If you are considering upgrading your property you may be looking at your existing home and feeling it could make a good investment property. Whether it is the right move for you will depend on a number of factors.

Tax deductible debt
Interest which is directly linked to income producing investment assets is tax deductible.

Many people assume they can simply redraw or set up a new loan on their old home (which will become an investment property) and claim that debt as a tax deduction. This is not correct.

Example
When Bill purchased his original home he borrowed $350000. Over time Bill has paid the debt down to $100,000. Bill decides to upgrade to a $500000 property. The purchase costs are $25000. Using the equity in his existing home Bill redraws the original loan back to $350000 ($250000 increase) and then borrows the remaining $275000 against the new property.

Because Bill has a loan of $350000 against his investment property he assumes that all this loan is tax deductible. Bill is dead wrong.

Which property the loan is secured against is irrelevant – it is the purpose of the loan that the ATO will consider. In this case the purpose of the $250000 increase was to assist with the purchase of a new owner-occupied property therefore the purpose is not for investment purposes and therefore is not tax-deductible. 

Only $100,000 of the loan is tax-deductible. The remaining $525000 offers no tax benefit whatsoever.

Age
If the property is older than 5 years it will offer little in the way of depreciation for plant and equipment which would offer significant tax write downs. It will also have lower capital depreciation deductions.

Tax Refund
The impact of both the lower interest and the age of the property could mean that Bill will miss out on a tax refund of around $7000 if he had instead sold his own home and borrowed for a new investment

Capital gains tax
As his existing home is his principle place of residence Bill can sell it today capital gains tax free. If he purchases a new principle place of residence his existing home will attract capital gains tax if it is sold at a gain. So for example Bill holds onto the old home for a further 10 years and it increases in value by $200000. Bill sells the property and is taxed on 50% of the gain - $100000 at the applicable marginal rate.

So he has not only missed out on a substantial tax refund for the last 10 years he now gets hit with a huge capital gains tax bill as well.

Repairs
If it is a significantly older property then it may also present significant maintenance and repair issues which will impact the overall cashflow of the property.

Performance
Just because you have an emotional attachment to the home doesn’t make it a great investment property. The rental yields and capital growth rates may be substantially less than what can be achieved elsewhere.

 
What opportunities are you missing?
Are there ways to improve your current cashflow that you are not currently doing? Are your finances correctly structured to build a property portfolio or are they holding you back? Do you have a plan of attack of how to build a portfolio? Are your finances set up to ensure you can acquire property without negatively impacting your lifestyle? Are there things you are missing that you should or could be doing that could have a significant impact on your wealth creation plans?

Contact us for an initial discussion.

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All the best

Greg Carroll
MTA
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Not all properties are treated equally by lenders. There are some properties that lenders like, some which they will have restrictions around, and some which they just won't touch at all. What does this mean for you. It means you may not be able to fund a particluar property purchase of they you may have to tip in additional cash to get the deal across the line

Below are some the the property types where lenders may have restrictions or may not fund at all.

• Inner city units and developments particularly studio apartments
• Student accommodation
• Retirement villages
• Rural properties
• Remote regional properties with low population levels
• Unusual properties eg unusual building designs
• Multiple properties on one title
• Company title properties
• Properties under the NRAS scheme

Units less than 50m2
Lenders prefer units with a liveable floor space of 50m2 and above. Some may consider units down to 40m2.

Number of units in one complex
Most lenders will put a cap on the number of units a borrower can hold in one complex. The guidelines for this will vary on the size of the complex. Usually around 4 is the maximum but this may be reduced is it accounts for more than 25% of all units.

Lenders may also choose to restrict their exposure to certain apartment blocks. If they have already financed a number of purchases in a particular complex they may not support any further transactions.

Inner city units and hi-rises
Some lenders have an aversion to inner-city apartments and high rise developments. They may still lend against this type of property but at a reduced LVR.

Serviced apartments/Student accomodation
The majority of lenders are not very keen on serviced apartments. Generally it is not possible to obtain lending where mortgage insurance is required. Most lenders who will consider this type of property will restrict the lending to 60% to 70%, however some will go to 80%.

Lenders may need to see additional detail to determine the level of acceptable lending. In particular they will want to see the current letting agreement and if there are any restrictions associated with having the property released from the letting pool.

Commercial property
In terms of home lending generally commercial property can not be accepted on a stand alone basis. Some lenders may accept it as supporting security at a reduced LVR.

Company title
This will vary from lender to lender. Some are an absolute no while some will consider on a case by case. It is definitely worth making investigations before proceeding with this type of property.

Heritage listed
Generally considered on a case by case situation.

Warehouse conversions
Only considered by a handful of lenders. Again assessed on a case by case basis

Multiple units on one title
This situation may particularly apply where someone want to purchase a block of units that have not been strata-titled. Some lenders will consider up to 4. Above this would probably see the deal considered on a commercial basis.

