Banks need to be thoroughly prepared for AASB 9, with proposed changes to negative gearing set to have a material impact on loss provisioning and profitability, according to RiskWise Property Research.

Accounting Mechanism With Gears

Under the new financial instruments, accounting standard banks will need to make provisions under an ‘expected credit loss’ (ECL) model, rather than the incurred loss models used previously.

Where banks identified an increase in credit risk, a loss allowance must be recognised in respect of a residential mortgage before it became past due.

The ECL impairment model must incorporate detailed macro-economic modelling and consideration of multiple forward-looking scenarios.

For residential lending, mortgage books need to be better analysed and in more detail across each portfolio.

Changes in tax legislation to create further challenges.

Wargent Advisory CEO Pete Wargent highlighted the potential impact of changes to negative gearing and capital gains tax legislation, if the ALP succeeds at the next Federal election, as one possible challenge for loss provisioning. Taxes

“Extensive RiskWise modelling shows that, nationally, dwelling prices would fall by 9 to 12 per cent should the proposed changes to tax legislation be voted through and, under AASB 9, banks will need to consider such forward-looking information in their models,” Mr Wargent said.

“This could soon become the base-case scenario as the Federal election approaches and banks need to prepare accordingly.

In addition to the obvious impact on each of the loan portfolios, banks will need to accurately assess the risks associated with future lending decisions.”

Regional modelling essential

Mr Wargent said although the proposed changes to tax legislation would be applied nationally, there would be meaningful variations in performance at the regional level. 

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“RiskWise models show that, by SA4 region and dwelling type, there will be significantly different impacts, and banks must use similarly detailed models or risk failing to comply with the standard,” he said.

“Even at the regional level the findings were often markedly different for houses and units, with material impacts in certain areas of highly concentrated rental stock that isn’t family-appropriate.”

Weaker housing market conditions already reflected a deterioration in buyer sentiment.

Our models have also assessed potential impacts on the price of new dwellings and consequently loss provisioning for construction loans needs to be updated where the risk of default increases.

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All these changes require lenders to manage this process in a thorough and timely manner to assess the impact on each of the SA4s regions.

External auditors will need to review ECL models and should work jointly with independent property research companies to ensure that bank models meet the requirements of AASB 9.

Due to the complexity and inherent uncertainties, the impacts should be reviewed regularly, potentially leading to significant adjustments.

Banks may not have adequate internal models for this complex scenario analysis.

If they don’t act now the impact could potentially be material to financial reporting and, in turn, to share prices.

Just as you can claim wear and tear on a car purchased for income-producing purposes, you can also claim the depreciation of your investment property against your taxable income.

Seasoned property investors know all about this one. In fact, some will take depreciation into account before purchasing their next investment. But it’s not just for the pros. Anyone who purchases a property for income-producing purposes is entitled to depreciate the building and the items within it against their assessable income.

Seasoned property investors will take depreciation into account before purchasing their next investment.

But others are none the wiser, which means that, every year, thousands of dollars go unclaimed.

To make substantial savings, all property investors need to do is arrange a qualified quantity surveyor to inspect their home and prepare a report for their accountant.

13 Evan St, Gladesville; nsw real estate

Picture: realestate.com.au/buy

 

So for anyone who’s unfamiliar with the process: it pays to learn.

Here’s a basic guide to lead the way. Let’s call it Deprecation 101.

1. What is property depreciation?

There are two types of allowances available:

  • depreciation on Plant and Equipment;
  • and depreciation on Building Allowance.

Plant and Equipment refers to items within the building such as ovens, dishwashers, carpet and blinds.

Building Allowance refers to construction costs of the building itself, such as concrete and brickwork.

Both these costs can be offset against your assessable income.

2. So how does a depreciation schedule help me?

Simple. A depreciation schedule will help you pay less tax. The amount the depreciation schedule says you claim effectively reduces your taxable income.

A depreciation schedule will help you pay less tax.

Depreciation is known as a “non-cash deduction” because it’s the only deduction that you don’t have to pay for on an ongoing basis; the deductions are in-built within the purchase price of your property. All other deductions, such as interest levies, will hurt your hip pocket on an ongoing basis.

