I'm Jeremy Sheepard. >> And I'm Daniel. >> We use data to expose deceitful property experts and their marketing BS. >> This is the expert busting series. >> Welcome to episode seven of the expert busting series. How depreciation hurts capital growth.
Jez, let's jump in. >> Yeah. Don't buy properties with high rates of depreciation. It's a mistake to think that there's uh any benefit in this. It's actually the complete opposite. We're going to show you uh some data, some examples uh and we will explain what depreciation is, how it hurts.
Let's get into it. >> Let's get into it. So, Jeremy, what is depreciation? >> Right. So, uh many investors have this poor understanding of exactly what depreciation is. They think of depreciation as simply a claim that you make on your tax return.
It's some paperwork. It's a leg up uh tax trick. Um they think it's a, you know, like a government handout, a thank you from the ATO for being a property investor. Uh but depreciation is not a government handout. It is a loss in the value of the dwelling, what's being constructed, the building uh for your investment property. over time.
Over time, the building depreciates as as it ages. That is uh depreciation. It is not applicable to land because land does not depreciate. >> And it's not a tax dodge. It's not a government handout and it's not free money. >> Yeah, that's right.
It's uh it is not a good thing. >> And a lot I think this is besides we hear this all the time, cash flow, cash flow, cash flow. And I always bring it back to well, what's your personal circumstances like every month? How much is your savings or offset growing by? So when I see clients coming in really trying to get that one or two or three extra percent yield or like maybe that.5 or 1% extra, it doesn't have a huge impact. And a lot of people or investors will get drawn to depreciation because it's like, oh, it helps me with my cash flows now with capital growth.
I have to wait and then I have to wait to either sell down or pull equity out. So, look, you could find that nice balance if it is a big issue for you, a property that's maybe what 15, 20 years old. Um, but we always go for that land to asset ratio and get that bigger block size if you can. And depreciation is only can only be claimable for investment properties, not your owner occupier that you live in. >> So, yeah, again, you can talk to your tax accountant. This isn't tax advice, but >> yes, you can buy uh a brand new property with high rates of depreciation and live in it.
>> That's a lifestyle choice, but if it's an investment choice, um you're going to suffer. Every bit of depreciation is a bad thing. >> Well, back in the day, what maybe 2015, 2016, maybe what, 10 years ago now, that I would say there were a lot of off the plans being sold off in a lot of these estate areas. Maybe not so much common now, do you think? Or there's still a lot of >> Oh, yeah. I think they're they're everywhere still.
Okay, I'll have to jump back on social media. Maybe I haven't been marketed too heavily enough. I see more of these buyers agents pop up on my feed. Not like the brand new stuff too much. So, >> um, >> yeah. So, what is it?
>> Well, uh, yeah. So, land goes up in value, it appreciates, but the dwelling built on top of that land that depreciates as it ages. So, uh, let's say you start up an ice cream shop and you've got, um, ice cream maker and a freezer and so on. As they age, they depreciate it. Uh, they depreciate and you can claim that depreciation, that loss against the income that you earn. And it's the same from uh, an investment perspective.
If you have an investment property, it gets rental income, but uh, the building depreciates over time and you can claim that up to a point in time. >> Yes. So I think the the point here is land goes up in value. So think of maybe the building component. An example I would use is you buy a car. You buy a car and typically a lot of people will turn over their cars in that sort of first three, four, five years because they're claiming a bulk of the depreciation of the vehicle if it's for their income purposes, i.e.
maybe they're a real estate agent or they purely use it just for work purposes. They buy a brand new car, they depreciation it, and then they go off and buy another car and keep claiming that depreciation on the the value of the the car, >> right? Yeah. Well, but years ago, like >> the same with property, >> maybe around co you could have bought that brand new car, had it for 3 years, claimed appreciation, and still sold it for the same amount because it was such a big demand for cars back then. So, can work both ways, but very rarely we steer of it if we can. >> Yeah.
Yeah. Uh, yeah. So depreciation is a uh it's a dollar estimate >> in the loss of value based on on age and quantity surveyors are experts in this. They have learned how quickly certain items depreciate. For example, they know how quickly a hot water tank will depreciate uh compared to an air conditioner compared to carpet all those sorts of things. Uh yeah, so a quantity surveyor can list all the items of a house or a unit including the building itself and they come up with this estimate of lost value uh based on how much it has aged and they can even forecast the loss of further aging.