Rural property
Will vary from lender to lender. Some will only consider a few acres. Other will look at up to 50 hectares. Property can not be income producing, hobby farms are acceptable.

Aged care security and retirement villages
No

Vacant land
Accepted by almost all lenders if the intention is to build on the block. Usually will be part of a construction loan. A number of lenders will not accept land only as security. Some will accept as supporting. Some will accept as a stand alone.

ONE of the country’s biggest banks expects house prices to rise as much as 20 per cent before the end of next year, with lifts predicted to begin soon in parts of Queensland.

ANZ chief economist Warren Hogan told the Committee of Economic Development of Australia that the “housing market is at the early stages of a solid cyclical upswing” fed by low interest rates and market shortfalls.

“We expect a 15-20 per cent lift in home prices between 2013 and 2015,” he said with long-awaited rises already underway in Sydney and Melbourne.

“I am sure Brisbane, Sunshine Coast and Gold Coast will lift in terms of house prices in the next little while,” he said in the Sunshine State yesterday.

Mr Hogan said investors and “new participants” in the market — such Chinese and other overseas buyers who typically did not need to borrow in Australia - were pushing increases.

“They’re quite active and their judgment on what is fair value for property is very different from others in the market,” he said. “I think that’s something to keep an eye on.”

But experts agreed Australia was not in a house price bubble yet.

Commonwealth Bank head Ian Narev said: “We never say never — but we don’t think we are seeing even the early signs of a bubble at the moment.’’

Queensland Treasurer Tim Nicholls said there was no evidence of a housing bubble in the state.

“In Queensland we’re seeing steady but moderate growth in house prices, so we’re not overly concerned about a bubble here,” he said. “We think that Queensland growth rate is about right. We’d like to see some more growth coming through in terms of the number of houses and approvals coming through, but in terms of prices, we’re not seeing a bubble coming through here.”

Mr Hogan agreed it was not a bubble “but it could be”.

“If you whack the big four banks together, the system is only growing at five per cent, even though we’re writing new mortgages at 18 per cent ... Overall credit growth is still quite tepid so you wouldn’t say that that’s a bubble.”

Asbestos materials of various types were commonly used in Australian property construction between 1940 and 1990. Asbestos materials were embedded in wall cladding, roofs, gutters, drain pipes, vinyl flooring, electrical wiring thermal insulation, boilers, exhaust pipes, switchboards, thermal insulation and inside fire doors.

The new National Work Health and Safety Act of 2011 requires owners of buildings constructed before 2003 to conduct an asbestos survey. Where asbestos materials are identified, this triggers the mandatory requirement for an asbestos register and asbestos management plan (AMP). Some property owners appear to be unaware of this new obligation.

An asbestos register is necessary to track of asbestos materials remaining (or removed) in investment properties. Asbestos may also be located in inaccessible areas and unfortunately discovered during re-development with sometimes disastrous and costly results. Asbestos materials if disturbed can cross contaminate internal areas of the buildings, requiring evacuation, loss of rent and potential occupant litigation.

Asbestos removal is a legally notifiable project, which can result in extremely costly asbestos removal projects. Careful investigation during due diligence can forewarn investors, revealing the true cost of asbestos removal. Armed with detailed information and cost options, investors can then more accurately evaluate if they wish to proceed with the purchase or avoid the risk.

Australia’s economic growth is expected to pick up pace this year thanks to a lower exchange rate and stronger activity in the housing and retail sectors, according to the latest forecasts from the Reserve Bank of Australia. 

Investment in the mining and resources sector is forecast to peak some time this year and a pick up in the non-mining sectors of the economy is needed to maintain economic growth.

“Until recently, survey measure of current business conditions have been below average, consistent with subdued non-mining investment,” the RBA said in its quarterly statement on monetary policy.

“A number of indicators, however suggest a gradual increase in growth over time.”

“The depreciation of the exchange rate should provide some additional impetus to activity in the traded sectors of the economy,” the RBA said. 

The bank said that business conditions improved in the latter part of 2013.

“Retail sales and the Bank’s liaison point to a pick up in household consumption growth in the December quarter and measures of consumer sentiment remain a little above average levels,” the RBA said on Friday. 

While Sydney and Melbourne’s property markets may struggle to sustain their phenomenal recent growth rates, Brisbane is being tipped to benefit from its ample room for capital growth and rental yield potential.

Brisbane’s property market is showing signs of growth early this year, which is good news for buyers seeking a relatively affordable investment.

RP Data’s research director Tim Lawless suggested this week that while the “investment fundamentals” are waning in markets such as Sydney and Melbourne, investors might turn to Brisbane because it’s much earlier in the growth cycle. 

The stage that a property market is at in the growth cycle is influenced by the level of supply and demand. In Brisbane’s case, increasing demand could certainly see values climb above the current median of $462,000.

Throw in the city’s solid rental yields, which are hovering round the 5% mark and notably higher than averages in both Sydney and Melbourne, and there’s plenty of reasons for optimism.

