Question Mark

STUDENT APARTMENTS
Q: There are plenty of student accommodation developments being advertised at the moment. They look like quite a good deal, are they worth investing in?

With prices starting about $150,000–200,000, student accommodation can be a good way to get into the property market for a comparatively small outlay. This can be valuable for DIY super investors, who can’t borrow to invest, or for others who want to a foothold in the market without large loan commitments.

Student apartments are essentially a cash flow-driven investment. Rental returns are usually strong: about 6–8% of the capital value; and vacancy rates are low.

But don’t expect too much capital growth. There are often dozens, even hundreds, of apartments in a complex, so at any one time many of them may be for sale. This dilutes competition among potential buyers and keeps a lid on resale values.

Student apartments are designed specifically for a particular tenant market, so they’re often too small to fit in the amount of furniture that other kinds of tenants have. If the number of apartments is greater than the number of students available to rent them, there are no other tenants to take up the slack.

You may also have trouble financing your purchase. Lenders have strict policies about the kinds of properties they take as security for a loan. If your student apartment is less than 50 square metres (and many are) lenders may see it as a higher risk. This may limit your gearing ability.

RENTAL GUARANTEES

Q: I need a steady income stream, so the idea of buying an apartment with a rental guarantee really appeals to me. What do you think of rental guarantees? How do I know the company will honour them? Are the guarantees legally enforceable?

I have two major concerns with rental guarantees. First, the guaranteed rent level is often higher than what you would get in the “real world”, where returns are determined by the balance of supply and demand.

When your guarantee period runs out and you have to rent out the property on the open market, there is a strong chance that your rental income will drop considerably.

Second, rental guarantees are not a “bonus”, they are built into the initial purchase price. This means you’ll pay more to buy a property that has a guarantee than one that doesn’t.
In other words, you’ll pay a premium for a relatively short-lived benefit.

Rental guarantees are enforceable only to the extent that the person or company providing the guarantee is able to meet their commitment. If the developer goes out of business, a host of other creditors will be further up the queue than individual investors seeking payment of their rental guarantees.

DEPRECIATION BENEFITS

Q: I’ve got my eye on two investment properties: one that’s brand new, and one that’s about nine years old. A friend suggested I would be better off buying the new property, to maximise the amount of depreciation I can claim as a tax deduction. Is that right? How long do depreciation benefits last?

Your friend is right; most of the depreciation benefit on the older property will have been used by the previous owner. The taxman allows you to claim depreciation on two components of residential investment property:

1) Fittings and fixtures. These account for the vast majority of allowable depreciation deductions. Fittings and fixtures include built-in appliances, floor coverings, benchtops, light fittings, etc.

Most of these assets depreciate very quickly. The rate of depreciation, and the time you can claim it, is different for each type of fitting or fixture. However, as a general guide, most of the depreciation will be used up in the first five to eight years.

2) Building depreciation. This accounts for a much smaller proportion of allowable depreciation deductions. The tax office will allow you to claim building depreciation at the rate of 2.5% a year over 40 years.

Depreciation is a very complex area of tax law, so you should consult your accountant about your individual situation before purchasing a property.

LAND TAX SURCHARGE

Q: I own two Melbourne investment properties in a family trust. I’ve heard the Victorian Government is going to enforce a land tax surcharge on property held in trusts. Is this true and how will I be affected?

Land tax liability is calculated according to the land value of each property owned by an individual or other entity. The more properties owned by one entity, the higher the land tax bill.

The Victorian Government is proposing to introduce a land tax surcharge to deter people from trying to minimise their land tax liability by holding individual properties in separate trusts.

The surcharge is 0.375% for property with a land component valued over $20,000, with a sliding scale up to 3.5% for a land component valued over $2.7 million. As an example, the owner of a property valued at $200,000 will pay an annual surcharge of $950, over and above their existing land tax liability.

It’s important to understand that the surcharge will not apply to properties held in existing trusts that have nominated a beneficiary. If you haven’t already nominated a beneficiary, you should do so before the proposed introduction date.

With only a couple of months until the proposed changes become law, you’d be well advised to consult your accountant who can give you advice about your individual land tax position.

AUCTION ACTION

Underlining the somewhat mercurial nature of Sydney’s auction market, advertised auction numbers virtually double this week, from 231 to 446. The most significant increases are in the inner east, where numbers jump from 58 to 182, and the northern beaches, up from 11 to 39. Such a strong surge in supply could provide good buying opportunities.

In sports-mad Melbourne, where the Spring Racing Carnival is at full gallop, advertised auction numbers take a temporary dip, from 788 to 344. The sharpest declines are in the inner south, where numbers fall from 191 to 41, and the inner west, where they drop from 63 to 19. Tight supply is not a recipe for good buying, so guard against impulse buying and overspending. Supply levels should return to normal next week.

The Brisbane region is mimicking Sydney’s changeable auction levels this week, as numbers climb from 148 to 247. The biggest increase is on the Gold Coast, from 10 auctions to 67.