What should property investors be doing in the current market?

Currently, there are many excellent opportunities for investors to purchase prime real estate with great capital growth potential especially in most capital cities throughout Australia.

Some of these areas have a high proportion of rental properties and there are opportunities to turn ‘ugly duckling’ ex-rental properties into swans through cosmetic renovations.

Traditionally ex-rental properties that have been neglected by their owners have offered excellent opportunities for astute first home buyers in the real estate market.

This is particularly the case with self-managed investment properties because many of these owners lack the discipline to conduct regular property inspections and ensure that necessary maintenance is undertaken, such as replacing carpets or repainting internal walls.

A typical investment property of this kind may be one that has been leased to a successive number of students with the owner trying to sell the property while it is still under lease.

Because we live in a time-poor society, badly presented former rental properties are penalised by property buyers even though a small investment can totally rejuvenate these homes.

Astute home buyers should focus on well-located areas that have an above average rate of rental properties which means that the chances of buying a poorly presented property are higher and the buyer has confidence that it is located in an area that historically achieves high levels of capital growth.

If you plan to buy an ex-rental property for renovation purposes it is important that you claim your full depreciation benefits. All properties regardless of age can quality for tax depreciation benefits.

For example, a property that is more than 50 years of age could still qualify for thousands of dollars each year in tax depreciation benefits for the owner.

However, many property investors who renovate ex-rental homes, make the mistake of throwing out many items without understanding that they may claim tax benefits on these materials at 100 per cent of its written down value in the year of disposal.

A typical amount spent on a home renovation ranges from $20,000 to $50,000 for a basic refurbishment and the investor can qualify for both plant and capital works allowance as a tax deduction and the residual write-off of the disposed item.

However, to qualify for these tax benefits, the investors have to undertake a depreciation schedule for the property as near to the date of purchase as possible.

The depreciation schedule will provide the tax office with a ‘physical snapshot’ of the property and the schedule will itemise all of the fixtures in the property that can be depreciated for tax purposes.

The depreciation schedule undertaken at the time of purchase also means that the investor could still qualify for depreciation on many of the existing fixtures in the property providing the investor intends on keeping those existing fixtures/items and waits for a reasonable time to begin renovations. Many people do not realise that older properties still maintain substantial allowance in plant and equipment regardless of their age.

Anyone who has purchased an older property for investment purposes should therefore carefully consider the significant taxation benefits that can be achieved before beginning any construction work.