3. Is my property too old to claim depreciation?

The simple answer is no. If your residential property was built after July 1985, you will be able to claim both Building Allowance and Plant and Equipment. If construction on your property commenced prior to this date, you can only claim depreciation on Plant and Equipment. But it will still be worthwhile.

Commercial and industrial properties are subject to varying cut-off dates.

Here is a chart showing the relevant timelines for differing types of construction.

REA797-Table-chart

4. Shouldn’t my accountant prepare this report?

If your residential property was built after 1985, your accountant is not allowed to estimate the construction costs, nor are real estate agents, valuers or solicitors.

According to Tax Ruling 97/25, issued by the Australian Taxation Office (ATO), quantity surveyors are appropriately qualified to estimate the construction costs, when those costs are unknown.

According to Terry Aulich, Chief Executive Officer of the Australian Institute of Quantity Surveyors (AIQS), while accountants can offer general advice on other aspects of tax depreciation, construction costs and property depreciation are domains that require highly technical expertise.

“Quantity surveyors are specialists in the accurate measurement of construction costs with a view to maximising a client’s financial position in relation to their property assets. Only a fully-qualified quantity surveyor brings the appropriate education, experience and training to provide reliable figures upon which to base a property tax depreciation schedule,” says Terry.

“One doesn’t want to rely on best guesses when dealing with the ATO – especially when there is professional help available.”

Terry also suggests that clients should check the credentials of anyone claiming to be a quantity surveyor. He recommends that the first question clients should ask their quantity surveyor is whether they are a member of the AIQS, as membership indicates that a quantity surveyor has completed an accredited qualification.

5. Will you need to inspect my property?

The Australian Institute of Quantity Surveyors (AIQS) Code of Practice stipulates that site inspections are necessary to satisfy ATO requirements.

A trained quantity surveyor will ensure all depreciable items are noted and photographed. This guarantees you won’t miss out on any deductions. The documentation can then be used as evidence in the event of an audit.

It’s very common for quantity surveyors to liaise directly with the tenant or property manager in order to cause minimal disruption to the tenant. The best time to get a quantity surveyor to inspect your property is immediately after settlement and hopefully just before the tenant has moved in.

6. My property is renovated. Can I still claim?

Yes, but you will need to know how much you spent on renovations. Providing this information is an ATO obligation.

If the previous owner completed the renovations, you are still entitled to claim depreciation.

In either case, where the cost of renovation is unknown, a quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation.

7. How much will my depreciation schedule cost?

The cost of preparing a tax depreciation schedule varies according to a number of factors, including the type of property you’ve purchased, its location and size.

Most of the leading quantity surveyors offer a money back guarantee to save you twice your fee in the first year, or they give you the report for free.

So you have absolutely nothing to lose – and many deducations to gain.

To sweeten the deal further, quantity surveyor fees are 100% tax deductible.

8. How much will I save?

Each property is different and many factors must be considered when preparing a property depreciation schedule. There are several depreciation calculators on the market, many of which can be found easily through a Google search for “depreciation calculator”.

Don’t pay for a property depreciation estimate; in my opinion, the best ones are free.

9. How long will it take to complete my schedule?

Your depreciation schedule will take approximately 2-3 weeks to complete, as long as the quantity surveyor can inspect your property without delay.

10. I bought my property 3 years ago. Can I still make a claim?

Yes, you can. Your accountant can amend your previous tax returns as far back as two years ago. There are some exceptions, so contact your tax agent or the ATO for clarification.

There is more education about the property market available than ever before.

Yet many first home buyers remain quite clueless about the process.

And that means when they are involved in their first property transaction they come across a bunch of unfamiliar terms, which doesn’t help with their stress levels.

So, here are five terms that first home buyers must understand.

1. Cooling off period

Market Cooling

A cooling off period doesn’t have anything to do with jumping in a pool on a hot summer’s day.

Rather, it’s the legislated time that buyers have to change their mind about their property purchase.

The length of cooling off time does vary from State to State but it is generally a few business days following the signing of a Contract of Sale.

While it does give buyers an out, they could be liable for a small fee to walk away.

Plus, there is no cooling off period when buying at auction.

2. Conveyancing

Conveyancing is one of the terms that you generally won’t have come across unless you’ve bought a property before.

