So for the average Joe who is not the next Mark Zuckerberg or young millionaire, pay attention. The 4 wealth fundamentals you’re about to read are not only practical and realistic, but integral to your success.

Goal

When it comes to building wealth, always start with the end in mind. By knowing your goal, all your other decisions and actions will be better guided towards its attainment. Although it’s the most simple, it is also fundamental.

Ask yourself – How do I want to live after I retire? Comfortable? Lavishly? The answer will help find the solution to the next question which is – How much would I need in my retirement for this lifestyle?

Once you know this information, you need to create a flexible plan that can be adjusted as time goes by.

Income

At the foundation of your wealth building strategy will be your start up capital, which usually derives from the income you create.

There are a lot of factors that you need to take into consideration when it comes to income. One would be whether you know if your present income is going to be stable, increasing or decreasing in the future based on your circumstances and career. The answer will dictate how freely you’re able to spend or how cautious you should be with the money you’re currently making.

Aside from living expenses and leisure, your income should be set aside for a smart and proactive savings plan. This is a factor that is highly recommended especially if you’re young, as the earlier you begin the longer you have to build this up.

Investing

Only after your savings plan is set up and active, should you start investing. Every other factor in building wealth is based on surviving. The reason why investing is so important is because it’s geared towards thriving and having a great future instead of just preparing for a “rainy day”.

In many cases, time is the most important factor in investing, oftentimes more important than the amount you invest due to compound interest. The most important component is that you start as soon as possible, even if it’s a dollar that you can build on over time.

Expenses

Without a doubt, expenses are the one factor that if you get wrong, can cause failure for the rest of the fundamentals. The fact is, if you’re spending more than you’re earning, not only are you losing money, but you cannot save, invest or create a prosperous future for yourself.

If this is the case for you currently, feel good that you came across this article. Have a look at your weekly expenses, what are the musts and what are the purchases that don’t really matter?

This could be as simple as cups of coffee, excessive shopping or anything that you feel you do to an excess. Although cutting these are small at first sight, in hindsight you will find they build up to massive savings and will tip you over the scale to more income than expenses.

There are many more facets and factors to learn of course, but these tips will give you a basis of understanding on what to initially pay attention to. Wealth is a major component in our lives, so making these fundamentals a focus will be one of the most important decisions you make. Contact us today to discuss further. 

Deductions apply for any property you own that is available for rent, hence excluding your home or personal holiday accommodation. Listing with agents can help prove your properties are available for rent as the proper documentation will be in place.

Below is a list of items which you can claim as deductions against rental income this year which are either deductible immediately or after a few years of owning the property. Further below is a list of items that are not deductible, and usually questioned by the ATO. This will assist you in compiling your information and make it easier to prepare your income tax return. You can also use this information to improve your decisions in relation to managing your investment properties.

DEDUCTIBLE – Immediately

Expenses relating to the maintenance and management of your investment property, including interest on loans, can generally be claimed immediately, against your current financial year’s income.

Property Management & Maintenance Expenses

• Advertising for tenants – directly by you or where the agent charged you
• Body corporate fees or Strata Title fees and charges (Special levies for capital works on a building can only be depreciated at 2.5%)
• Cleaning
• Gardening/Lawn Mowing
• Pest control
• Security patrol fees

Rates & Taxes

• Water rates, charges & usage
• Council rates
• Land tax – first time owners have to lodge an initial land tax return with the Office of State Revenue in each state. They will not chase you up and they will charge additional interest for late lodgement, so you must initiate this

Property Agent

• Fees/commissions – including GST
• Postage & petties
• Statement fees
• Bank charges/fees
• Lease document expenses
• Letting fees

Administration Expenses

• Stationery used to maintain your rental records
• Postage on documents relating to property management
• Telephone calls relating to property management – ATO prefers to see a diary
• Legal expenses relating to debt collection or tenant problems
• Electricity & gas – where not covered by tenant

Insurance

• Landlords
• Building
• Contents
• Public liability

On Acquisition – from the solicitor’s settlement letter

• Balance of council rates
• Balance of water rates
• Balance of body corporate fees

Repairs & Maintenance

• Plumbing
• Electrical
• Handyman

Repairs and maintenance relate to wear and tear or damage as a result of renting out the property. The idea is that an expense is considered a repair when the functionality is being restored.

