Highlights from this week:
- Funding new house and land packages
- How to get deductions more regularly and sooner
- Everyone has an opinion about property but who do you listen to?
- Capital growth and high return. Impossible – or is it?
- What makes a top agent – someone you can rely on?
Is it possible to get capital growth and high return? – Clint Greaves
Kevin: No doubt, that is the goal. I’d say that all property owners are looking for good capital growth and a healthy return on investment. Is it possible to get both? Yes, it is, according to Clint Greaves from Real Estate Investar. Clint and his team provided Your Investment Property with a list of 98 suburbs in Australia that are currently giving sky-high yields. Clint joins me to talk about the findings.
Clint, thanks for your time.
Clint: Thanks, Kevin.
Kevin: It’s possible; we know that, because you’ve come up with the list. Can you tell me how you actually came up with these suburbs? What was the selection criteria?
Clint: Sure. At Real Estate Investar, we’ve been looking at the entire market, collating and analyzing all of the sales and all of the rental listings right across Australia, literally on a daily basis for the last 11 years. We look at all the activity that’s happening, and we can then do a lot of analysis to understand exactly what the top, the middle, and the bottom is from a selling perspective and also from a rental perspective right across the country and each suburb.
Not just in the suburb, but looking at it from a dwelling type – for houses, for units, and townhouses – and also for the number of bedrooms in that dwelling. If you think about the median selling price and also the median rent for a two-bedroom house versus a three-bedroom house versus a four-bedroom house, they’re very different, let alone houses versus units and so on.
We look at all of that data all of the time and we produce a number of sets of stats and also some advanced investor-centric search tools to help people identify suburbs where median yields are higher in a particular suburb for that type of property than others.
Kevin: Yes, not only is it a very comprehensive list in the article itself – which is called “98 Suburbs with Sky-High Yields” inside Your Investment Property magazine – there’s also a really good list of pros and cons for positive-geared property.
The other thing I like about this, Clint, is that on each of these suburbs that you’ve identified, you’ve given a really good description of the types of properties in there and a little bit about the marketplace, so it’s a very comprehensive list.
Were there any surprises, any inclusions in that list that jumped out at you and you thought “Well, I didn’t think this one would make it?”
Clint: Yes, there were a few. The first point is that we’re looking at medians or we’re looking at midpoints. So, within a suburb, even within a particular dwelling type, there’s still going to be a wide range of properties.
We’re looking at the median or midpoint for that suburb or property type, and it’s really a case of being an indicator of where opportunities could lie and where there’s an opportunity for investors to look and do research and actually do the analysis to understand what the underlying cashflows would actually be. Because these medians are based on gross yields, they’re based on the median listing and the median rental prices, so it’s really about further analysis.
If you look at the list, there’s a number of regional towns, which is exactly what we would have expected. But there are also surprises. One example is if you look at a suburb like Ultimo in central Sydney, it’s anything but a regional town. So, on first glance, that’s something that you wouldn’t expect to see on that list.
But again, when you start to say “Okay, why is it on the list?” and you dig a little deeper and you see that the actual property type in Ultimo that made the list are studio and one-bedroom units and then you look at the makeup of the suburb and what the drivers are from a demand perspective, you can see that it’s heavily influenced by student accommodation and there’s the UniLodge.
That sort of information then starts to identify what sort of investment property this would be. And when you’re looking at that sort of investment, you would expect a higher gross yield, but of course, you then need to consider all the other costs that sit between the gross and the net yields, things like vacancy rates for student accommodation in particular, potentially, and then maybe some higher costs in terms of body corporate fees and other fees that sit between the gross and the net.
On the face of it, Ultimo was a bit of a surprise. But then when you dig in and look at why it’s there and what the drivers are, then it starts to make a lot more sense.
Kevin: That leads me to my next question, which is what were some of the common features that became apparent from the list? Was there some sort of uniformity?
Clint: Yes, there were. When you start to look at it, there are a couple of key things. As I mentioned, there are – as we would have expected – a number of regional towns. If you look at the makeup in terms of the type of properties that were making the list, there are a number of studio or one-bedroom units that, as I mentioned, would typically have higher gross yields but oftentimes, there are additional costs that need to be considered when you’re calculating your actual gross cashflow.