Uh and they draw up a schedule. We'll show you a schedule soon. Uh, and a depreciation schedule estimates how much value you've lost due to aging over the lifetime of your investment property. >> And another example is to like let's say you're looking to buy any investment property. Now, you can actually reach out to a quantity surveyor and get estimates on what they believe is available in the depreciation of the property. So, the property could be 40 years old or 50 years old and it has already been fully depreciated, but let's say there's been a renovation and they can assess that by the photos alone or they might get someone to do a walk through and they might go, "Okay, look, maybe based on our estimates, you know, there's a bit of um depreciation for this over the next 10 or 15 years." So, they'll be able to say yes or no.
Um, and if it is a yes and there is an amount that can be depreciated, you pay their fee and then you'll also get depreciation for those later years down the track. So, that's one way. But typically, if it's an older property, hasn't been renovated, less likely that you're going to have any depreciation in that property. You buy something already renovated, you're most probably paying a premium for that property going into a heated market. So, it's a bit of a balancing act. The other thing you can do is buy an older property, do all your renovations, the paint, the carpet, could be the the dishwasher, washing machine, whatever it might be, bits and pieces, bits and pieces, and then you can grab all those invoices, provide it to your accountant, and then they can claim that in future years because why would you go to a quantity surveyor when you can just give all those invoices directly to your accountant?
So, I would always start with a quantity surveyor. Hey, I'm looking at this property. It's 50 years old. Is there any depreciation? They might go, "No." Okay. You're planning on doing your rens.
Keep all the invoices. Send them through to your accountant and they'll claim it in future years. >> Nice. >> Bonus tip. >> All right. Yeah.
So, there's a couple of different divisions. D, do you want to take us through the uh different divisions of the tax law here? >> Yeah. So, it's a little bit different. So, things changed. So, with the federal budget uh budget ruling back in uh back on the 9th of May, 2017, let's say you built a brand new house, okay, brand new house.
And this is an example I've got here. So, I think this is maybe from BMT. There's a couple out there. You've got Duo Tax also. Um that's quite popular, but there's a lot of quantity surveys out there, but this is just an example on BMT. that you've got, this is an example of a property that's been built and there's a plant and equipment component.
So plant and equipment is pretty much anything within that. So it could be um fixtures, fittings, anything that can be removed. It could be things like blinds, carpet, oven, range hood, ventilation, air con, whatever it might be that falls under division 40. And then you've got division 43, which is the capital work. So that's the building. That's the building, the actual the house, the structure.
Okay. But what happened in on the 9th of May 2017? Let's say you built this property and let's say you moved in there first. >> Okay. You moved in there. Um or let's say you had it as an investment.
Either way, and you sold it to someone else later on, they can't then go claim all the plant and equipment. That's pretty much goes to nil right away, but this will stay the the vision 43 you can still claim in future years. So, um yeah, so pretty much for any secondhand plant equipment as an investor, um they can't be pretty they're not going to be deductible when they move over to that next purchaser, if that makes sense. >> Right. >> I think it's just Yeah, I don't know if it was just to stop people maybe I don't know. Was it to stop them buying brand new properties?
I don't know. >> Unlikely. They're trying to encourage that. We need more supply. >> Yeah, I was just maybe deter maybe investors buying. Yeah, I'd have to find out.
So, if anyone knows, maybe leave a comment there for us. But that's how they sort of both both set out. All right. And then this is what have I got here? Uh built 1980. Yeah.
So, typically kitchens renovated in 2005. Okay. These are some examples that I had, but pretty much like if a kitchen was renovated in 2005, um it could potentially be depreciated over a certain period. So, normally the the buildings component can be done over 40 years. So, you can claim 2 and a half% every single year, if that makes sense. >> That's the uh prime cost method, isn't it?
>> That's the prime cost method. That's right. And then you've got um the diminishing value method where you can sort of claim a lot more upfront. So like let's say you're on a higher income, you might decide to go down the diminishing value so you claim a bulk a lot more upfront. The prime cost is a bit more stable in the way that you can claim it. But again, you can talk to your tax accountant about that.
But there sort of the the two different estimates. Is that clear on the screen, Joe? >> Yeah. But um I just want to look at that chart you're showing with the there's a difference between diminishing value and prime cost. So uh diminishing value is more uh is a more realistic way of modeling what actually happens. So you build a brand new house uh it is the newer it is the faster it depreciates.
Uh so over the first 10 years it's going to lose more in value than it does over the second 10 years. And that that's that's what the ATO are trying to model here. >> Yeah, you can pick you can say, look, I want to claim the property at a diminishing value compared to a prime cost. So, think of it as like if I'm on a higher income, well, I want to claim that back sooner because I'm getting that cash flow a lot sooner. But let's say, for example, in the future years, um you might think that yeah, like let's say maybe you're 10 years from retirement and you're still on a really good income. You want to claim as much as you can, but then later on you know that your income's going to drop or you might go to part-time.
there's going to be less to claim at those later years with the diminishing way. But with the prime, it's a bit more stable. You can see through the years how stable it is. And the reason why it's really low in that first year, it hasn't taken the first 12 months of depreciation. It's been prored. So typically it would start at that higher amount if that makes sense.