For example – fixing broken glass on a window is considered a repair, while replacing the whole window frame is an improvement. Renovations, improvements, replacements and extensions are treated differently to repairs and maintenance. These falls under building costs, and are usually deductible at 2.5% per year for up to 40 years.

Repairs made immediately after purchase of the investment property or maintenance to make the property suitable for rental are considered to be of a capital nature – part of the cost of the property and can be depreciated. They are not deductible as the ATO considers the lower price of the property reflects its state of disrepair.

The ATO is particularly vigilant to catch people who are claiming expenses described as repairs when they are considered to be improvements.

Interest & loan account fees on loans to finance investment properties

• For the interest to be deductible the loan must have been applied to acquire an income producing asset e.g. rental property
• Where loans used for both investment property and private assets the interest has to be apportioned based on how much of the principal was used for which purpose. This usually happens when people are using a Line of Credit facility.

Travel expenses to

• Inspect property
• Maintain property
• Collect rents

A full deduction can only be claimed if the sole purpose of the trip relates to the property. Where the inspection is combined with a holiday, expenses must be apportioned.

Cost of preparing a Quantity Surveyor’s report showing

• Depreciation expenses
• Special Building Write-off

Seminars

• Cost of attending property investment seminars – only to the extent that they relate to operating or maximising the return on currently owned properties

Where money is spent on relevant seminars before any property is acquired, there will be no deduction available.

DEDUCTIBLE – Over a number of years

Borrowing Expenses

• Loan Application fee
• Lender’s legal fees
• Title search fees
• Lenders mortgage insurance
• Stamp duty on mortgage
• Mortgage registration fees

These are deductible over the period of the loan where the loan is less than five years. Otherwise deductible over five years.

Depreciation on Plant & Equipment (decline in value of depreciating assets)

• Carpets, vinyl, linoleum and other removable floor coverings
• Hot water systems, heaters and solar panels
• Air conditioning units
• Blinds and curtains
• Light fittings
• Swimming pool filtration and cleaning systems
• Security systems

Depreciation on the building construction (also called Capital Works Deduction)

• Your total capital works deductions can’t exceed the construction expenditure. No deduction is available until construction is complete.

Set of assets

• To be depreciated in accordance with their effective life.

For assets costing $300 or less, you can claim an immediate deduction for the entire cost. You can’t do this if the asset is one of a set of assets that together cost more than $300, making it a deduction over a number of years, for example, if you buy four dining chairs each costing $250, you can’t treat them as separate assets to claim an immediate deduction. Note that if you only rent your property for part of the year you will not be able to deduct the full amount of your expenses.

NOT DEDUCTIBLE

The following items are either not deductible or considered to be of a capital or private nature by the ATO.

On Purchase

• Purchase price
• Stamp duty on purchase
• Legal/conveyancing fees
• Pest & Property inspection
• Sourcing Fee
• Renovations immediately after purchase
• Repairs immediately after purchase

On Sale of a property

• Legal/conveyancing
• Advertising
• Agent fees

Pre-Purchase expenses including (especially if property was not then purchased)

• Attending seminars to acquire more property
• Cost of reports on property prior to purchase
• Travel to inspect property prior to purchase

Always remember to keep proper records in order to make a claim, regardless of whether you use a tax agent to prepare your tax return or you do it yourself.

Investing in purpose built student accommodation allows you as an investor the opportunity to participate in Australia’s largest non-resource export sector, Tertiary and Further Education. The benefit of this hugely rare opportunity is it’s highly resilient nature to economic instability.