If you look at the numbers, 29 of the 98 suburbs and property types that we identified were studio or one-bedroom units, but there were still 44 of the 98 that were suburbs with high median gross yields for houses. We’re talking about two- or three- or four-bedroom houses.
So, there are definitely lots of opportunities for high cashflow opportunities out there when you start to look at all of those suburbs.
Kevin: Yes, very encouraging when you look at the list. A final question for you, Clint. Was there any one state in Australia that stood out in terms of the number of suburbs that you identified?
Clint: There were. There was one state in particular that stood out at the top of the list, but also one that we wouldn’t necessarily expect near the bottom of the list. At the top of the list, Queensland had 36 of the 98 suburbs, so approaching a little over one in three of the suburbs and property types identified were based in Queensland.
You had 19 in New South Wales, getting down to 12 or 13 in Tasmania. But surprisingly if you think about it from a population and size perspective, Victoria only had 8 of the 98 suburbs that we identified. And when you look at those eight suburbs, none of them had a median gross yields of more than 7% or 8%. So, that was a surprise at the bottom.
But again, I’d just emphasize that these are median rents based on all of the properties, so it’s definitely not to say that you can’t find lots of great cashflow opportunities in the suburbs that were identified in Victoria, or anywhere else for that matter, and other suburbs where you can identify good gross yields as a starting point and then drill in and look at the actual numbers from a cashflow perspective on an individual deal.
Lots of interesting insights, I think, in the report.
Kevin: Yes. My guest has been Client Greaves. Clint is from Real Estate Investar. They supplied the list to Your Investment Property. That is out now. Make sure you get a copy of it. It’s a great piece of research, I can tell you.
Clint, thanks for your time, and congratulations on your work, too.
Clint: My pleasure. Thanks very much, Kevin.
Buying house and land packages – Andrew Mirams
Kevin: I recently recorded a Skype interview recently with Andrew Mirams from Intuitive Finance, which you may have seen. We were talking about financing new and established properties and we branched a little bit into house/land packages.
It’s a conversation all on its own, isn’t it, Andrew? How are you?
Andrew: Good day, Kevin. I’m very well. And yes, absolutely it is. With the amount of building and development that’s happening all around Australia, it’s quite a current concept, one that’s happening a lot around the place.
Kevin: Does it happen more with first-home buyers? Do you find that that’s the sort of package they’re looking for, Andrew?
Andrew: It is often an affordability issue where you have newer estates that are more affordable than inner city and inner rings. Obviously, where you have inner Melbourne, inner Sydney, inner Brisbane, they’re all developed so they’re not house and land packages, but you have new estates in areas all around outer suburbs, where from an affordability or a location perspective, people are looking to buy into.
Kevin: Is it always advisable to buy the land and then engage the builder, or do it as a joint package? How does the bank look at that?
Andrew: That’s a great question, Kevin. There are probably two ways of doing a house and land package. There’s one we would term as a turnkey solution or a turnkey purchase, and the other one is where you actually buy the land and then build the house on it.
The differences are that a turnkey is really one where you go, you find the piece of land, you find the house you like, and you’ll contract the builder and the land, you’ll put down a 10% deposit. It’s very much similar to a traditional purchase where you put down a 10% deposit and the balance on settlement. That’s kind of what you get with a turnkey solution.
You’ll agree to the price, the fixtures, the fittings, how it and when it will be built and what time it will be built by, you put down your deposit, and then the builder goes and builds it. On completion, they’ll hand you a brand-new home and you’ll pay the balance. And that’ll be done in a fairly timely manner, because obviously, the builders want to get in and get out. They’re holding the actual cost through the whole development, so they want to turn that around relatively quickly.
With a house and land, it’s different. You can buy the land… And a lot of people will do this. It might be an affordability issue, it might just be that they’re in no hurry, they’re not sure what style of house they want to put on, etc. Do they want a pool? Do they want a big shed? All the other things.
With a house and land deal, you can settle on the land today, and then you have time to make those decisions about your house, and then you’ll do your house as a separate contract and normally as a separate loan. Within that, instead of just paying a deposit and then the balance on completion, you’ll pay for your land, and then through a building contract you pay certain stages.