So it started from like 19th of June. So I've only got a little bit to claim and then the first full year is from July 2019. >> Right. Yeah. Okay. This is a portion of a financial year there.
>> Yeah. But the idea is if you buy a property that's like, you know, 40 years old, 50 years old, and it has no renovation or nothing's been done to it, you're going to have zero depreciation to claim because the asset has been fully depreciation. >> Yeah. Yeah. And that's actually a good thing, not a bad thing, which we'll come to soon. >> All righty.
What have we got here? We got capital growth. So, >> yeah. So, capital growth is also called appreciation. AP uh so it's an increase in value over time. Uh that obviously is a good thing.
Uh I call it the ants pants of property investing. Uh yeah, nothing changes a property investor's net wealth position faster than capital growth. The opposite of appreciation is depreciation. It's a bad thing. It's something to be avoided. It's when an asset becomes less valuable over time.
So appreciation good, depreciation bad. Capital growth good. The opposite of capital growth is depreciation. So just yeah keep that in perspective. What's good and what's bad. Now let's look at a tax example here.
So your income is 100,000. You've got losses of 5,000 and you got your taxable income. So income is what you receive from your employer or your business. But then let's say a lot of people I guess are always looking for something to claim back to reduce their taxable income so they get a tax refund at the end of the year. Everyone likes that, don't they, Jez? A bit of uh Christmas in July.
>> Yeah. >> And then examples could be like maybe if you work from home, there could be some home office expenses. There could be things like income protection. So a portion of that could be deductible. You might have your accounting fees. Look, dry cleaning, depending on the profession.
It could be donations, whatever it might be. There might be losses that can bring down your taxable income. And a lot of people invest in property for this reason. They bring their taxable income down, but they're investing in these assets that are growing at a rapid pace. >> Yeah. And this is just a general tax law.
This isn't specific to property investing. in in tax generally you can claim your losses against your earnings uh and then you pay tax on the the net profit. Uh so it's the same with property and one of the losses that you can claim is depreciation. And if we have a look at this example, let's say we've got an investment property and we've received 20,000 in rent for the year, but our expenses are made up of 30,000. So it could be the mortgage interest, could be property management, council rates, insuranceances, repairs and maintenance. And then the big one here is I've allocated 10,000 of depreciation.
So your net expenses is 30,000 and your net amount is -10,000 because of that depreciation with on the your tax return. You'll have that depreciation amount there that's going to reduce your taxable income and you're going to get a little bit of money back based on your marginal tax rate. But it's more about is that asset that you've owning outperforming. >> Yeah, you'd want some uh growth in this circumstance to exceed that minus 10,000 and hopefully by a a good margin. But I think where people get confused is you pay interest, you pay a property manager their fee, you pay council, you pay insurers, you pay trades to do repairs and maintenance, but you don't pay depreciation, you claim the loss. So, it's something that you it doesn't have to come out of your wallet or bank account, but it is real.
And there's a lot of people out there sometimes they get a commission from selling new property uh that'll try and tell you that that depreciation isn't really a loss that you incur. It's real. It does happen. It's just that you don't see it because it's measured in the value of your property. It doesn't come out of your wallet. >> And I would argue the fact that let's say you bought a property, let's say it could be in Perth or in Queensland, wherever it might have been.
You've bought a brand new property and it's done well. You've had a great experience. So, when you hear that depreciation is a bad thing because you've had asset growth in the property that you purchased, I always say look at a comparable. Let's say you bought that property in 2018 as an example, brand new on 400 square meters. Look a couple suburbs in or further away and you got 800 square meters at the same price or cheaper. What's your land to asset ratio?
That's the biggest thing. That's the best example that you can go away and go, what have I done better? If I bought something that was established, has that performed better in that period? So, that's the best way to sort of really look at it, isn't it? >> Yeah. And even in the same suburb, you could have some old properties selling at the same time as new properties.
Uh, in fact, if you have two properties side by side in the same street and they are identical in every way except one's got a new building on it, the other's got an old building, it is a mathematical certainty that the old property will outperform the new because of depreciation. >> And you get it at a cheap price if they're next door to each other that's already been factored into that brand new property. And you see it all the time like with the typical values in a pocket. You might have a a property that sells for $200 or $300,000. Like there are differences, i.e. could be on a main road or um depending on what it might be, newer properties, older properties, renovated, unrenovated.
So, it's just a matter of suburb selection first, then down to that that property depending on what your budget is. But this is a perfect example with that depreciation. And this is what we mentioned. You don't get it all back. So, if we claim 10,000, okay, we give it the quantity report to our accountant. They claim 10,000 reduces their taxable income by 10,000.