Conveyancing is the legal transfer of the property’s title from the seller to the new buyer and is usually completed by a legal professional called a conveyancer.

This takes place on settlement day, when the property becomes yours, but a conveyancer can also help with other legal checks and balances before that time such as any caveats on the property.

3. LMI 
Metropole Property Home Buyers Enquiry

LMI or Lenders Mortgage Insurance is insurance that protects the lender if a borrower defaults on their home loan.

For loans with a greater than 80/20 loan to value ratio, borrowers will generally have to pay LMI, which can cost thousands of dollars.

That said, borrowers can capitalise LMI onto their home loan, which means you don’t have to physically have the money.

The thing with LMI is that while it is an additional expense, it can help first home buyers into the market sooner rather later.

That’s because saving a 20 per cent deposit is difficult so using LMI allows you to buy a property which will likely increase in value far more than what the insurance cost you in the first place.

4. Owners Corporation

Many first home buyers purchase units or attached dwellings because of their affordability relative to houses.

When they do, they across the terms owners corporation or body corporate, which is the legal entity that manages that complex on behalf of all of the owners.

It schedules the maintenance and repair of common property, such as a swimming pool, as well as collects quarterly fees from owners to cover administrative costs and regular upkeep such as painting.

5. Capital Gains Tax

One of the major changes of recent times has been the rise of rentvesters, who are often first home buyers. capital-gains-tax-money-government-pay-property

These are first-time buyers who opt to continuing renting while investing in a property elsewhere.

A term that investors must understand is Capital Gains Tax, because you’ll eventually have to pay it when you sell the property at some point in the future.

CGT will need to paid on any investment properties that achieved a capital gain during your period of ownership.

However, there is a 50 per cent discount for investors who hold the asset for more than 12 months. 40327469_l

Plus, the capital gain is classed as income during the year you sold it, so the tax that you pay will depend on how much you earned that year.

No one likes CGT, but because it’s not going anywhere anytime soon, you might as well learn as much as can about it, including when might be the best time to sell to reduce its impact on your bottom line.

Cooler market conditions are enticing more first home buyers into property markets across the country.

They are making the most of softer prices and the savvy ones are educating themselves before taking that important first step on the property ladder.

Free Strategy 570x292

Blockchain, a collection of digital ledgers that updates through a peer-to-peer communication, has risen in popularity over the last year mostly through cryptocurrency, but one report details how technology can adapted to the rental market.

Outlined in the Understanding the Disruptive Technology Ecosystem in Australian Urban and Housing Contexts: A Roadmap report by the Australian Housing and Urban Research Institute, blockchain has potential to improve tenant-landlord relationships.

The report mentioned online rental application forms, using 1Form as an example, and how their usefulness could be enhanced through blockchain.

“In that case, there could be a full ledger of the applicant’s rental records, their correspondence with the agents and landlords, if they had been in arrears, their bond lodgements, etc.,” the report noted.

“Such clear ledgering can potentially replace the need for references as the applicants’ full rental history is available for view.

“Conversely, however, this may also potentially disadvantage vulnerable individuals in private rentals, particularly if they had trouble keeping up with rental payments due to unstable employment, or if they have special needs (such as grab rails and level access that may require some modification to the dwelling) that some landlords may discriminate against.”

Ledgers could also be made available for a landlord’s history, which could contain how quickly they responded to repair requests, if they have a habit of raising rents, if they were taken to a tribunal and what the outcomes were.

The reason for keeping these ledgers transparent between tenant and landlord also has the potential to improve how the private rental sector functions, the report noted.

The report added there would need to be legislative safeguards in place that protect the privacy of all parties involved.

“While it is important to protect tenants’ privacy and identity, provisions must be made to include clauses where, with tenants’ permission, such information can be shared in the context of tenancy transfer and linking up with necessary services,” the report stated.

Did you know you can use the equity in your house to help finance the purchase of an investment property?

We sat down with Bankwest Stores and Lending Network General Manager Carolyn Morris to learn how owner-occupiers can parlay their home equity into a career as a property investor.

What is home equity and how can it help me?

Home equity is the difference between a property’s current market value and any debt held against it.

“The good news for first-time investors is that equity may be used towards the purchase of an investment property,” says Morris.