There has been significant growth in tertiary enrolments in Australia over the last decade, against the ongoing backdrop of chronic undersupply of purpose built student accommodation. In turn this provides the potential for high occupancy rates and growing returns.

Located in Australia’s most popular destinations for tertiary students, investors will be attracted by the combination of significant annuity-style income together with the potential for capital growth.

What you need to know about this investment opportunity:

•       Asset backed, strong yielding investor returns
•       Anticipated IRR 15% to 18% p.a. net of fees (comprising yield and capital growth)
•       Targeted initial cash yield of 10.5%+ p.a. (once fully operational) payable quarterly, rising to 13.0%+   p.a. from year 3 onwards
•       Significant tax deferred component
•       Prime CBD locations close to Universities, transport and amenities
•       Investment term between 3-7 years with compelling exit opportunities

If you’d like to discuss student accommodation as your next strategic investment purchase, contact CPS Finance today.

So, what’s the difference between positive and negative gearing?

Positive gearing

Positive gearing simply means that your investment property earns more income than it costs to have it, so you are receiving more rental income from your tenants than what you pay for things like the loan repayments, interest, maintenance of the property, rates and other fees. Usually this happens when rents are high due to a strong demand, or when interest rates are low.

For example, if your investment property earns $500 per week in rental income and your loan repayments and other associated costs are $450 per week, then you are positively gearing that property and you don’t have to pay anything out of your own pocket each week to continue your investment. The property effectively pays for itself.

That said, it’s not always the investment strategy of choice for many investors. Let’s look at some of the pros and cons of positive gearing:

Pros

• The risk isn’t as high – because the property pays for itself, the risk isn’t as high if your circumstances were to change such as a job loss.
• More money in your pocket – on a week by week basis you have no out of pocket expenses, and you might even be making enough from the property to make extra loan repayments or save for your next investment.
• Future lending – the status of your investment portfolio can look good, which may mean you are appealing to lenders for your next loan. 

Cons

• Changing markets – depending on where you buy, you could experience a dip in demand for the property which would mean less, or no, income from the property.
• Income is taxable – just like any other income, the income you earn on a positively geared property is taxable.

Negative gearing

Negative gearing with property is when your expenses, such as loan repayments and rates, are higher than the rental income you receive from tenants. This means that you are out of pocket as you will have to contribute to the loan repayments yourself as well.

While it sounds like an odd thing to do in the short term, the goal with negatively gearing an investment property is that you will eventually make more money through an increase in its value than what you pay out, or lose, through expenses.

Let’s look at the pros and cons for negative gearing:

Pros

• Tax breaks – a lot of investors choose negative gearing because it allows you to claim tax deductions relating to expenses you incur. Investment losses reduce your taxable income which in turn reduces the amount of tax you pay.
• Appealing to tenants – often properties that are negatively geared have slightly lower rent, which is appealing and more affordable to potential tenants.
• Capital gains – if the property continues to increase in value, the capital gains from it will eventually be high enough to cover borrowing and associated costs, meaning the investor can earn more when selling.

Cons

• Higher risk – if your income suddenly changes, you may not be able to cover your costs for the property.
• Budgeting – you need to be able to budget way ahead of time, for things like maintenance, increases in interest, or if the property sells for a profit you will need to pay tax on the capital gain.
• A long game – negatively investing in property is a longer term strategy to create financial freedom, so you need to be prepared for that and not expect passive income yet.

So, at the end of the day, neither investment strategy is better than the other. The both have their advantages and disadvantages, and the benefit of either will depend on the investor and their ideal strategy.

If you’d like to discuss which option bests suits your needs, contact us today!

Benefits of buying old

There are a myriad of benefits to buying an older property, all of which will either help cash flow, capital growth or equity.