And let's say you're on a tax rate. We're just using a rounded number here. Let's say 40 cents to the dollar. You pay $4,000 less tax. So you're not better off by 4,000. You're actually worse off by $6,000.
>> Yeah. So you've you're thinking about this depreciation. uh you claim $10,000 and you pay less tax. So your income comes down by $10,000. So you're paying less tax. And that amount with the example here, 40 cents in a dollar means you pay $4,000 less tax.
And immediately people think, "Oh, I'm better off by $4,000." No, you're not. You're actually worse off by 6,000 because there was a $10,000 loss. It's not as bad as$10,000. It's only as bad as 6,000, but it's still worse than zero. A Z loss is what you would have for a property that is not depreciating. >> The amount of times I hear people say, "Oh, property is not costing me much." But they're not looking at the actual capital growth of the property.
Like, what's the future prospects of capital growth? Oh, it's a great property. It's not costing me anything. Then I'm like, well, what did you buy it for? 500,000. What's it worth now?
500,000. >> Come on. You know what I mean? In that period of time, the rest of the market has moved on and you're actually falling behind. >> And it happens all the time. Like there's so many times when a market is stagnant, but then other markets have gone up by 40 50% over the three years.
>> Yeah. Yeah. You got to compare yourself to the national growth rate, >> maintenance. >> Yeah. So depreciation is different to repairs and maintenance. Uh repairs and maintenance are costs that you incur immediately like the whole water cylinder.
I think that's what the picture is in the middle there. Uh, so that might go bung. Uh, foot traffic. Where's a hole in the carpet? I think that's the rug on the right there. So, there are expenses that you need to pay right away.
Uh, and like depreciation, you can claim those expenses as a loss on your tax return. But depreciation is a bit different. Something becomes less valuable as it ages even before it needs to be replaced. uh the building itself that's part of this and all its fixtures and fittings like the range hood, kitchen, shower head, so on. Uh so all of these things become less valuable as they age and the tax office allows you to claim these losses as a tax deduction to reflect the new age and therefore new value of your asset. >> And with the hot water cylinder, there'd be two components.
One could be repairs where you can claim it right away. But if you have to buy a whole hot water system, well that's going to be depreciated then over a period of time. So an example would be let's say I got a new hot water system and then Jez you bought the property off me a year later I decided to sell it. You'd still have some um well actually you wouldn't because Yeah. would >> decision. Correct.
Yeah. So you wouldn't. >> But if you put a new deck out the back then I would. >> Let's do an example the back deck. Yeah. So, let's go through this uh example of a back deck.
So, this is an example of depreciation of just one part of a rental property. So, let's say you build a deck uh out the back for $40,000 and assume this deck is believed to have a lifetime of 40 years just to make uh the the numbers easy. Uh you can claim $1,000 a year in depreciation for the next 40 years. So, the assumption the ATO is making there that is that you are going to have to replace this deck in 40 years time and you're going to have to spend um some money to replace it. So, you can claim the aging in value. It's worthless after 40 years.
So, you can claim $1,000 a year for 40 years. Now, there are other options like the um diminishing value method, but we'll just keep it simple like the prime cost which is um 1,000 a year. Now, let's say you earn $100,000 a year from your job. So, instead of declaring an income to the ATO of $100,000, you're now allowed to declare an income of only $99,000 because you've claimed $1,000 in depreciation for the deck. Uh that means you get taxed on a lower amount. You pay less tax.
You're not being taxed on an income of 100,000. You're being taxed on an income of 99. uh even though your employer still pays you the same amount. So now let's say you're paying the tax office 40 cents for every extra dollar you earn with the deck depreciating at $1,000 a year. You're now declaring a taxable income of only $99,000. That $1,000 difference at a marginal tax rate of 40% is worth $400.
In other words, by claiming the $1,000 loss, you pay $400 less tax, and that's each year. Now, again, this does not mean you are better off by $400 each year. It means you are worse off by $600 a year compared to having uh a property with an old deck that is already fully depreciated. the and the 40% I think we mentioned earlier is an estimate 40 cent 40% so it's not like just to make things simple these aren't the actual tax rates >> the back deck I think again you'd have to talk to a tax accountant but we've it's 40 years or 2 and a half% peranom due to the fact that it's a capital improvement like you're putting a capital injection i.e. the back deck. It's like construction pretty much.
>> Yeah. And this is for an investment property. For an investment property, that's right. >> Not your personal home. >> Correct. Or it could have been Yeah, that's right.
