Deppro on Property Club Conference

Property ClubProperty Investment

DEPPROSecond hand properties, there’s always been a bit of a myth about that, but there’s two sides to it really…The age of the property, if the property was built before 1987 then you need to talk to us first because if it’s built before 1987 the problem you’re facing is there’s no capital works left in the building. In fact the legislation said that before ’87 it doesn’t apply to that building. However, if it’s after 1987 then simply there’s 40 years from the construction completion date and anything else that might’ve happened after ’87. So if things were added, I’ll go through that a bit more with you. Therefore when people ask you about second hand properties all I ever thing about is: You get 40 years from the date it’s constructed. In fact if you bought a property tomorrow which was built in 1987 … so the math would be that property could be depreciated until 2027 at 2.5% per annum on the construction cost, the reasonable construction cost. There’s no big deal about it, if it’s after ’87 or ’87 and after there is still 2.5% depending when you buy it. Obviously if it’s built in 1997 and you bought it today, you would have some 14 years left at 2.5%. That would be on the construction cost and we as construction cost in 1997 of course, so it’s going to be a relatively low figure compared to if it was built today. But there is still life in it, that’s the point I want to make.

Capital works, what are we talking about there? We’re talking about the building, the cost of altering the building, cost of capital improvements to the surrounding property. There’s a lot there for us to work on. When we look at properties we look at extensions … you see the property on the left there, the older property, it possibly is pre-’87 but we know now that they’ve built something perhaps last year and that whole area can now be valued and depreciated. For 40 years, that extension. Now when we’re out there we’re looking for the telltale signs. If you ask us “Why do you go and view properties? Why can’t you just do it?” When the client tells you how much it cost and what have you. It’s because we’re looking for things. See if you buy an older property sometimes it’s hard to know whether … particularly if they have cement rendered it or something, it might be hard to know whether there was an extension done at some stage. Obviously we’re looking for telltale signs like on the floorboards perhaps there, we’re looking for the extension lines. That’s the kind of thing that we’re looking for to establish, “All right, this looks like it’s only been done ten years ago. Let’s look at the historical data on how much it would’ve cost to build a room this size ten years ago,” let’s say. That’s the sort of work we do.

Again, older property, new kitchen. If there’s a new kitchen … I work in Sydney and I do a lot of inspections as well and there aren’t that many properties in Sydney now that were built in the ’60’s or ’70’s that haven’t had a lot of work done to them. It’s a simple fact of life that there’s been a lot of work done. So say a kitchen like this, obviously it’s pretty flash, but it’s a new kitchen. We look at that kitchen and say “Okay.” If the current owner didn’t do it, we try to establish when it was built and we have to estimate sometimes, we look at how much that costs. Then that kitchen, taking out the appliances, we estimate the value of it and then we depreciate it 2.5% per annum for 40 years. So there is life in second-hand properties. A bathroom is another example.

Now swimming pools, since February 1992, if your house has had a pool built in it … So you buy a second-hand property and there’s a swimming pool in it, the property was built in perhaps say 2000 and in 2002 someone put a pool in it. Well then we would look at that swimming pool and say, “Okay that’s a pool that was built since 1992.” We’ll value the pool how much it cost to construct and we’ll give you a 2.5% depreciation on the swimming pool and the fences and the paving and the motors and everything else. There’s a lot to do in second-hand properties and there’s a lot of opportunity in second-hand properties.

