport Link that is under construction. The new train station will provide great amenity to the area and the property is also subject to draft rezoning, which is likely to allow medium density development on the site. In addition to this the property is also in close proximity to the Perth CBD and Perth Airport. The property has also been recently renovated.
St James Purchase price: $490,000 Purchase date: October 2016 Block size: 582sqm Specification: 2 bedroom, 1 bathroom built in 1954, zoned R20.
Deal: This property represents a deal given its low price point and future development potential – the property is subject to rezoning as a draft R40. It is also in close proximity to Curtin University and the Perth CBD, which are two major employment and education hubs.
Greenwood Purchase price: $560,000 Purchase date: October 2016 Block size: 690sqm Specification: 4 bedroom, 2 bathroom house built in 1987, zoned R20/40.
Deal: This property represents a deal primarily because of its strong development potential being R20/40 and on a corner block, which allows for enhanced project design. The property also has good accessibility to Mitchell Freeway and Greenwood Train Station and is in good rentable condition making it suitable for a family.
Don’t
Queens Park For sale price: $340,000 Block size: 222sqm Specification: 3 bedroom, 2 bathroom villa built in 2001
Don’t: This property doesn’t represent a good investment because it is located on a fairly major road in a large homogenous complex of 12 villas. The property is surrounded by medium-density zoning, which will add to supply levels, most likely of similar villa stock, restraining capital growth and rental yields. The property is also under the flight path adding to noise pollution.
Finding the best location and commercial property for your budget
When buying a commercial property to establish a new business, the location and specifications of the premises are key.
However, as is the case with most start-ups, finances are tight given expenses are high and income is low, or perhaps non-existent.
In most cases, this means compromise, which was the case for one entrepreneur who was establishing a stand-up paddle board distribution centre in Perth.
This client engaged us with a $400,000 budget requiring a 140 – 150 square metre premise comprising mainly warehouse space, but he also wanted a small office and a showroom area as well.
The sticking point in the client’s brief, though, was that he wanted to buy the property in Balcatta, which is regarded as one of Perth’s premium industrial locations.
Knowing the local market, we advised the client that finding a suitable property within his budget in Balcatta would be near impossible.
With no room to expand his financial capacity, we advised the client that we’d search for properties in other locations that suited his budget and criteria, but we’d also examine Balcatta nonetheless.
While Balcatta was all but out of the question, our consultants were confident that, with assistance from our in-house research department, we could find a suitable property in a location that met the client’s needs.
With this in mind, we identified Wangara and Malaga as two appropriate areas to establish his stand-up paddle board distribution centre.
After an extensive search, our campaign confirmed what we had already known – Balcatta was too expensive for the client’s budget.
We advised the client that if he was determined to establish the company in Balcatta, there were a number of leasing options available that we had identified.
However, set on buying his own premises, the client valued our advice and decided he would be happy to consider the other locations that we’d also investigated – Malaga and Wangara. We recommended Malaga as his best option.
Providing the client with a shortlist of properties that we could walk him through and explain the benefits and drawbacks of each, the client eventually decided on a 143sqm site which we were able to negotiate the purchase price and contract terms.
While Malaga isn’t regarded as much as a premium industrial suburb as Balcatta, the former is still relatively central being just 11 kilometres from the Perth CBD, and it comprises property that, although generally older, offers great value for money.
More importantly, as a distribution centre, it fits the client’s needs given that Malaga borders Reid Highway, which is connected to Perth’s major arterial roads providing good connectivity to key retailers.
As an added bonus, we were able to acquire the property for just $310,000 – well below the client’s budget – which provided him with more financial capacity for other aspects of establishing his business.
Posted in 
Taxation Newsletter – March 2017
Re-characterisation of income from trading businesses
The ATO has released Taxpayer Alert TA 2017/1 to say it is reviewing arrangements that try to fragment integrated trading businesses to re-characterise trading income as more favourably taxed passive income. The ATO is concerned with cases where a single business is divided in a contrived way into separate businesses. The business income expected to be subject to company tax is artificially diverted into a trust and, on distribution from the trust, that income is ultimately subject to no tax or to a lesser rate than the corporate rate of tax.
The ATO explains that “stapled structures” are one mechanism being used in these arrangements, but the review will not be limited to arrangements involving stapled structures.
