Neglected ex-rentals a gold mine for investors

Former rental properties offer opportunities for fast capital gain through cosmetic renovations.

These ‘ugly duckling’ ex-rental properties have often been neglected by their owners, but offer excellent opportunities to astute investors.

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 performed, 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.

Poorly presented former rental properties are severely penalised by property buyers, even though small investments can totally rejuvenate these homes with minor projects such as new carpets and painting.

DEPPRO generally finds that a large number of rental properties come onto the market during the first months of the financial year, as owners decide to dispose of assets after reviewing their finances.

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

When an investor is undertaking even modest improvements to an ex-rental property, they should be aware of the generous tax depreciation benefits associated with property investment.

For example, investors who replace old floor coverings such as carpets can qualify for tax depreciation benefits.

Unfortunately, many investors throw out items without understanding that they can claim tax benefits on them at 100 per cent of their written value within the year of disposal.

Investors can qualify for both plant and equipment assets and capital works as tax deductions, as well as the residual write-off of the disposed item.

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

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

When the depreciation schedule is undertaken at the time of purchase, the investor can still qualify for depreciation on many of the existing fixtures in the property, provided that they intend on keeping these fixtures and wait for a reasonable time before renovating. Many people do not realise that older properties can still yield substantial plant and equipment deductions.

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

Anyone who has purchased an older property for investment purposes should carefully consider the significant taxation benefits available before beginning any construction work.