• An older or established property offers the opportunity to add value to the existing structure, and therefore potentially increasing your equity in the property quite quickly. Whether it be a cosmetic makeover or a full overhaul, having the scope to improve on the existing property is a wise investment option for those willing to outlay construction costs to reap the rewards long-term.
• A cosmetic makeover to your investment can also improve the rentability of the property and therefore the rental return.
  Dependant on the style of property, there is a potential to subdivide the property to allow for an additional income stream with a dual occupancy property, or granny flat.
• Established properties are lovely to maintain their value or experience minimal fall during a slow marketing period, whereas newer properties are often more heavily affected by these movements and rely on the market solely to increase their value again (as there is no scope for renovation or upgrades.)

Benefits of buying new

Aside from the shiny newness of a fresh property, there are some significant wins for an investor purchasing a new property.

• Many would argue the biggest benefit to purchasing a new property is the tax incentives. There is significant scope for depreciation which are a helpful way to minimise your tax. A new property allows you to claim on the building value including fittings and fixtures. The ATO will also provide a substantial refund if the property is positively geared.
• The newer the property the more likely you are to attract buyers should and when the time arises to sell the property. The bones of the property including plumbing and electrical should still be in good condition easing a buyers mind for potential expenses upon purchase.
• Along with more buyer interest, comes more interest from renters. If you have a new property, you’re likely to attract quality tenants who will pay decent rent and make rent payments on time.
• Similarly to purchasing a new car, having a newer property does bring peace of mind that everything is in the best possible condition from the outset. Knowing the plumbing and electrical are new, the walls are freshly painted and the property presents well, is enough to ease an investor’s mind for years.

There are many pros and cons to purchasing either a new or older property. If you’re after wealth as a long-term solution, our advice would be to invest in an older property where there is larger scope for improvements. However like with any major investment purchase, it does depend on your individual circumstances and objectives. Seeking the help of trusted professionals will be able to guide you in the right direction.

Contact CPS Finance today to discuss the options available to you.

In Australia, we’re seeing a rise in rental yields, and while a good indicator on a sound investment, an investor shouldn’t rely solely on this information to make purchasing decisions. Here are a few tips on why you shouldn’t rely on rental yield alone when it comes to your next investment decision.

Look beyond rental yield

Rental yield shouldn’t be seen as a guarantee of future growth by hopeful investors, as it is far too simplistic to provide a comprehensive overview of a property’s potential performance. As author of Real Estate Riches Dolf de Roos says, “are we talking gross or net returns? Pre-tax or after tax?”. De Roos goes on to explain that for residential real estate you have to remember to remove insurances, rates and maintenance costs to arrive at the net yield. This alone can often mislead investors. While yields provide some information about the property, it’s merely a snapshot in the overall property performance.

Use the resources available to you

Unlike rental yield, there are resources available to you that can paint a full picture of the property’s current, and potential performance. Many software programs have been developed to help analyse relevant data including vacancy rates, inflation, costs, insurances and maintenance, revealing anticipated yields as well as equity growth.

This level of sophistication is scarcely used by investors and landlords, which is unfortunate considering the true impact it could have on purchasing and investing decisions.

See the bigger picture

Although software can be pivotal in purchasing decisions, it is limited when it comes to individual circumstance or investor questions. There will always be additional factors or queries that a computer simply cannot answer, for instance, “should I invest in the Chinese market if I cannot speak Mandarin?” Each investor is going to have a unique set of circumstances, which is why engaging with a financial planner or with a local real estate agent will assist in making decisions that suit your situation.

Think about the future

Purchasing an investment property is a long-term strategy. Although analysing the current market performance is crucial upon purchase, it’s just as important to think about the future. When you’re weighing up your options it’s worth considering the following;

• Buying below market value
• Buying a property which can be renovated or upgraded
• Buying in an area with good capital growth potential

Rental yield, although worthwhile considering, is not the golden ticket to making a decision. Capital growth is equally as important as it will allow you to sell at a profit. Combining this with a renovation or substantial upgrade, will then allow you to increase the rent in the short term. If you successfully purchase a property in the right location, add value through renovation and therefore acquire capital growth, you’re more likely to be able to use this new equity to purchase another investment to replicate your success.

To discuss your investment options, contact CPS today.