It's for an investment property and it's not your home. So, I think this is a really good example um a really good example to look at. >> And I think just on that point, sorry, you go Jez. >> Yeah, you you finish off. I want to go to the next slide. >> It's a debate, I guess.
So maybe it's a debate around do you buy something a little bit newer where it's like there's no maintenance issues, it's all fine, you can claim depreciation, like do you find that middle ground or do you go for that land to asset ratio? Like what would you do? >> I would go for maximum land asset ratio >> and I'm with you. I would always steer to that and there might be some push back because you're buying a property that's maybe 40, 50, 60 years old. As long as it's structurally okay and the building and pest reports um they can be a bit tricky at times. They've the disclaimers everywhere, but that's why I think it's good to use a a solid buyers agent.
They do their walk through and you just have your buffers in place. Like I rather buy something that I'm most probably getting at a lower rate, but that land to asset ratio is a lot higher. I'm not paying a premium. I might be getting that stamp duty a little bit cheaper cuz I'm not paying that top dollar. And then I rather go in and then add the value off the back of it. So do my own rena, outsource it to a bit of the BA and the actual property manager.
Yeah, it's if it's your Renault project, then the uh profit margin is yours. You're not paying for someone else's reno project or some developer's new build >> because you will see that discrepancy in the properties that have been prettied up recently, you are paying for someone else's renovation >> and they're charging for it. >> Yeah. So after 40 years, um, you add up those $400 each year, you've you've paid $16,000 less tax, which sounds great when you when you add it all up, but there's a catch. Your deck is now theoretically worthless. Uh now it might not be about to fall down, but if a valuer or a quantity surveyor were to come in and value your property, they would factor in the cost to build a new deck since it's now 40 years old and it may need replacing.
Now, since the deck cost you $40,000 to begin with, your net position has actually gone backwards by $24,000. So note that you you haven't lost $40,000 over 40 years. you've only lost 24,000 because you're able to claim the loss to get that tax discount. >> So, with the tax claim, it is not as bad as a $40,000 loss. It's only as bad as a $24,000 loss. But here's the big point.
It is still a loss. It's something to be minimized. You don't want to maximize losses. And that's where people get confused. They aim for these high depreciation properties. Depreciation is a loss.
Well, they could have paid 40 grand. And a really simple example is you got a house side by side. A house side by side and then you got that deck that you you're paying 40 grand extra for that deck. Is that the way that you look at it where there's already an existing deck there that might still be okay? >> That's right. Yeah.
It's not worthless, but you've Yeah. claimed its depreciation over all those years. And then if you look at the ATA atto guidelines in plain English, I would say that the DV 43 is claimable. It reduces cost base actually sorry what happens is is it reduces your cost base. So, like let's say you go sell a property in 10 years time and you've been claiming that deck, been claiming that deck, been claiming that deck, you've been claiming that deck deck. What happens is it'll increase your capital gain in future years because you've been claiming that um maybe I'm getting a bit ahead of myself and everyone else, but let's say the property is um let's say cost 500,000 including all your stamp duty and all your purchase costs.
That's like the cost base of the property and you sell the property for 600,000. >> You sell the property. >> Are you um going to do the clawback? You're talking about the ATO's claw back of all that depreciation you claimed. >> Well, yeah. Yeah.
It gets added on. So, like let's say you sell that property 10 years ahead and you made let's say $100,000 capital gain, you'd get a 50% discount on top of that and then you pay tax at that 50,000 just gets bolted onto your taxable income. But what happens is let's say you've claimed uh let's say $10,000 in depreciation. Well, the way that you work it out is 600 minus 510,000 not 500 because it gets added back onto that cost base of the property. >> So whatever you've claimed the atto grab it back at the time you sell >> actually sorry it reduces your cost base. So instead of being 510 it should be 490 as an example.
So if you've claimed 10 grand >> of that um >> so it increases your capital gain. Correct. >> Yeah. Decreases the cost base, increases your capital gain. >> That was it. Talk to a tax accountant.
But that's [laughter] >> Well, we do have a slide with an example I think somewhere. >> But D 40 is a bit different like the it's got something to do with um it is handled a little bit separately. They call it I think the written down value versus the disposable value of the asset um of the fixtures and fittings. So, it's a bit technical, but you can always talk to your accountant about that if you have been claiming that over time. But the thing is it's there to be claimed. So if you don't claim it um I think legally by the ATO you still need to show it.
So if you're not claiming um like the for example the div 43 like that actual building component that gets that reduces your cost base either way you claim it or you don't claim it. It's still reducing your cost base. >> That's a good point. I may have um been misleading there. I'm not saying don't claim depreciation. Uh what I'm saying is don't target properties that have high rates of depreciation.