“Depending on your particular financial circumstances and the amount of equity available in your home, you may even be able to finance the entire purchase price of your investment property, including any additional costs such as stamp duty and settlement fees.”

18 Austin Avenue, North Curl Curl NSW REAL ESTATE

Picture: realestate.com.au/buy

It’s important to remember that you might not be able to use the entire amount of your available equity, as a dip in property prices could leave you exposed.

“If your financial circumstances permit, a bank will more typically lend you 80% of your home’s current value, minus any debt still owing,” says Morris.

How to calculate your home’s useable equity

Let’s say your home is worth $500,000 on today’s market and you still owe $200,000 on your mortgage.

Given most banks will likely lend you no more than 80% of your home’s current value, here’s how to calculate your home’s usable equity:

• Your home’s value = $500,000 x 0.80% = $400,000
• The amount of your outstanding loans = $200,000
• Your home’s potential useable equity = $400,000 – $200,000 = $200,000

So, if your home is worth $500,000 and you still owe $200,000 on your mortgage, you have $200,000 of useable equity towards the purchase of an investment property.

But “you’ll still need to show the bank you can afford the repayments on the full loan amount, which will include both the previous mortgage and the new one,” warns Morris.

Read more: Low income strategies for investing in property

13 Evan St, Gladesville; nsw real estate

Picture: realestate.com.au/buy

How much can I spend on my investment property?

To determine the value of an investment property you may be able to buy, Morris says a general rule of thumb is to multiply your useable equity by four.

“If the potential useable equity on your home is $200,000, you may be able to purchase an investment property worth up to $800,000, inclusive of stamp duty, legal fees and other costs, subject, of course, to your ability to afford all repayments,” she says.

How much will it cost to access my equity?

There are various factors that can impact the cost of accessing your equity.

Morris says if you want to access more than 80% of your useable equity, you’ll need to pay for lenders mortgage insurance (LMI), the price of which varies greatly depending on the lender, the level of risk and the interest rate charged.

“If you decide to switch lenders, you’ll need to take into account additional costs, such as application and government fees. There may also be costs associated with closing your current loan product, especially if your home loan predates 1 July 2011, when exit fees were abolished,” she says.

In short, using the available equity in your home makes buying an investment property an achievable goal.

If you think it may be the right path for you, speak to a trusted lender for specific advice that takes your personal financial situation into consideration, as well as other professionals such as your accountant, and property experts.

Read more: Home loan calculators from Bankwest

Carolyn Morris, Bankwest

 

To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this report.


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This webinar was presented on 28 June 2018.  It shows you a simple process to follow if you want to make big profits on your next renovation project, and how Real Estate Investar can help.


 

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Register for a demo today and let us show you how we can help you make large profit on your next renovation.

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Setting the weekly rent on your rental property can be a bit of a tightrope.

List the price too low and you’ll be faced with hundreds of potential tenants at your open for inspections, as well as a deluge of applications. But list it too high and there’ll be tumbleweeds blowing through your applications folder.

So when your current tenants are moving out and you want to boost your rental yield from your new tenants, how can you increase the weekly rent but still ensure you attract a wide range of tenants?

Test the market

With thousands of renters on the lookout for properties each week in every Australian capital city, as a rental property owner the odds are stacked in your favour.

So why not see how much people are prepared to pay to stay in your property?

terrace house

You need to understand the market in order to maximise your rental yield.

Hocking Stuart Richmond property manager Jo Leonardis says the beauty of the rental market is that you can always start your price high and then adjust it down if required.

“For example, one property we might be able to lease between $550 and $600 in this market, so we’ll put the property on at $595 per week and see how that goes,” she says.

“We say to our clients, ‘Look, let’s try X amount for the first couple of open for inspections, and then let’s bring it down if we have to’. So we test the market if need be, but we don’t go over the top.”

But make sure you crunch the numbers. If you’ve got your heart set on a certain amount but your property is vacant, how many months at that higher amount will it take to make back what you’re losing because the property is empty?

Be strategic

Leonardis says if you want to achieve a rental yield that’s at the very upper end of what you think might be possible, it can be an effective strategy to advertise your property at just under a major price hurdle, in the same way that a consumer item might be sold at, say, $19.95.

“If you’re putting it on at $600 a week, then you’re cutting out a bit of the market that can possibly afford to pay in the high fives,” she says.