How to diversify your property portfolio

Location

It is easy for an investor to favour an area that has proven to be successful for them in the past by providing strong capital gains or high rental yields. However, investing in the same location several times over makes you more vulnerable should natural disasters, population fluctuations or declining employment rates occur. If all of your properties are experiencing the same economic or market changes, it could place strong financial pressure on your assets.

Price point

Another diversification strategy involves purchasing properties at different price points, providing more flexibility should a property need to be sold. Instead of purchasing a property with your entire budget, splitting this over two assets allows you to free up cash by selling one asset, instead of two. It is important to note, diversifying your property portfolio does not mean compromising on the quality of your investment – quality always trumps quantity for long-term investment goals.

Style of property

The benefit of investing in different style properties, is appealing to different segments of the market. For example, purchasing a townhouse in a suburban area will attract the right rental market and candidates. Both re-sale potential and rental demand will benefit from purchasing the right style property in the right locations.

Residential vs. Commercial properties

The fourth diversification strategy is purchasing commercial property as an alternative to residential assets. Investing in commercial property is more focused on rental return of the asset and the security of tenure which is directly linked to the covenant on the property. Generally speaking, net returns are higher for commercial than for residential meaning that most outgoings are paid for by the tenant.

Although investors may not be able to control the property market, local environmental changes, infrastructure or the economy, they can learn to minimise risk within their portfolio through diversification.

Contact CPS Property today to learn how you can offset risk through diversification of your property portfolio.

What is an offset account?

An offset account is a type of transaction account that can be linked to your home or investment loan to save you money on interest. It is used to reduce the interest you owe on your mortgage by offsetting the credit balance of your transaction account daily against your outstanding loan balance.

How an offset account works

A customer takes out a $500,000 mortgage at 5% interest per annum over 30 years. They decide to put $50,000 in an offset account. As $50,000 is now in this account, the interest is now calculated on $450,000, rather than $500,000. This customer will therefore save $142,211 and will also reduce the loan term by 4 years and 3 months.

It is great for savers as any extra cash you have left over from your wage each month can be put into this account to help reduce your interest even further. You could even put the rent you receive from tenants into this account.

Benefit of an offset account

One major benefit of having an offset account is that it allows you to pay down your mortgage faster so you end up paying less interest in the long run, which is especially ideal on an owner occupied home. It also acts as a transactional account enabling you to deposit as well as withdraw money allowing you to have access to your savings if you require them. This can allow you to move quickly on the purchase of another property if the right deal comes along.

Disadvantages of an offset account

As well as benefits, there are also some disadvantages which you should bear in mind before proceeding. These include:

• It might have an account-keeping fee attached to it.
• It might have higher interest rates or fees compared to a basic home loan.
• A partial offset account only offsets a percentage of the balance whilst a 100% offset account will offset the full amount, but is usually only available for variable-rate loans.

Should you have an offset account?

So should a property investor use an offset account? Deciding on whether to have this type of account or not will ultimately depend on your situation. If you know you are a good saver and have a large sum of money that you can put aside then this option could be right for you. By leaving your money untouched for longer this will help lower your home loan repayments each month and the overall interest you will have to pay.

Before proceeding with an offset account it is important to seek expert independent advice first to know exactly what you can and cannot do. You should also shop around to find the best option to suit you.

Want to find out whether an offset account will work for you? Talk to CPS Finance to discuss your options.

Eligible investments for a PIV include hosting an investment in an Australian managed fund, direct investment in securities exchange-listed assets, proprietary limited companies, property other than residential dwellings and government approved philanthropic donations. Direct investment into residential real estate is excluded from the PIV, as is loan back arrangements (where the investment is used as collateral by the applicant).

An applicant is only permitted to apply for permanent residency after 12 months of maintaining their investment, but there are no minimum residency requirements at this stage and the applicant does not need to live in Australia at all for the 12 month period.

The PIV has created an exciting opportunity for people looking to invest and eventually live in Australia.