Traditionally, the stages are the base stage, then you get your frame stage. You go then to your lockup stage, so once it’s all bricked up or boarded up, the roof and the door is on so that it can be locked up as the name suggests. Then you have your fit-out or fixtures stage, and then pretty much your completion stage.
Kevin: There are quite a few stages to that sort of development. Does the bank normally come out and just double-check that all those stages have been completed before they’ll actually forward the money?
Andrew: It varies a lot lender to lender. Normally, they won’t go out and view a slab; they’ll assume that the slab is down, because nothing much can be done there. But as you get to the main stages, the lockup, they will generally do an inspection on lockup just to verify that it is in fact at that stage. Certainly, at fit-out and on completion, they’ll absolutely want someone to inspect and make sure that the work’s been done.
Kevin: With that type of construction, let’s hypothetically say that there was a build cost of $500,000 and it’s going to be done in maybe half a dozen stages. Is the full $500,000 funded right up front? In other words, when do you start paying off the loan?
Andrew: It’s a pay-as-you-go type arrangement, because the house doesn’t get built in one lump sum; it gets built progressively. So, it goes on a progressive stage like the stages I’ve just mentioned.
You’ll pay a deposit, then as the base – either the footings or a slab – goes down, then you’ll pay another percentage then. So, a 10% deposit, 10% at that stage. The frame stage is generally a smaller stage. About 15% might be attributed to that stage. Then the lockup is pretty significant with the roof and the doors, and if it’s getting bricked and everything, that’s normally a significant stage. That might be 25% to 35% of the build, and that’ll draw down that part then. The fixtures and fittings, now your carpentry, cabinetry, any dishwashers and all those things that are being installed all go in, so that’s another significant stage, and they’ll draw down there.
They draw down the money as it gets expended. So, as you get to the stages, you put in a progress draw claim to the lender, it gets shuffled off, and then once it’s paid, you pay interest only on what you’ve actually borrowed.
You might have, like you said, that peak limit of $500,000. You don’t start paying interest on the $500,000; you only pay as you go, as you hit those stages. So, it gets expensive near the end once it’s actually complete, and that’s when people are generally getting excited because they have their new home to move into.
Kevin: A dumb question, and I apologize up front for this. When these progress payments are made, does the builder invoice the bank, or does the builder invoice me as the ultimate homeowner and then I pass that on to the bank?
Andrew: No such thing as a dumb question, Kevin. That’s a good question.
The contract is with the builder and with the customer, so they will invoice the client as they get to that stage. The client, in our case, we ask that they be forwarded to us so we can manage the bank in a timely payment, but the client will then send that invoice off to the lender saying this is what stage we’re up to. On most occasions, the lender will then normally send out someone to inspect and make sure it’s at that stage so that they’re happy to advance the funds, and they will advance the funds.
Kevin: There’s a lot involved in this. That’s one of the reasons why it’s always good to have a broker working with you. You guys are doing this all the time. I may only do it once or twice in my entire life, so it can be quite a mystery.
Andrew: We have dozens of build projects happening as we speak, Kevin, so you’re right, we’re dealing with it all the time. Most people might build once, maybe twice. If you speak to a lot of people, they’ll say, “After I’ve done it, I’m only building once,” for that reason. It’s a bit to do, and it’s quite complex.
Kevin: It is quite complex. Having been through it once myself – but it was quite a long time ago – I don’t think I’d like to do it again, anyway.
Andrew: I only finished my own build a couple of years ago. I hadn’t built for a long time, so it was great to be back involved in it, and it does give you a nice reminder of why you only do it once or twice in your lifetime, Kevin.
Kevin: Yes, it almost becomes a full-time job. Great talking to you.
Andrew Mirams from Intuitive Finance. A great fountain of knowledge, and you can reach him, of course, through our website. Any question you have for Andrew, anything to do with financing, just fire it in to me – email@example.com – and I’ll have Andrew answer it for you. Watch out for his regular videos too. I mentioned at the outset that we had done one just recently. We try and get them out every couple of weeks, or a couple a month, anyway.
Andrew, good talking to you, mate. Thanks for your time.
Andrew: Great, Kevin. Thanks, mate.