“If you’re putting the rent at $595, you’ll see that you’ll get a completely different set of tenants and people walking through the door. So it’s just that psychological justification. Even $5, it does do a lot for people’s interest in attending the open (for inspection).”

cosy rental

Price strategically – don’t forget there are tenants who might be searching just under your bottom line. Picture: Getty

Know your market

The simplest way to know whether an increase to a certain level will put off too many prospective tenants is to keep abreast of where rents are at for similar properties in your suburb and surrounds.

Leonardis says it can pay to regularly monitor what other properties are achieving in rent nearby, to ensure your expectations are realistic.

“People get put off by seeing other properties and competitors putting rents at a different scale,” she says.

“It’s all relative to the market. Week by week the market changes. So, for us, we look at it on a weekly basis.”

“Twenty dollars here or $20 there doesn’t affect too much, it’s when it’s a massive jump and you can’t really justify why it’s an extra $100 a week.”

Review regularly

Leonardis says you’ll also reap better returns for your rentals if you adjust rents up throughout a tenancy, as tenants then become conditioned to paying more as time goes on.

“Review rent every 12 months, and provide comparable properties to justify the increase,” she says.

“In a stable market, obviously you have to look at it a little bit more carefully, but we’ve been successfully increasing rents. Tenants have been OK with it. They kind of expect it, I think, every year.”

 

They say too many cooks can ruin the broth, but when you own an apartment, townhouse or unit in a block, multiple opinions are part of the deal. That’s why body corporates exist.

A body corporate – or owners’ corporation, as it’s more commonly known – brings together all the individual owners within a single strata titled property, like a block of flats. Strata is a way of handling legal ownership of part of a building.

The owners’ corporation manages shared expenses, decides how common areas, like gardens and lobbies, are maintained and deals with issues between owners, like noise and parking.

common foyer area

A body corporate is responsible for common lobbies. Picture: realestate.com.au/buy

Emily Sim, the head of property management at Ray White, says the cost and specific rules of owners’ corporations differ between buildings and are spelled out in the contract of sale. She explains the ins and outs.

What does a body corporate do?

A body corporate makes the decisions for how they want the common grounds of the property to be maintained.

They also manage all the outgoing expenses for the maintenance of the building, Sim says.

It’s responsible for things like car parks, driveways, entrances, lifts and lobbies, pools, shared courtyards and gardens.

Do owners have to be part of it?

Across Australia, owners are legally required to be part of the owners’ corporation if their property is subject to a strata title, and must pay for things like insurance.

Owners will often pay an external strata company to do the job for them.

“An annual general meeting is held to review all of the practises and typically any changes to the plan only occur when there is a vote and the majority vote for an alternative,” Sim says.

An extraordinary annual general meeting can be called to deal with “unforeseen issues.”

How much does it cost?

Owners pay funds into the body corporate each quarter or year.

Sim says that in most cases the more square metres of the complex you own, according to your property title, the more in contributions you will pay.

“A good example is a property which has a car park and storage cage. This property owner’s financial contributions would be higher than a property owner with a one-bedroom flat in the same building,” she adds.

Most owners’ corporations also maintain “sinking funds”; a “small back-up pool of money to cover unforeseen costs,” Sim explains.

body corporate buildings

Owners pay funds into the body corporate each quarter or year, with the amount based on square metres owned on property title. Picture: realestate.com.au/buy

What is a “special levy”?

A special levy can be charged if there is a cost for the running or maintenance of the building that is in excess of the standard levies.

For example, it could be to pay for a new roof or to repair termite damage.

“It is always voted on in an AGM or extraordinary AGM, but if the work needs doing, it generally gets voted in,” Sim explains.

Should owners be involved?

Every property owner should have an active interest in how their property is managed, according to Sim.

With the owners’ corporation in charge of how the property appears, as well as maintenance, there is an obvious link with how much an apartment, townhouse or unit within it is worth.

“Minutes from the AGM and history of the strata management can hamper a sale price and, in some cases, create so much fear that prospective buyers lose interest in the property; this ultimately will affect a sale price too.”

 

The positive cash flow property investment strategy involves seeking out properties where monthly income exceeds holding costs.  

This will generate surplus cash flow for you pre-tax.

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