For more information, visit Premium Investor Visa

According to the CoreLogic RP Data Home Value Index, dwelling values were absolutely flat across the combined capitals during December, with negative movements in Sydney, Adelaide and Canberra being offset by a rise in dwelling values across the remaining five capital cities. The Sydney housing market was the main drag on the December results, with dwelling values down 1.2%, while values were down 1.5% in Adelaide and 1.1% in Canberra. The remaining capitals saw a rise in dwelling values, led by a 2.3% bounce in Perth values and a 1.0% rise in Melbourne values over the month.

Index results as at December 31, 2015

After dwelling values had been broadly rising since June 2012, the December quarter results revealed a 1.4% fall in dwelling values across the combined capitals, the largest quarter on quarter fall since December 2011. Six of the eight capital cities recorded a negative result over the December quarter, with weaker conditions in Sydney and Melbourne acting as the greatest drag on capital city performance, according to CoreLogic RP Data head of research Tim Lawless.

The largest quarterly fall was recorded in Sydney, where dwelling values were down 2.3% over the final three months of the year, followed by Melbourne, where dwelling values were 1.9% lower. The only capital cities to show a rise in dwelling values over the December quarter were Brisbane (+1.3%) and Adelaide (+0.6%).

This was in contrast to the first three quarters of 2015, where capital city dwelling values rose by 9.3%, largely driven by a 14.1% surge in Sydney values and a 13.3% increase in Melbourne.  In stark contrast, the final quarter of 2015 showed Sydney as the weakest performer of any capital city, with dwelling values down by -2.3% while Melbourne recorded the second weakest result of -1.9%.

The complete 2015 calendar year results reveal a 7.8% increase in capital city dwelling values which is the lowest rate of capital gain over a calendar year since 2012 when values slipped 0.4% lower over the full year. Highlighting the diversity in the capital city housing markets, dwelling values fell across four of the eight capitals in the 2015 calendar year. The largest of these falls were recorded in Perth, down by 3.7%, and Darwin down by 3.6%. Hobart and Adelaide also showed subtle falls of 0.7% and 0.1%.

Despite the recent weakening of housing market conditions in Sydney and Melbourne, the two largest capital city housing markets still recorded much stronger annual gains than all other capital cities,  11.5% in Sydney and 11.2% in Melbourne. Dwelling values in Brisbane and Canberra were up a more sustainable 4.1% over the year.

Mr Lawless said, “The wealth created from housing in Sydney and Melbourne has been exceptional over the past twelve months.”

“In dollar terms, Sydney home owners have seen approximately $82,000 added to their wealth thanks to the strong capital gains over the year while home owners in Melbourne have seen the value of their dwelling grow by approximately $60,400. Brisbane home owners are $18,560 better off while Canberra owners have seen the value of their homes increase by approximately $21,900.”

“Home owners in the remaining capital cities have seen some erosion of their wealth via falls in the value of their dwelling. The largest losses have occurred in Perth where the average dwelling is now worth approximately $19,970 less than it was 12 months ago, while Darwin home owners have seen the value of their home shrink by a similar $18,150. The annual decline has been milder in Adelaide and Hobart, however dwelling values are still $515 lower in Adelaide over the year and down $2,430 in Hobart.”

“The slowdown in housing market conditions across Sydney and Melbourne in the last half of 2015 is being driven by a range of factors that can best be described as both organic and externally influenced. Organic market conditions have been derived from affordability pressures, rental yield compression and cyclical factors, while factors from external influences largely stem from a change in the regulatory framework introduced by APRA which has made it more expensive and difficult for investors to access housing finance. Added to this is higher mortgage rates and more restrictive credit policies and loan servicing requirements.”

Source: CoreLogic 

Looking to secure your next investment? Brisbane might be the opportunity you’ve been waiting for. Having solidified its reputation as a reliable and stable investment market, all while maintaining growth and ROI, Brisbane is a smart choice for local and international investors currently.

Contact CPS Property today to discuss your investment opportunities.