Who gives the best advice? – Bryan Loughnan
Kevin: Kickstarting your investment portfolio just takes one step – the first property – but sometimes getting to that point can be very frustrating, for a number of reasons. You might lose your nerve, you might be confused about the amount of information that’s being pumped out about what’s happening in the property market.
Interestingly, I had a chat with Simon Pressley from Propertyology in our regular video last Sunday, and we made the point then of just how frustrating it can be with the conflicting information. So, who do you rely on? Who do you talk to?
Bryan Loughnan also from Propertyology joins me to talk about this.
Good day, Bryan. How are you doing?
Bryan: Good, Kevin. How are you?
Kevin: I’m fantastic. It can be very frustrating, particularly for new investors. Everyone has an opinion, but who should we take notice of?
Bryan: Absolutely. It’s a common concern of many people who contact us, Kevin, particularly first-time investors. They spend a lot of time reading magazines, listening to podcasts, reading online forums – and there’s some fantastic information out there, but as I think you said, it’s almost an information overload.
What I think the most important thing for anyone to consider is to make sure that they’re comfortable. It doesn’t matter who they talk to, what opinion, what advice they get; they’re the ones who are spending money, they’re the ones who need to put their head on the pillow at the end of the day, and they need to feel comfortable with whatever decision they make.
Kevin: Simon is going to come back in a couple of weeks’ time and share with us what he thinks are some of those key indicators you should be taking notice of, but what are some of the warning signs that you might be talking to someone who’s not qualified?
Bryan: There are obviously lots of different levels of qualification in property, whether it be a university degree, whether it be your state legislation and state requirements. From a buyer’s agent’s perspective in particular, it might be more being a member of REBAA. But what you need to pay attention – for me, anyway, if I’m talking to people – is what are they trying to tell you, and more importantly, why are they trying to tell you that? So, trying to think about their motives. Do they have an ulterior motive? Are they making a certain recommendation for a particular reason?
And also, people sometimes like to – particularly with property – make predications when in actual fact, we don’t have a crystal ball. So, people who want to try to say that a certain market is going to perform at X.34% or something like that, when they’re getting very specific like that. Those sorts of things can be very concerning.
Kevin: What are the first steps for a new investor? What should they be doing?
Bryan: I think new investors need to spend some time with their household budget, making themselves comfortable with what they can spend, talking to a good broker, and ultimately building a team of professionals around them.
There’s not one person who’s going to be able to take them through the entire process, so having a good broker is important. We believe obviously from a buyer’s agent perspective, having someone to actually identify a location and find the right property and negotiate the lowest price is equally important.
But then once you own a property, you still need a team around you. There are really good property managers. Obviously through the process, a conveyancer, and tax depreciation schedules, accountants, the whole team of specialists.
Kevin: Let’s talk about that team, but I also want to talk about the important attitudes that someone needs to develop to be an investor. We know it’s about mindset, but what are some of the things we can do to shape our attitude, Bryan?
Bryan: I think as a property investor, Kevin, we need a long-term mindset. Property is a long-term asset. You can’t trade it on a day-to-day basis like you can with the share market or the bitcoins that are going around at the moment. We don’t track it on a day-to-day basis. So, as a mindset, you should be thinking long-term.
I often talk to clients as property investors thinking of themselves as business owners. Their business is going to be to provide accommodation to someone, a tenant, ultimately. So, thinking of yourself as “How do I get income?” It’s having a demand for a rental, but then it’s also about the expenses and the team around you. And obviously, a property manager will be an employee of yours.
So, it’s about building that mindset of the long-term nature of property as well as the business mindset rather than getting emotional about it.
Kevin: Yes, keep that emotion out of it and understand that it is a business. And if you’re getting attached to the property, then maybe you should step away from it and ask for other opinions.
Bryan, it’s been great talking to you. I’m looking forward to catching up with Simon in a couple of weeks’ time to get his input into this very important topic, as well. Bryan Loughnan is from Propertyology.
Thanks for your time, mate.
Bryan: Thanks, Kevin. Cheers.
What makes a top agent? – Matt McCann
Kevin: There are a number of decisions you need to make when you’re selling your property. Without a doubt, the most important one apart from how you sell it is who is going to sell it for you. It doesn’t matter if you’re selling the family home, your first apartment, or an investment property, choosing the right real estate agent is key to getting the best result possible for your property.