TIP: Taxpayer Alert 2014/1 deals with similar arrangements where trusts “mischaracterise” property development receipts as concessionally taxed capital gains to obtain a lower tax rate.
ATO warning: research and development claims in building and construction industry
The ATO and the Department of Industry, Innovation and Science have released Taxpayer Alert TA 2017/2 and TA 2017/3 as a warning to businesses that are not being careful enough in their claims or seeking to deliberately exploit the research and development (R&D) Tax Incentive program. The alerts relate to particular issues identified in the building and construction industry, where specifically excluded expenditure is being claimed as R&D expenses. The alerts provide clarification for a wide range of businesses who had been incorrectly claiming ordinary business activities against the R&D tax incentive.
Intangible capital improvements made to a pre-CGT asset
The ATO has issued Taxation Determination TD 2017/1. It provides that for the purposes of the “separate asset” rules in the Income Tax Assessment Act 1997 (ITAA 1997), some intangible capital improvements can be considered separate capital gains tax (CGT) assets from the pre-CGT asset to which the improvements are made, if the improvement
cost base is more than the improvement threshold for the income year when CGT event happened, and it is more than 5% of the capital proceeds from the event.
This determination updates CGT Determination No 5 to apply to the ITAA 1997 provisions, without changing the CGT determination’s substance.
TIP: Contact us if you would like more information about how this determination applies to your CGT situation.
Personal services income diverted to SMSFs: ATO extends offer
Since April 2016, the ATO has been reviewing arrangements where individuals divert personal services income (PSI) to a self managed super fund (SMSF). The arrangements, described in Taxpayer Alert TA 2016/6, involve individuals (typically SMSF members at or approaching retirement age) performing services for a client but not directly receiving consideration for the services. Instead, the client sends the consideration for the services to a company, trust or other non-individual entity.
The ATO has previously asked taxpayers to help identify and resolve these issues before 31 January 2016, offering to remit the related penalties. That offer has now been extended to 30 April 2017.
Depreciating assets: composite items
Draft Taxation Ruling TR 2017/D1 sets out the Commissioner of Taxation’s views on how to determine if an entire composite item is a depreciating asset or whether its component parts are separate depreciating assets. The draft ruling says that a “composite item” is an asset made up of a number of components that can exist separately. Whether one or more of the item’s components can be considered separate depreciating assets is a question of fact and degree to be determined in the particular circumstances. For a component of a composite item to be considered a depreciating asset, the component must be separately identifible as having commercial and economic value.
TIP: The draft ruling usefully lists the main principles to take into account when determining whether a composite item is a single depreciating asset or is made up of multiple depreciating assets. Contact us if you would like to know more.
Tax risk management and governance review guide released
The ATO has released a tax risk management and governance review guide to help businesses develop and test their governance and internal control frameworks, and demonstrate the effectiveness of their internal controls to reviewers and stakeholders. The guide sets out principles for board-level and managerial-level responsibilities, and gives examples of evidence that a business can provide to demonstrate the design and operational effectiveness of its control framework for tax risk. The guide was developed primarily for large and complex corporations, tax consolidated groups and foreign multinational corporations conducting business in Australia, but the ATO says the principles can be applied to a corporation of any size if tailored appropriately.
Overtime meal expenses disallowed because no allowance received
A taxpayer has failed in claiming deductions for overtime meal expenses before the Administrative Appeals Tribunal (AAT). The AAT denied his appeal because he was not paid an allowance under an industrial agreement.
The AAT noted that whether overtime meal expenses are deductible according to the tax law depends on whether the taxpayer receives a food or drink allowance under an industrial instrument. The AAT agreed with the Commissioner of Taxation that the taxpayer had not received an allowance of this kind and, in fact, had not received any allowance at all.
Time extension to review objection decisions disallowed – again!
The Administrative Appeals Tribunal (AAT) has refused to allow a taxpayer extra time to apply for review of a decision made by the Commissioner of Taxation. The taxpayer had previously made the same application for an extension, seven years after the Commissioner’s decision, but both the AAT and the Federal Court refused it.
In this later case, the AAT found that the taxpayer’s application should not be allowed because he had still not adequately explained why it took him seven years to ask for an extension and a decision review.
TIP: This decision illustrates that a taxpayer can continue to apply to the AAT for extension of time to apply for review of the Commissioner’s decision disallowing an objection, even after being previously rebuffed. The additional application must include new claims and the taxpayer’s case must have merit.