But if you have bought one, then by all means, yeah, claim as much as you can. >> I think it's that, like I said, the middle ground. You don't want to buy something that's maybe an absolute uh dump of a property that needs a lot of work, a lot of time. You might want to find something. The ideal scenario for me, and I know for you too, Jez, would be you buy a property that can be rented >> right away as is. as is, but you've got potential to add that value off the back of it.
>> Yeah. You want to be able to put a tenant in. Yeah. All right. So, u this is one of the big things about this this whole topic. Depreciation is a loss.
So, there is a misnomer in property investment and it's a term. Oh, I catch myself saying this uh I'm embarrassed when I whenever I say it, but it just comes out of my mouth because so many people use this term depreciation benefits. There is nothing beneficial about depreciation. It is a loss. You actually want to avoid it, not maximize it. And I think where people get mixed up is when they start talking about claiming depreciation on their tax return.
They think of it as a a bonus. >> It's a great thing. Everyone wants everyone wants to rooster the tax bill. Everyone wants to do it. And they like that big lump sum at the end of the year, don't they? >> Yeah.
It's um you know you're not really hurting the atto by [laughter] by doing this. Uh yeah. So a better strategy is to minimize loss not maximize it. Yet incredibly there are some professionals in this industry who advise maximizing depreciation. And some of them they might do this because of either a lack of understanding of what depreciation technically is but I think the majority of them do it because of a hidden agenda. uh they want to make the new property seem more appealing than an old property maybe because um they get a commission on the sale.
>> Well, it sounds good, doesn't it? Like you buy a property, it's only going to cost me $20 a week once you factor in depreciation and I've got a house. Like it sounds great in theory, doesn't it? >> Yeah. You've um you've just put yourself in a huge amount of debt for something that might not grow as fast as you think. And there have like I said I know areas like of Perth I know other markets that have been brand built brand new they do go up in value like depending on the amount of supply in the pocket that's most probably the big one you might have a little estate there where you've got in early bought the block built and done really well trying to do that these days it's a lot more difficult because there's a lot more premiums in the block of land and there's a lot of premium built into the building of the of the property.
Um yeah, the premium I reckon is is all in the building of the the property. But but you you look at it from a developer's perspective. You're doing a feasibility uh for a project. >> The land is an expense to your project. >> It's the building you make the profit on. So you're trying to minimize the amount of land, maximize the amount of building so you have the the smallest >> land asset ratio.
I I was listening to uh or reading a blog by a developer and they were beating their chest carrying on about how they have this very high land asset ratio. Uh and they were bragging about like 30%. I think I wouldn't touch 50%. And here they are bragging about 30%. Um yeah, it's crazy. >> It's I don't know what it's education.
It's got to be Yeah, this this education needs to be somewhere. Jez, I know you've got all these other institutions, but um look, >> yeah, >> I don't know. We won't go into it too much now, but I'm not a big fan of them to be honest personally, and I'm going to do a whole episode on it because I've seen um businesses are part of these property institutions, as they call it. I'm sure everyone can figure out what I'm uh talking about, >> but they got developers in there with these accreditations, property investment, property investment accredititations, and they're selling this off the plan, and there's no accountability. It's like whatever. >> Yeah.
Yeah. >> Like nothing gets stopped. It's all just >> Yeah. >> Yeah. Just as more on this topic, check out I think it's episode number three in this series, new versus old. There's more of it in there.
Maybe we need to I know J start up a council or something or property I don't know >> anyone can >> yeah true true >> just create your own >> selling now this is actually the example I spoke about before where you bought the property for 500,000 >> 400 >> 400,000 apologies the depreciation is 30,000 now when you um and it's good to have like maybe an Excel file somewhere when you buy your property you you work out what your stamp duty was all your costs it's always good to have a tab on all of that so Your cost base is down to 370,000. You've owned the property for 5 years and you sell it for 600,000. So you've made a capital gain of 230,000. Okay. Not 200,000 230 because you've claimed 30,000 of depreciation. >> Yeah.
So instead of paying capital gains tax on 200,000, you're paying capital gains tax on 230,000 because you've claimed 30,000 in depreciation. >> Correct. And there'd be, we haven't factored in here, but there'd be a 50% discount on that if you've held a property for over a year in your personal name. So, hence why like a lot of people might um invest in their super funds due to that lower tax those lower tax rates. >> Yeah. >> Okay.
Bad advice. Yeah. So, if depreciation is such a bad thing, how do we get this term depreciation benefits? Now, I think a fair few accountants might advise their clients to buy a negatively geared investment property and that will have high rates of depreciation like a brand new apartment. So, so that their client pays less tax. Now, the assumption they're making, you know, accountants know tax very well, but they don't know property investing so well.