Initial agent selection relies on many important criteria, not the least of which is the skill and track record of the agent. There are a number of Internet sites now well established that can help with this very important decision, and there is a reason why they are growing in popularity. It’s because they offer a great benefit to the consumer.
One of those sites is Local Agent Finder. We have told you about them in the past, and we’re going to tell you about them again. Matt McCann from Local Agent Finder joins me.
Matt, thank you once again for your time.
Matt: Nice to be here, Kevin.
Kevin: Why do you think consumers have embraced this service so enthusiastically?
Matt: It’s interesting. A little bit of the research that we do around consumer behavior talks to pain points in the selling process, and what we know is that 57% of homeowners believe selling the house is one of these very stressful transactions in their lives, but two-thirds of them say that actually finding the right real estate agent reduces that stress dramatically. So, clearly, there’s a very important role for real estate agents to play in helping people manage them through this kind of transaction.
Probably the part there that’s really interesting for us is that the vast majority of people aren’t experienced property sellers, so there’s a lot about the process that they just don’t understand day-to-day, which is obviously quite different if you are an experienced person looking for the information to be able to make the decision about who the right agent is.
That’s one of the things that’s key to our service and why it’s been so popular. We bring that data that a homeowner would want to know into a single place, make it easy to consume, allow them to analyze and manipulate the data so that they get to the point where they feel comfortable that what they’re doing is being empowered to pick the right agent for them.
Kevin: Yes. Of course, the real estate agent is the first critical decision, as we’ve already said. An agent can help you then decide on how you sell, when you sell, how you present your property, what buyer reaction is going to be like. So, I can understand that this is a very difficult stage for any seller, and to have someone walk them through with confidence is pretty important.
Can I just ask you what the process is that Local Agent Finder uses to sort agents?
Matt: In terms of how the service works and how you ultimately get to that recommendation set, what we do first up is a homeowner will come on and they’ll go through our registration process. That takes around two minutes, and the information we’re gathering there is really information about the homeowner themselves, their property, what stage of the process they’re at, and ultimately what they’re looking for in an agent. That varies quite a bit relative to the types of people who come to the service.
What we then do is profile both that property and that homeowner and use our proprietary algorithm to work out exactly which set of agents are the right ones to put in front of them for them to be recommended.
What the algorithm takes into account are the key quality markers. It takes into account historical listings, that an agent has sales, the types of sales they have, whether they’re apartment-driven or home or townhouse, homeowner feedback. And then we marry those with local factors, so understanding the local area and having experience in an area that’s relative to the property.
What we’re trying to do is get the consumer – the homeowner in this case – matched up with the agents who are best equipped to give them the information they need about their property in their local area and who have a great track record of doing that for other people.
It sounds time-consuming to do on your own – it is – so a key part of the service for us is actually the convenience, making it very easy to consume and understand this data. Ultimately, what we’re trying to do is empower the homeowner to make the right agent selection for them.
To do that, we put really important information in front of them. For us, one of the critical pieces of information is homeowner reviews. They’re very important in giving people confidence about the agent and the style of agent that you’re ultimately going to choose.
We give them their performance data, so we give them information about sales in the previous 12 months, current listings, time on market, and valuation, so you understand exactly what’s being sold by a particular agent. And really importantly, we give them pricing. This is actually commission rates and estimated marketing fees that come from these agents. They’re not averages; they’re actual information.
When you have all that sitting in front of you, you have a lot of information. And perhaps the newest piece of our service – which is going live at the moment – is actually video. You’re going to be able to see an agent in action, undertaking an auction or talking about their experience in an area. You’ll get their market performance data, you’ll get reviews, and you’ll get their pricing. That gives people a very strong idea about who they should really have in their loungeroom talking to them about the sale of their property.
Kevin: Matt, quite frankly, we’ve heard some horror stories – and I know you would have heard them too – from people who believed the hype of the agent and after engaging them, they felt let down because the actions don’t really align with the promises.
How can a seller be sure that they’re not listing with a dud agent?
Matt: I think there are probably two or three key things you would do. One is you need to access the data about the history of an agent, first up. That’s really important. Knowing you have an agent who’s had a long track record in selling property in a particular area relevant to you, knowing that they’ve had good feedback from prior customers, and reference checking is really important.