No deduction or capital loss for apparent guarantee liability
The Administrative Appeals Tribunal (AAT) has affirmed that two family trusts that were involved in a building and construction business with other related entities were not entitled to a deduction or a capital loss for $4.3 million that they claimed related to a guarantee liability. The AAT found that the documentary evidence and the oral evidence from the relevant trust controllers was not sufficient support for their claim that the guarantee obligation existed. The AAT noted that unusual features of the “guarantee deed” that put into question whether the trusts were genuinely subject to a guarantee obligation – including that the deed did not record any actions that the guarantors were to perform if the debtor defaulted.
Taxpayer denied deduction for work expenses of $60,000
The Administrative Appeals Tribunal (AAT) has confirmed that a mechanical engineer with a PhD qualification was not entitled to deductions for various work-related expenses totally approximately $60,000. The expense claims in question (for vehicle, self-education and other work expenses), were denied because the taxpayer was unable to establish the required connection between the outgoing amounts and the derivation of his assessable income as a mechanical engineer. Furthermore, in relation to a range of miscellaneous expenses (such as mobile phone and internet charges, professional membership fees, conference fees and depreciation), the AAT found that most of the deductions were not substantiated with sufficient (or any) evidence. The AAT did not exercise its discretion to allow these deductions on the basis of the “nature and quality” of any other evidence regarding the taxpyer’s incurring the expenses.
TIP: This case clearly shows the importance of properly substantiating any claims you make for work-related expense deductions. Contact us to discuss what documentation you should keep to make tax time easier.
Property Newsletter – February 2017
Momentum Wealth Golden Guinea Fund
Target returns:
17.5% per annum*
*based on the total return per annum over a 24 month investment term.
INVEST WITH CONFIDENCE
Fixed price building contract and planning approval completed means reduced risk from cost variations
Backed by director – key staff members have also invested and are personally guiding the project
Preferential equity – new investors receive preferential returns over existing investors
24 month investment term
STRONG INVESTMENT FEATURES
Established area with low supply and growing demand
Strong infrastructure – Fiona Stanley Hospital and Murdoch Health Precinct, Murdoch Activity Centre, Garden City expansion, Port Coogee Marina and more
Strong market fundamentals – as at December 2016, percentage of stock on market for sale is 1.16%* and rental vacancy rate is at 2.4%* *sourced from realestate.com.au and REIWA December 2016
LOCATION
The keystone of the suburb is the large leafy reserve located right in the heart of Samson. The Golden Guinea Fund project is set directly opposite this urban oasis, providing investors with access to a well-positioned metropolitan lifestyle that has the best of both worlds.
ELIGIBILITY
This syndicate is open to anyone** who meets one of the following criteria:
Combined gross income of more than $250,000 per annum (which includes gross rent, income from other investments and business turnover)
$2.5 million in net assets
Is able to invest $500,000 or more
** must be a wholesale investor under the Corporations Act (2001)
Pendragon Capital Ltd AFSL 237549
Deals and Don’ts – Eden Hill, Edgewater, South Lake
Eden Hill
Purchase price: $430,000 Purchase date: October 2016 Block size: 669sqm Specification: 3 bedroom, 1 bathroom dwelling, zoned R17.5
Deal: This property represents a deal because of its great condition (being recently renovated) coupled with its future development potential – using the corner zoning discretion and the 5% variation its zoning could be increased to R25. The cheap price point and the fact Eden Hill is a gentrifying suburb along with the individual benefits of the property with its location opposite a park make for good long-term growth prospects.
Edgewater
Purchase price: $532,000 Purchase date: October 2016 Block size: 789sqm block Specification: 4 bedroom, 2 bathroom house built in 1984, zoned R20/40.
Deal: This property represents a deal for its strong development potential being zoned R20/40, in addition with its location on a corner block, which will allow for enhanced development designs. It is also in a highly rentable condition featuring 4 bedrooms and 2 bathrooms making it suitable for a family.
South Lake
Purchase price: $450,000 Purchase date: October 2016 Block size: 775sqm Specification: 3 bedroom, 1 bathroom house built in 1987, zoned R20.
Deal: This property represents a deal because it neighbours a park and is subject to rezoning as a draft R60. The property also presents well with a basic internal presentation that is clean and liveable.