The assumption is that you'll get capital growth which adds to your net position while you're paying less tax yeartoear on a cash flow basis. But that assumes that all property grows at the same rate and ironically higher depreciating properties grow slower uh which defeats the very purpose of the strategy. So it's like it's like asking for a pay cut so you pay less tax. Oh, please, sir, can I have a can you drop down my wage so that I pay less tax? That's just shooting yourself in the foot. Uh, so if you want to pay zero tax, just earn zero dollars.
>> What's the Nana Jez? What's the the ideal you have a massive asset base and you're earning a low amount of income, but you can still fund your lifestyle? >> Is that the dream? >> Sounds good. Actually, my dream is just not not to receive emails. [laughter] >> Just check it once.
check it once a week. So, >> and just before we leave that bad advice, I think that some accountants may have been uh responsible, well-meaning, but responsible whereas there is something a little bit more dastardly uh there are property developers uh and they are trying to sell new property. So, they want you to believe there's something good about losing money uh so they can get a sale. Uh, and there are also sales agents that are working for developers who get a commission. And there are even some crafty types who uh disguise themselves as um property investment advisor. Uh, but they make their money from flogging off new new property, which of course has higher rates of depreciation.
That means if you have the choice to buy a new property or an old property uh in the same booming suburb, uh you should definitely choose the old one because it will it will perform better because it has lower rates of uh depreciation. So old will outperform new. All other things being equal, old will outperform new. >> And we're only talking about investment, not owner occupier. >> Yes. Sorry.
Yes, of course. >> Well, again, most probably you're buying that property at a lower rate. Like it's going to be cheaper. I'm talking more about new. There are instances where you want to actually move into your own home that you've decked out yourself. It's brand new.
You're not buying a property that's maybe 40, 50 years old. You might want that smaller block size, but as long as you're aware that it may lead to maybe um slower capital growth. Like it depends on your strategy, right? You want a bit of stability. So, you buy the home to live in. I know there's a lot of people in Sydney.
They might rent in Sydney, but invest in Perth, invest in Melbourne, invest in Townsville. like they just want to invest and get into those markets that are growing. >> Um >> yeah, I think it's uh yeah, rentfesting is becoming a much more popular thing now, especially for people in Sydney. >> But I think it's more education. I think there's like tax accountants and these property investment firms actually believe this is the right way. Maybe they don't even think about >> Yeah.
Well, you know, in order to believe, in order to to confidently say that depreciation is a good thing, the first mind that you need to fool is your own. >> And so, yeah, they do become very biased. But >> yeah, historical data shows that new properties underperform old. >> I think it's a matter of you're paying a premium. If you're looking at two properties within a suburb, why is there a price discrepancy? So, if you look at the recent sold property sales, you are paying a pretty much a premium.
could be 100,000 more, 200,000 more. And you need to factor that into your cash flows. And >> look, I understand why sign buyers agents firms buy new properties. You know why? >> It's easy. It's >> less headache.
Buy a property. I'm not going to hear from the the client again. But is that really putting the client up front? I think as long as you're honest with the client and saying, "Look, we're buying an older property. It's got these issues. We may need to spend a bit of money." As long as they're aware of it, that's the crucial bit.
>> Yeah. Yeah, I mean when you think about uh the repairs and maintenance for an old property, >> so it might be it's in the low singledigit thousands, you might get a couple of phone calls from your property manager each year. Uh but is that uh so annoying that you would forego like $20,000 of depreciation in a year? You know, we're talking we're comparing low singledigit thousands to double digit thousands. And think of it as, let's say there's a $200,000 price discrepancy in a property that you're looking at within the same suburb. So one's $800, one's 600, and one has been renovated quite significantly.
That $200,000 difference in just stamp duty alone in Victoria, for example, could be an extra 11,000 back in your pocket. So $200,000 may be cheaper. Um, and but you save that $11,000 on stamp duty and you could maybe inject that $11,000 on a cosmetic rena. Maybe maybe you put an extra 30 in, spend 40 grand back up, and you can make that property look pretty good and you're still 160,000 in front. >> Yeah. And that profit margin is yours, not who you bought from.
>> That's right. >> All right. Depreciation benefits. Why professionals should not recommend high depreciation properties. So, just I think this was a presentation we did back a while ago for CPA Australia. I think back in 2023, it's a while now.
over two years ago. But this is um a unit in the Infinity by the Crown Group. It's on um 301 Botney Road in Zetland. It's where the Green Square Library is. >> Fancy looking, isn't it? >> Very fancy looking.
And um I just thought I'd put some information here, but like this was a contract that was signed in one of the the units there. 1 million79,500. The build was complete four years after. Must have moved in or rented out. I'm not sure. And then it was sold in August 2023 for 1.05 million.