But probably the most important thing is to not just to meet with one. You really need to meet with three agents, because you’ll then get a spread of opinions about valuation – and obviously one of the key points where people trip up is they’re told a valuation at the beginning of the campaign and by the time they get to the end of a campaign, they’re told something different.
So, it’s really important to get a good mix of what agents think about the value of the property and how long they think it would take to sell. I think if you get the information and you meet with three agents, you’ll get a much better chance of avoiding having a situation where you’re unhappy with an agent.
And probably the final piece is as you go through that process, ask yourself what you really want from the agent. If you really want a light-touch engagement and an outcome where you’ve outsourced the process to an agent, there’s a particular agent for that. But if what you want is to have your hand held along the way because you’re concerned or nervous about the outcome, there’s a different agent for that, as well.
So, it really is important to pull out the key things you’re looking for in an agent, and that way, if you say those things and make sure you’re very clear to an agent up front, you won’t be let down when you get to the end of the process.
Kevin: Given that someone was going to do all of that, if they still find that they’ve got someone who has let them down, what do you suggest they should do if they are unhappy?
Matt: If you sign a typical authority, you’re locked into the agent for 90 days, usually. The key thing there is on the way through that process, I’d be continuously going back to the agent to say “Hey, these are the expectations you’ve set with me; I don’t feel like they’re being met.” But if you’re at the end of that exercise, then the key part is to go back out to the market.
We have a number of people through our service who come along and say “Hey, I didn’t get the result that I wanted, but now I want to look for another set of agents.” And again, we encourage them to go through that same process: meet with at least three, understand the data that sits behind those agents, make sure that you’re getting good information about homeowner reviews so you understand the type of experience you’re going to get. And frankly, change agents if you’re that unhappy.
Kevin: Given that you’re going to be meeting with agents, sometimes the difficult thing is to know what questions to ask them or even what answers to expect. What do you think are the most important questions someone should ask an agent before they appoint them?
Matt: It’s really important to ask the right questions, and we absolutely agree with that. One of the things we do as part of our service is we’ll often have our client and consultants talk potential vendors through the questions they should ask the agents, and I’ll summarize some of those here. We also provide everyone with an interview guide so that they know the topics they should cover.
The first thing you really want to understand is the experience of the agent, and that means you’re really getting a detailed understanding of how many properties have been sold and listed over time – and particularly in the last 12 months. We think that’s a critical data point for you to start your conversation with.
In sense-checking that, what we would say is to then ask the agent for examples of properties that are like yours that they have sold in that period, over the last 12 months, and get them to talk you through how they went about the campaign and the success of that, the execution of that sale.
We would follow that by saying actually ask the agent if you could talk to that vendor, because we think a really important step is getting an example of how they went through and how happy they were.
Probably the next piece of the puzzle is their understanding of the local area, so getting an understanding of where they think the value drivers are. Is it access to transport? Is it local schools? Is it the nature of the types of properties in a particular area?
When you get that and you hear that across three agents, you’ll get a really good sense of whether an agent really has a good handle on the information that relates the local factors that’ll make a difference when it comes to sales day.
For us, clearly, valuation is important and being set the right expectations on valuation. As we were talking about before, it’s critical to make sure you talk to more than one agent so that you get a really good sense of what the valuation is.
What you might find is that there might be an agent who’s over by a couple of hundred thousand dollars in one valuation and the other two aren’t. It gives you sense that you then either go back to that agent and say “Hey, we’re not sure about that,” or alternatively, get a sense of how they think they can achieve a better result.
The next part relates to fees and advertising, particularly vendor-paid advertising. Ultimately, you’re on the hook for the dollars here, so you want to make sure that the plan they have is one that you think is the right one, and again, examples of where that sort of advertising campaign has worked before.
Finally, what we would say is you want a really good sense of how long an agent thinks it will take to sell a property. So, in terms of timing, you really want to understand that it’s this number of days on market, we require an auction or we don’t require an auction, the types of processes, steps, and milestones you have to go through to get that sale done in the timeframe you would expect.
We think if you ask all those questions, you’ll then get a very good sense of what you’re likely to understand and receive in terms of the engagement with your selected agent.