Don’ts – Applecross
For sale price: $299,000 Specification: 2 bedroom, 1 bathroom apartment in a complex of 21 built in 1964
Don’t: This property doesn’t represent a good investment because it is located on a busy road in an aging flat-style complex with other affordable housing. The complex is dated and poorly presented with little chance of revitalisation due to the strata ownership style. A number of new large-scale apartment developments from the nearby Canning Bridge precinct will also add significant new apartment stock to the area, which will contain future capital growth.
Suburb snapshot: Cottesloe
Cottesloe was established in the 1800s with the opening of the Fremantle train line and is now one of Perth’s most prestigious postcodes.
The beach-side suburb is located in the Town of Cottesloe, approximately 10 kilometres southwest of the Perth CBD.
Growth in the area took off in the 1890s, spurred by the opening of the Perth-Fremantle railway line.
Significant development occurred during the 1910s and 1920s aided by the promotion of the beachfront.
Today, there are four train stations in the suburb on the Fremantle train line including Victoria Street, Mosman Park, Cottesloe and Grant Street Station.
Neighbouring suburbs include Swanbourne (north), Peppermint Grove (west) and Mosman Park (south-west).
Cottesloe has a population of 7,398 with a median age of 40.
The median house price in the suburb is $1.7 million and features a mix of dwelling types consisting of 70% houses, 11% semi-detached and 19% flats and apartments.
66% of properties are either owned outright or being purchased, with 32% of properties being rented.
A massive 43.6% of residents identify as professionals, which is twice as high as the state and national averages at 19.9% and 21.3% respectively.
The suburb’s main features include the Cottesloe Beach, Sea View Golf Club, Cottesloe Central Shopping Centre and North Cottesloe Primary School.
The popular Claremont Quarter is also nearby, as well as the Swan River and Allen Park.
The suburb is bound by the Indian Ocean in the west, North Street in the north and Stirling Highway in the east, and features Stirling Highway and West Coast Highway as its main arterial roads.
Specialist medical loans – not so special?
Are you a medical professional seeking finance? Some lenders offer special deals for those in the medical industry, such as doctors, physiotherapists and dentists, among others. But are these exclusive loans all they’re cracked up to be?
A wide variety of lenders offer special rates and fee packages for medical professionals, including GPs, specialists, surgeons, vets, physiotherapists and dentists, among others.
While some of these deals might seem great, it’s important to examine the lending requirements and structures more closely before signing on the dotted line.
Cross collateralisation risks
Some lenders will require such special loans to be cross collateralised, which can tie you to a particular lender and restrict your lending capacity in the future.
This might not be specified upfront, so it pays to ask, and the lender may require security over your business.
This can create problems when it comes time to review your loan, and in the event that one of your properties underperforms, you may not be able to secure finance again or could even be forced to sell your property.
No LMI loans
Some lenders also offer a ‘no lenders mortgage insurance loan’, which can be an advantage for some borrowers and help them purchase their property sooner.
However, in some cases, the total cost of the loan over the period of time (including rates, charges etc) is higher than the saving, meaning it’s not a better option in the long term.
One 100% loan – or is it?
There are also 100% loans on offer to medical professionals, meaning you’ll require no deposit or lenders mortgage insurance.
In some instances this can actually be 2 loans though, consisting of an 80% loan with one lender and a 20% loan with a second lender. The second loan is usually at a higher rate though (presently about 8%).
In these circumstances it may be better to save a 10% deposit and apply for a 90% loan – with no lenders mortgage insurance – rather than pay the extra costs.
Obtaining a specialist package can be beneficial, but it’s essential to compare your options and understand the fine print before committing.
A good finance broker will be able to assist you with this, and recommend packages that suit your individual circumstances and work for you now and into the future.
Should I undertake my own development or join a development syndicate?
Many investors aspire to undertake a residential property development at some point in their investment journey, but is it better to complete your own project or join a development syndicate?
Whether developing yourself or through a syndicate, when done right there is no question that the end result can be highly lucrative.
More often than not, though, aspirational developers only hear about the big profits on offer and don’t understand the amount of time and effort required to complete a residential property development themselves.
As such, if you want to undertake a development on your own, it’s advised to engage a project manager, who can oversee the build on your behalf.