The housing market is in the early stages of a solid cyclical upswing, buoyed by low interest rates, but it's not a bubble, ANZ Bank chief economist Warren Hogan says in a Committee for Economic Development of Australia report. "Our view is that prices remain largely explained by low interest rates, sharply improved affordability, the release of pent-up sales demand created over recent years and an unprecedented (and increasing) shortage of physical housing stock," Hogan writes. He says the majority of future price gains will be in Sydney, Perth and Melbourne, with investors driving the upturn in the market.

Leading agent John McGrath has forecasted that the strongest east coast market over the next three years was likely to be south-east Queensland.

If you have a capital loss it is carried forward until you make a capital gain. Other losses are treated differently. For example if your business or rental property loss pushes your current year income below zero, you are entitled to carry that loss forward into the next financial year, but first you must reduce it by any exempt income you have received, for example Centrelink family payments. Further, you cannot pick and choose when you offset the loss. It must be used up immediately. This can mean it is wasted. For example if you have a $10,000 carried forward loss but only have $15,000 in taxable income in the following year then the loss from the previous year must be used to reduce your taxable income down to $5,000. The loss is wasted because you would not have had to pay tax on the $15,000 anyway.

In interesting article I came across last week below.

Australian property prices in 2014 and beyond - a peek into the future

By Arek Drozda
Friday, 31 January 2014

In my previous article, 'Australian property prices explained', I presented a chart that provided very accurate narrative on what has happened in the Australian property market over the last three decades.  

It is safe to conclude that the same concept which allowed for the description of the past with such accuracy, should also be able to provide a reasonable guidance for the future.  

Of course, predicting exactly what will happen in 2014 and beyond is a tall order. Life is known to create such a variety of unanticipated scenarios that the reality will almost certainly play out differently to what everybody expects.  

Therefore, I prefer to think about the future in terms of a range of possible outcomes and likely probabilities of occurrence rather than as a single, definite result.  

The real benefit of such an approach is knowing how changes in economic conditions can potentially affect the outcome - not in picking the exact end result in advance.  

Since changes in some economic factors will have more profound effects than others, if you can identify in advance what are they, you can watch out for the tell-tale signs that a particular scenario is playing out – and act accordingly.  

You only need to be right about the direction property prices are heading to be able to benefit. Please consider what follows with caution - in the “what if” category, rather than a certainty.  

Based on the income capacity of working Australians, residential property in this country is not overpriced and prices are far from bubble territory.  The proof is in relative changes in the cost of buying over the last 27 years, which has been significantly below the relative changes in personal incomes over that time. Below is a slightly different representation of that information to highlight this point. 

By rearranging the data we can create a chart that shows how much more property prices could increase at present and still be considered affordable (in relation to current incomes and as benchmarked to 1986). 

The above chart indicates that current property prices are potentially undervalued by as much as 45%. Of course, this does not mean that prices will immediately move by this much but the potential for a substantial jump is there.  

Yet another perspective using the same underlying data reveals that conditions are now starting to resemble those in 2009. Although affordability in 2009 was not as extreme as in late 1990’s, it nevertheless led to a substantial price increase in 2010.

Therefore, as history shows, if interest rates remain mostly unchanged and incomes keep growing, we can anticipate a significant jump in property prices in coming years.  

The increase could either be a rapid advancement of 10-20%, or even 30%, in the next 12-24 months if the 'good times' perspective prevails or, if pessimism dominates, it could result in an even more substantial jump but in the more distant future.  

Of course, this scenario can only play out on the proviso that there are no unexpected shocks applied to the system, such as a major international conflict, another economic calamity in the region, another collapse of world financial system, or a major natural disaster – to mention a few obvious cases.  

In terms of further outlook, if the relationship between costs of buying, incomes, rents and prices hold in the future, and the current rate of income growth continues, then it can be estimated that from now to the end of 2023 property prices could grow by as much as 140% under a historically low interest rate scenario (i.e. 5% per annum), or as little as 20% under a high interest rate scenario (i.e. 10% per annum).  

Under a more probable scenario of slower growth in incomes and interest rates averaging 7% per annum over the next decade, prices can still be expected to grow by 60% in the next 10 years.  

A much gloomier future is also possible but the probability of this scenario is rather small at this point in time.  

That is, a 40% drop in property prices is possible in the next decade but it would take extreme economic conditions for this scenario to play out. In particular, mortgage rates would have to persist at close to 20% per annum for a good part of the decade and income growth would have to drop to 2% per annum to bring prices down by this much.  

In conclusion, the outlook for property prices in Australia is positive - unless of course the world encounters another economic disaster of a magnitude that is hard to even imagine.  

Some insist that the next big event is 'just around the corner' so, it would be wise to keep an eye for the tell-tale signs of possible troubles brewing somewhere in the world but there is no obvious reason to panic just yet.    

Arek Drozda is an independent analyst who has worked in the public and private sectors for over 20 years in business development, data analysis and in building geographic information systems.