One of the things as just a bit of a tip, when you buy a second-hand property very often the first thing we want to do is gut it and we want to put in everything new so we can get a tenant at a good price, at a good rental, which is great. There is another strategy, particularly for those already existing tenant. I’m not suggesting you do this, I’m just suggesting this is a possibility. If there’s an existing tenant already you may want to leave it as it is, if the tenant is happy enough, for about six to nine months. Then after that you’ve established that you have had income producing … you’ve used that entity, or that building, for income producing activities as it was. That means then that you then gut it out, you can depreciate what was there in that year. What you would do is you’d ask us to come in on day one and we would value the property as is, in its rough state. You would establish that you’ve used it for income producing activities for six to nine months and then you decide you’re going to gut it. Once you gut it and take it all out you’ll have all the receipts. You know exactly how much it cost you to put in the new kitchen, the new bathroom. We’ve given you the estimates of the value of what’s already there. The accountant has our report and he also has your new receipts and everything else and the accountant can just do it. Write that off there and then make these the depreciation of the new stuff. We don’t have to come back in again because the accountant has got all of the figures. It’s just one way of doing it, most of us do like to go in there and clean it up and get new tenants, but if you have an opportunity that’s not a bad way of doing it. You can’t just gut it straight away, you have to show the taxation department that you’ve used what’s there for a reasonable period of time. Again, you can always ask us if you’ve got that opportunity coming up we can discuss it further and with your accountant. That’s just a tip that I’m leaving with you.

Settlement date. You buy a property … I’ve just picked up one of these brochures here that Property Club have for their second-hand properties. I’ve noticed, wonderfully, that they’ve got the construction date. This one says 2007. 2007, that was six years ago, so there’s still 34 years of 2.5% on this property here. All the ones that you’ll see outside on the stand. Now in relation to when you buy it, it’s going to be 2013. The inside, and it’s got to do with the settlement date, all the fixtures and fittings all get a new effective life. That’s even if the previous owners have claimed, because that’s done. Remember all these things that we do in taxation, depreciation, and benefits, they’re all government incentives to get people to buy. To get people to sell, to make it worthwhile for people to take risks like yourselves in property. So when a new person comes in they’ve got to give them the same kind of opportunity as they gave the previous owner, so everything gets a new effective life. However, anything that you do after you’ve bought it, after the settlement date, then you need the receipts. Anything that was done before settlement we will go in there and estimate what it costs, but you can still get the benefit of it. Pre-purchase improvements, that’s us, that’s where we come in to.

I’ve made my point clear, when you buy a second-hand property you’ve got it under construction date or construction completion date so you know how many years you’ve got left out of the 40. If it’s only ten years old you’ve still got 30 years, which is great, and the settlement date is important because at that date then everything inside the fixtures and fittings, the kitchens, the appliances, the carpet, the curtains all those things get a new lease on life. As I’m showing you here. All these things here, even if they’ve been there for ten years they’ll get a new effective life and there’s a formula for us to do that. Paul, I don’t know if Paul is here somewhere, but we’ve been discussing that at length. In relation to that it is a little bit confusing, he said, “Well, but this stove is five years old.” There’s a formula for bringing that up to speed in relation to the price that you purchased the home for. I won’t go into it too deeply, because it is a formula, but what I’m saying to you is that you do get the benefit. So that stove has a new ten year lease of life and whatever estimate we put on it, it will have that at 10% per annum. All those sorts of things there. There is a lot in a second-hand property. For instance floor coverings/carpets: ten years, floating floors: 15, linoleum: ten, free-standing furniture: 13 years. If you furnish your property, have it fully furnished, there’s a 13 year depreciation on the furniture package. With buildings, as I was saying earlier in relation to doing anything in a second-hand property post ’87, it’s garages and patios, if anything has been done like that in your older property we can revalue that. It’s all part and parcel of the percentage we can get for you.

That’s all I want to say on second-hand properties. I want to encourage you to realize that there’s plenty of opportunity firstly. Not to be discouraged by it. I know that Property Club mostly promoted new properties, which is fantastic, that is the bee’s knees, but if you go for older properties it’s not the end of the story. It’s actually the beginning of the story really, and that’s when we really come into our own as depreciation experts we come in and we discover what’s there for you to depreciate.

Thank you very much, you know where we are you can always come out and talk to me.

– Richard from Deppro, Parner of Property Club Charity

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