A good project manager will be able to guide you through the entire process, from designs and approvals, to selecting a builder and tendering work, as well as monitoring the progress of the project to completion.
This option allows you to have a high degree of control over the project, while having peace of mind and conviction in your decisions as you’re being advised by a professional.
Comparatively, a development syndicate is a much more passive means of property development.
Investors have little input into the process as the syndicator manages the project and has final say on all aspects of the development. That includes the final designs and fittings and fixtures to choosing the builder and trades etc.
Investors are kept up to date with regular progress reports, but it’s as simple as investing your funds and waiting for the syndicator to hand back the profits at the end of the project.
If you ask anyone who has completed a property development themselves, they’ll confirm that it’s essentially a full-time job, as you need to manage a vast array of consultants and the builder through the entire process.
This is why engaging a project manager to help you or choosing to invest in a development syndicate can be a much wiser option than developing on your own.
What’s the best type of investment property to buy?
When searching for your first investment property, investors are spoilt for choice, whether it be a house, apartment or villa. But what’s the best type of investment property to buy?
The answer to this question will largely depend on your own unique circumstances because the different types of properties offer different pros and cons.
Smart investors understand that they must acquire properties that work in tandem with their own investment goals, financial capacity, life circumstances and risk profile.
For example, if you have a high risk tolerance you may prefer a development site. If you don’t have a high disposable income, a villa that is neutrally geared might suit you better, and so on.
So what are the advantages and disadvantages of different types of investment properties?
Here’s a quick overview of the different benefits and disadvantages that are typically offered by houses, apartments and villas.
Houses
Benefits
- Usually better capital growth prospects compared to apartments and villas
- Relatively easy to add-value to through renovations/redevelopment
- Greater control over the asset
Disadvantages
- Lower rental yields compared to apartments and villas
- Greater maintenance required, which often means higher expenses
- Higher price point
Apartments
Benefits
- Higher rental yields compared to houses
- Often better rental returns, meaning lower or no holding costs
- Less maintenance required
Disadvantages
- Usually lower capital growth prospects compared to houses and villas
- Strata fees can be high, particularly if the complex has large common areas, such as pools and lifts
- Less control over the property with limitations for renovations due to strata bylaws
- More competition for tenants and buyers, particularly in large complexes and in areas where apartments are highly prevalent (i.e. CBDs)
Villas/townhouses
Benefits
- Relatively good capital growth prospects (not as good as houses though)
- Relatively good rental yields (not as good as apartments though)
- Ability to renovate the property (unless it’s restricted in the bylaws),
- Lower price point than houses
Disadvantages
- Strata restrictions can limit what you can do with the property
- Less control in terms of renovation options
- Fairly homogenous, similar to apartments, meaning there can be more competition when selling or leasing
Investors should also consider other investment options like development sites, commercial property as well as development and commercial syndicates in their investment plans, which are often part of the portfolio for more experienced investors. First time investors should generally start by looking at houses, villas or apartments, but again, individual risk appetites and circumstances apply.
Why you need to start your property investment portfolio in 2017
If you haven’t yet kicked off your property portfolio, here’s why you should start your property investment in 2017.
Most people are aware that property investment can be a great wealth creator, however many of us fail to act.
The reasons for this are varied, but typically centre on short-term matters.
For example, when property markets are booming people are typically concerned about property bubbles – they don’t want to buy at the peak and be part of a market ‘crash’, so no action is taken.
On the other hand, when the market is in a slump many are not imagining any recovery, believing that prices will only continue to fall, and again no action is taken.
While it would be great if property prices rose steadily in a straight line, the cyclical nature of property markets – as demand and supply drivers move up and down – means that this is not the case.
Although there are ebbs and flows in the property cycle, history has shown us that property prices in Australia’s capital cities have continued to rise over the long term.
Therefore, investors need to take a long-term view when considering investing in property and put the short-term matters into context.
So why should you start your property investment in 2017?
Two reasons.
1) the earlier you start the better, and;
2) the stats are indicating that 2017 will be the year to invest.
Get in as early as you can
The sooner you start the more time you’ll have in the market to capture compound growth on your property (i.e. you’ll have more time to create greater personal wealth).
So a $500,000 property acquired today that achieves 5% per annum growth over 10 years will be worth $818,334. That’s an additional $318,334 from the initial purchase price.
