Investors Should Crunch The Numbers For Extra Cash Flow
Before you walk away from purchasing a first or next investment property, you should crunch the numbers correctly by considering property depreciation. Your next investment property may actually be more affordable than you think if property depreciation is correctly claimed.
Astute investors will usually consider the potential rental return of the property, the property’s location in proximity to local services and facilities, local employment drivers and historical growth of properties within the area.
You should also work out the tax-deductible costs and other deductions involved in owning the property such as property management fees, rates, interest, repairs, maintenance and property depreciation.
These deductions add to your net cash return and every deductible dollar comes back to you, the owner, at their marginal tax rate. More often than not, investors fail to consider the financial benefit of claiming depreciation prior to making their purchase.
The following example shows how one property investor identified an additional yearly cash flow of $4,992 from property depreciation.
The property investor was considering purchasing a ten-year-old house priced at $560,000. They did some preliminary research and asked their Property Manager for a rental appraisal of the property, which resulted in an expected rental income of $530 per week, or $27,560 per year.
The investor was also able to work out an estimate of the costs involved in owning the property. Expenses including interest rates, property management fees, rates, repairs and maintenance costs came to a total of $36,060 per annum.
After contacting a Quantity Surveyor specialising in property depreciation for a free assessment of the likely depreciation deductions they could expect from the property, they found they would be able to claim approximately $13,500 in depreciation in the first full year.
Without claiming depreciation, the property investor would experience a loss of $103 per week during the first year of owning the property. By claiming depreciation, the weekly cost is reduced to $7, saving them $96 per week or $4,992 in the first year of ownership.
An investor who crunches their numbers prior to making a purchase will gain a better perspective on the affordability of the property and their future cash flow position. Once they purchase the property, a specialist Quantity Surveyor such as BMT Tax Depreciation can be engaged to prepare a property depreciation schedule to ensure depreciation deductions are accurate and maximised.