Kevin: So many things to cover, and that’s why you have to make sure that you get the right advice up front and that you do actually get the right agent.
Matt, thank you for sharing that knowledge with us. Matt McCann is from Local Agent Finder. I appreciate your time, Matt. Thank you.
Matt: No problem, Kevin. Any time. Cheers.
Getting tax benefits sooner – Brad Beer
Kevin: Investors often wait until the end of the financial year to take advantage of depreciation and the other deductions that they’re entitled to, but there is a method that allows investors to receive their deductions more regularly. This involves submitting a PAYG – pay as you go – withholding variation with the help of an accountant.
Brad Beer from BMT Tax Depreciation can explain how a PAYG withholding variation works and why including depreciation claims in this process will help you as an investor. He joins me to talk about that.
Good day, Brad. How are you doing?
Brad: Fantastic, Kevin. Yourself?
Kevin: Very well indeed, thanks, Brad. What difference can a depreciation claim, when it’s combined with submitting a PAYG withholding variation, make to an investor’s cashflow?
Brad: Kevin, it can make a fair difference because of the deductions. But let’s just step back to the PAYG withholding variation to start with. It’s actually been around since… It was introduced back in July 2000, and what it is is simply a mechanism where at the moment, what often happens is you go through the year, your employer takes some tax out of your income and holds on to it and gives it to the tax office, and at the end of the financial year or just after, we get our gross certificates, we do a tax return, and if it’s nice, we get a nice tax refund.
PAYG means that you actually work this out probably at the start of the financial year and say “Hang on, employer. I don’t want you to pay all this money to the tax office and hold on to it until I do a tax return next year.”
And with a property investor, some of the deductions, especially the depreciation deduction that’s a non-cash deduction, you’re making all these deductions and you get this big refund at the end of the year. You might as well get it earlier and put it into your offset accounts or into your things instead of letting the tax office hold on to it for the year.
Brad: And look, how much difference can it make? Your employer doesn’t know about your other tax affairs, so they take out the standard required amount of tax and they pay it to the tax office for you. But in a simple scenario where the average deduction out of the properties that we do for depreciation is about $10,000, if we just took that average number and put someone who’s on the average tax rate of 37.5%, that’s about $3700 a year in cash back in deductions. That’s about $60 or $70 a week, something like that.
So, based on only depreciation – and the other deductions as well, though, but just with the depreciation if you do a POYG on top of the other ones – it’s “Excuse me, employer. Don’t take $60 a week out of my pay packet and give it to the tax office. Just give it to me.”
Kevin: Exactly. It makes a lot more sense to me, too.
Brad, does a PAYG withholding variation negate the need to submit a tax return?
Brad: Absolutely not. All it is is you get your accountant at the start of the financial year to say “Excuse me, Mr. Employer. Stop taking all that money and giving it to the tax office. Pay me more of it.” And at the end of the financial year, you do a tax return just the way you do otherwise, and rather than getting a big tax refund, you don’t.
Sometimes, the tax refund is a good forced saving, but as a property investor, we should be a bit more prudent with our money and put it into areas and use it to work for us instead of the taxman’s pocket.
Kevin: Absolutely, and that’s what it comes down to. What advice do you recommend investors seek before they consider taking up an option like this?
Brad: A PAYG only works for a normal taxpayer, a salaried employee. The thing is what you need to do is make sure it suits you and your actual personal financial situation. Speak to your accountant. “Does it work? Should I do one of these? What will it mean? How much will it cost me to do one?” If you’re only going to get $3 a week extra, you might as well get your tax return at the end of the year.
So, look at that, crunch the numbers on what you think it should look like, get your accountant to help you. And your accountant is the person who will be able to help in that situation.
Kevin: Brilliant, mate. I can hear all those investors now rejoicing all around Australia saying “Yes, good on you, Brad. More money in my pocket. That’s what I like.”
Brad: Absolutely. And one thing you’ll need in there is obviously a depreciation estimate, but the big thing about it is it’s money in your pocket now instead of later, which is worth more and can be used to work for you instead for someone else.
Kevin: Yes, there’s some good news. Good on you, mate. Brad Beer there from BMT Tax Depreciation.
Well done, mate. Talk to you soon.
Brad: Great. Thanks, Kevin.