But hold that property for 20 years and it will be worth $1,339,341. That’s an additional $839,241 from the initial purchase price.
By holding the property for 20 years (instead of 10 years), the property can make a further $520,907.
Therefore, the sooner you start investing the more opportunity you’ll have to capture compound growth.
As the saying goes, it’s about time ‘in’ the market, not ‘timing’ the market.
While starting your property portfolio sooner rather than later is beneficial to achieve greater wealth, investors need to ensure they acquire high-quality properties that will outperform the market over the long-term.
2017: The year to invest
An increasing number of experts, media and recently released statistics have suggested that the Perth residential property market is primed for investment in 2017.
The latest data released by the Real Estate Institute of Western Australia (REIWA) shows that Perth’s preliminary median house price for the December 2016 quarter did not change from $520,000, which is a positive sign, as historically once all sales have settled this preliminary median generally increases, so Perth could in fact record an increase in price over the quarter.
Sales activity is increasing with the preliminary dwelling sales for the December quarter 2016 five per cent higher than the same time in 2015. For the week ending 31st of January 2017, property listings were down about 2% year on year, indicating that some of the excess supply in the market is starting to be absorbed.
Great time to buy right
Buying strategy is just as important as timing in order to maximise the benefits of any approaching upswing. Investors who examine potential demographic, social, infrastructure and planning changes will have the best chance in purchasing a property that will outperform the market.
For example, in 2007, our research team identified the City of Belmont as an investment-grade suburb with strong short and long term growth drivers exposing many of our clients to the rapid price growth that occurred in this area.
Finance Newsletter – February 2017
Some interest rates drop while others are going up?
Do you have the best rate available for your home and investment loans?
You may have noticed a Difference between home loan and investment loan rates? You might be able to save thousands per year in interest by reassessing your current loans. It costs nothing to find out.
If your interest rate is over 3.71% variable then you may be able to save by changing loans and or banks. I have access to a major bank that is currently offering customers a 3.71% variable rate (3.72% comparison rate) .This NOT a honeymoon rate, discount is for the life of the loan. Conditions apply – owner occupied homes only, principal and interest payments, minimum loan $150 000, 80% LVR maximum – No application fee, monthly or annual fees. If you are interested in saving thousands per year call Mercia finance to see if we can show you how to benefit from a better rate. We can also show you some great fixed rates and investment loan discounts. An example of what the above may mean to you – an average mortgage of $450 000 at the average big bank discounted rate of 4.4% = an annual interest saving of $3 105 per year. I may cost you little or nothing to get this rate for your mortgage – find out today.
Investors will have read that most banks are increasing the rate on investment loans. This includes current investment loans. If you are a property investor check your rates and find out if these increases apply to you. If you are not sure, ask Mercia finance for an obligation free loan check. Some institutions are not increasing the rates for investors. So this is a good time to make sure you have the best loan for your circumstances.
If you have questions regarding any type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA. Call us anytime. After hours is OK.
Taxation Newsletter – February 2017
ATO priority on settling cases – but not at any cost
The ATO has advised that it places a high priority on resolving tax disputes early, including through reaching settlements where appropriate, but that it will not settle disputes at any cost. It says “the sensible use of settlements” is part of its commitment to earlier and more effective dispute resolution. In this regard, the ATO has advised that in 2015–2016, it settled 1,362 cases (31% more than in the previous year) and that the increased number of settlements can be attributed entirely to settlements finalised as part of Project DO IT (Disclose Offshore Income Today).
TIP: The ATO’s stated policy of “placing a high priority on resolving disputes early, including through settlements where appropriate” is something that should be kept in mind in any dispute with the Commissioner, whether large or small. A settlement may provide a great opportunity to finalise a difficult or long-running dispute.
ATO develops work-related expenses risk profiles
The ATO has developed work-related expenses risk profiles to help it identify how work-related expense deduction amounts compare for similar taxpayers. The ATO said improvements in data analytics and modelling have allowed it to create a risk profile for tax agents’ practices based on comparing their clients’ work-related expenses claims with those made by similar taxpayers.
The ATO has said it will share these risk profiles with some tax professionals where their clients’ claims appear higher than expected.
TIP: The ATO’s increasing capacity to monitor the often difficult issue of work-related expenses claims means taxpayers and tax professionals need to take care when preparing returns. Contact us if you would like to discuss which of your work-related expenses may be tax deductible.