So in that period, it's actually gone backwards. So you bought a brand new property. Let's say an accountant or a developer sold you this uh how do I word it? I wouldn't say junk [laughter] from an >> It'd be nice living there. I'm sure it is. But it's like you've gone backwards where imagine if you invested back in 2015 into like um another market, let's just say.
>> Well, yeah. Sydney was booming at that point in time. Uh but only for another couple of years. 2017 it would have been Hobart. You could have bought a house for that amount. You could have bought um two two houses in Hobart with a rental yield of um something like 5%.
>> Yeah. Yeah, you could have maybe gone, like I said, yeah, you could have bought, sold, but you could have gone into Tasmania. You could have gone into Brisbane, you could have gone into Perth, like you could have been with that million dollars. So, with that million dollar allocation, >> you could have close to easily doubled that to 2 million. >> Yeah. In an eight in that 8year period, >> I think uh I don't know offhand, but I suspect the national growth rate would have been close to 100%.
>> So, a million dollars, that is an opportunity cost of a million dollars. >> You know what it is? It's this sunk cost cuz I know it's happened to me before when I started my investment journey early on. I had a property that had no capital growth and I I had no idea why I invested there. That was back in 2009 and it's like you've already put so much money into it. You've got it.
You don't want the headache of selling and then buying. I ended up selling that property. But it's a matter of if someone's purchases, they're still going to potentially defend it. It's not costing me much. It's doing really well. But once you actually break it down with a professional, you can see it's an underperforming property.
And I'm very big on monitoring your property portfolio's performance over time. >> Yeah. Yeah. But that's that's a good point that you raised about that sunk cost bias. We've already put money into this. We've already spent a million dollars.
I want to believe that it's a good investment property and maybe maybe it was had good cash flow. I I don't know. But um you've missed out on a million dollars worth of capital growth. >> I always used to take it like a lot harder, but these days I think running a business, you know, we're growing our business. There's some there's got to be some sunk cost, but you got to look at it as a learning experience, don't you? And okay, well, how can we make better decisions later on and then hopefully people can actually learn from what we're showing here today?
>> Yeah. Yeah. So, if I was the uh investor here in this case, I'd be uh remembering that million dollar loss and just saying, "I'm [clears throat] never going to make that mistake again." And I've seen so many like the amount of clients I've seen over the years like they've come in and they've bought these brand new properties and it's very rare that I've seen I think there might have been one or two that have done okay but a lot of these especially in these highrises in Melbourne like um Docklands um certain parts of Melbourne, South Bank have just been atrocious. >> So aim for that land to asset ratio house first. If you can't afford it, um if you don't go regional and your price point's still an issue, maybe you opt for a townhouse. You're still getting some land component.
But yeah, I'd rather go for that than a unit. >> Yeah. Yeah. Land to asset ratio. Yeah. >> The only time I would actually even consider a unit would maybe be somewhere premium spot.
You've always got that risk of over supply, but I'm thinking maybe look somewhere in Sydney. Small block, older block, good location, has strong demand continuously. But I'd rather put my money in most probably another pocket and get a house. >> Everyone's different. >> So >> yeah. So wrapping up, uh remember that appreciation is a good thing, depreciation is a bad thing, and the worst uh properties for depreciation are new properties.
Uh they've only just started depreciating depreciation. Yeah, they have 100% of their construction cost to go. So, don't be lured in by the big uh tax considerations, the tax deductions. Soon as he takes your eyes off capital growth, uh you're going to make a mistake in property investing. Um now, there are some other expert busts that touch on similar topics. I think I might have mentioned episode number three, new versus old.
There's another one, episode number 21, uh, which hasn't come out yet, but land, it's not about square meters. So, it is, um, it's the value, the land to asset ratio is a value thing. It's not a square meters thing, but yeah, check out that episode as well. >> And the other advantage I'd like to finish up on is depending on where you purchase, that block size could be really important. So, let's say you [music] are buying a property that has a lot of depreciation. and it's on a smaller block, you've potentially lost lost [music] all sub subdivision potential on that property.
Where if you buy an older property that you could maybe split, sell off, maybe you can do some duplexes [music] or town houses, you've got opportunity maybe 20, 30, 40 years in the future to be able [music] to do something cuz locations change, especially in these builtout areas. Um, you'll see that the houses will get knocked down and then [music] rebuilt and sell for a premium. So, >> you can't do that on 375 m. >> You can't. So again, like if you're growing [music] your portfolio, we're not to say that then they're going to um be bad investments. There's just better ways to increase your probability you aim for those older properties.
>> That's right. >> So um that wraps up episode seven of the expert busting series. Join us in our next episode, which is episode 8, why you don't make money when you buy. Take care and thanks for watching.