Onus on taxpayers to show no fraud or evasion: Full Federal Court
Several taxpayers have been unsuccessful in their appeals to the Full Federal Court in which they challenged tax assessments that dramatically increased their assessable income for certain income years. In each case, the Court confirmed that where the Commissioner of Taxation has issued an amended or default assessment out of time on the grounds of taxpayer “fraud or evasion”, the taxpayer bears the responsibility of proving that such fraud or evasion does not exist.
No disclaimer of trust interest: unsuccessful appeal
A beneficiary of two trusts whose assessable income was increased from some $70,000 to some $13 million in light of her entitlement to distributions from the trusts has been unsuccessful in claiming on appeal that she had “disclaimed her interests” in the trusts. Instead, the AAT found that she could not argue she had disclaimed her interests in the distributions. This finding was on the basis that she did not bring up having made “disclaimers” when she originally objected to amended assessments that the Commissioner of Taxation issued in 2013. Additionally, in any event, the AAT found that the disclaimers were legally ineffective because of the significant period of time between the distributions being made (in 2006 and 2007) and the disclaimers being made (in 2015).
TIP: Any attempt to disclaim an interest in a trust for tax purposes must be legally valid first – and the key consideration is that there must not have been behaviour that indicates implied acceptance of the interest. In this case, the taxpayer’s behaviour was problematic because she did not act until well after she received the distributions and they were assessed as part of her income.
Admin penalties of 75% for failing to lodge FBT returns
The AAT has confirmed that 75% administrative penalties were rightfully imposed on several companies for their failure to lodge FBT returns over a four-year period. The AAT found that the Commissioner of Taxation was obliged to impose a 75% administrative penalty because the FBT returns were not lodged, and that the “safe harbour” provisions did not apply to such an administrative penalty.
The AAT also found that it was not appropriate to exercise its discretion to remit the penalties in part or whole under the circumstances. The AAT relied on the criteria in Practice Statement Law Administration PS LA 2014/4 in arriving at its decision.
New ATO data-matching program: ride-sourcing
The ATO has announced a new data-matching program involving ride-sourcing providers. Under the program, the ATO will acquire data to identify individuals who may be engaged in providing ride-sourcing services during the 2016–2017 and 2017–2018 financial years. Details of all payments made to ride-sourcing providers from accounts held by a ride-sourcing facilitator will be requested from the facilitator’s financial institution for the 2016–2017 and 2017–2018 financial years. The ATO estimates that up to 74,000 individuals (ride-sourcing drivers) offer, or have offered, the services.
TIP: If you work as a driver for Uber or a similar ride-sourcing facilitator, the money you make is assessable income that needs to be included in your tax return. Contact us for more information about how the ATO’s data-matching program may apply to your circumstances.
Taxation ruling on commercial website deductibility
A new taxation ruling from the ATO sets out the tax deductibility of expenditure incurred in acquiring, developing, maintaining or modifying a commercial website for use in carrying on a business.
Broadly, the ruling explains that acquiring or developing a commercial website for a new or existing business is considered to be a capital expense, and is therefore not deductible. On the other hand, maintaining a website, including remedying software faults, is generally a revenue expense, so may be deductible.
Taxation determination on deductions for bad debts: trust beneficiaries and UPEs
In a new tax determination, the ATO states that a beneficiary is not entitled to a bad debt deduction for an amount of unpaid present entitlement (UPE) that the beneficiary purports to write off as a bad debt.
It says this is because the amount of UPE is not included in the beneficiary’s assessable income. Instead, the entitlement is used to determine how much net income of the trust is included in the beneficiary’s assessable income. This means that the the debt amount cannot be included in the taxpayer’s income in that year or in an earlier income year, which is a requirement for writing off a bad debt.
Taxpayer failed to prove that payments were “loans”
In a recent case, the Full Federal Court has found that several taxpayer companies had not discharged the onus of proving that assessments the Commissioner of Taxation issued to them were excessive. The amended assessments took into account income of some $4 million that the Australian companies received from overseas sources. The taxpayers had claimed that the payments were loans.
In allowing the Commissioner’s appeal, the Court majority held that it would not be appropriate to find that the taxpayers had provided the required proof that the payments were genuine loans; in fact, they had made inconsistent or “alternative” arguments about the nature of the payments.