Tax time approaches… Is your accountant fit for purpose?
The tax system is a very complex and continuously evolving area. Legislation is constantly changing and compliance is becoming increasingly stringent – it’s impossible for one person to know it all!
For this reason, it’s important that we as property investors, ensure our accountant has expertise in the area of property investment tax. Ideally, they should be property investors themselves.
Without the right person on the job, you risk losing potentially thousands in tax savings every year in the property portions of your returns.
A skilled property investment accountant should assist you with:
· Creating an investment strategy to minimise tax
· Structuring your portfolio so as to maximise returns whilst protecting your assets
· Ensuring you have claimed all the deductions you and your investments are legally entitled to
Whether you have an accountant currently, or are looking to change, it’s important to consider their suitability to your investment situation and goals.
Here’s the selection checklist I used when choosing my property accountants:
Are they registered and qualified? Tax accountants should beregistered at the online tax and BAS agent register. Ideally, they will be qualified to Chartered Accountant level – the most highly regarded in the industry. You can search on the Institute of Chartered Accountants website for a CA in your area who specialises in property tax. If they are a CA or member of another professional body, such as the Institute of Certified Practicing Accountants Australia or the Institute of Public Accountants, then they have to meet the standards of that association and you have the right to complain to the association if you’re not happy with their service.
Do they have sufficient experience? Your accountant should have at least three years’ experience working with investment property tax and ideally should be a property investor themselves. Your assets and position will be better maintained by a likeminded investor, qualified for the job.
Are they easy to communicate with? Investing can be a fast paced game at times so it’s important to be able to reach your accountant via phone and email if you have any questions or concerns. Selecting an accountant that takes forever to get back to you may result in you missing a deal or taking risks by proceeding ahead without your queries checked. Ask them what their response time is to client queries.
You should also feel comfortable asking questions and they should dedicate an appropriate amount of time to addressing your questions and concerns. Ideally look for someone pro-active – will they actively suggest ideas to reduce your tax and increase your returns?
What is the service capability of the team? It’s useful if you can also get accounting advice and services from other specialists within the same accounting firm, such as SMSF and financial and investment advice. To provide investment advice, an accountant must have an Australian Financial Services Licence.
Consider their fee structure? An obvious question, butit’s important you’re clear on what and how your accountant charges from the outset.Typically, fees are charged at an hourly rate and they will bill for their time for one-to-one appointments, phone calls and emails.
Choosing carefully using the above criteria will help you align with a professional who should be a positive and guiding advisor on your property journey.
A quality accountant will be worth their weight in gold as your portfolio grows – so avoid judging too heavily on cost. Investing in a good accountant will deliver solid returns year after year!
Conduct due diligence like a property expert in 4 easy steps
I’ve blogged regularly on the importance of research and due diligence when investing in property.
Risk is one of the biggest obstacles to investment for many property investors. Everyone has different comfort levels – some of us are prepared to take greater risks for greater returns, others are happy with lower returns if it means lower risk.
Risk assessment is a critical element of the purchasing process, but how many of us really undertake comprehensive due diligence?
It’s common for investors to get caught up in hype or act hastily out of fear of missing out. As a result, they skip over or rush through their market research and property assessment.
For others, a full understanding of the risks, getting comfortable with them, knowing the worst case scenario and how they would deal with it is the only way they can overcome their fear and take the plunge.
Risk evaluation can seem a very daunting thing. I have provided comprehensive lists of research areas in past blogs. This time, I thought I would suggest a more simplified due diligence process to help make it more manageable. I have split this into two parts. This blog covers the first part – market due diligence. The second part will cover property due diligence and will be the subject of my next blog.
Right, you have your deposit, you know your borrowing capacity and you have your investment strategy in place. You’ve done some initial groundwork and, depending on whether you’re seeking cash flow or capital growth, you think you’ve identified some potential markets. Now it’s time for the nitty gritty.
The four questions to ask yourself when doing your market due diligence:
1. What will drive market growth?
For our investments to deliver us strong yields and/or capital growth, we need demand for accommodation in our chosen area to outstrip supply. This requires us to identify some solid drivers of sustainable population growth. Local and state governments often publish economic reports on towns, cities and suburbs which provide population and housing projections and predict shortfalls. This information is useful but make sure you look at what factors they are using to reach these predictions, when the reports were published and if they match up with your own research outcomes.
Look for as many of the following growth drivers as possible. These factors can all have a positive effect on population growth and will greatly improve the growth prospects of an investment:
· Proximity to good existing or planned infrastructure and appealing lifestyle amenities such as public transport, shopping and entertainment precincts, good schools, parks, rivers and beaches
· Urban development and revitalisation projects
· Industrial development – the more projects the better. Exercise caution with single-project towns – if the project should run into trouble the property market will suffer swiftly and drastically.
Where can I find this information? Information on infrastructure and urban development planning can be found on the local council’s website and the state government’s department of planning website.
2. Where is the market at in its cycle?
It’s no secret that the best time to buy in an area is ahead of the growth cycle. Buying in at the peak means you’ve missed the boat. Suburbs, towns and cities will all go through cycles – it’s not difficult to evaluate if the market is a buyers market (what you want) or a sellers market. You just need to know where and how to access this information.
Where can I find this information? Source historical sales information (for a small fee) from the relevant state’s statutory authority on land information. For example, Landgate if the property is in WA, Land and Property Information if it’s in NSW, Land Victoria etc.
For historical listings data, you should be able to request this from your state’s Real Estate Institute. Run a comparison of the number of properties for sale and the number of properties sold over the last six months, 12 months, two years and five years. This will give you a comprehensive picture of the market’s cycles and what stage of the cycle the market is currently in. An increasing number of listings and a decreasing number of sales indicate the market is in a downcycle creating a buyers market.
3. What residential development is planned?
Any increasing demand for property in your identified area will be greatly softened if you haven’t accounted for increasing supply. Find out what residential development is underway or planned for the area.
Where can I find this information? Information on land releases, development areas, planning applications and building applications can be found on the local council’s website.
4. What type of housing will be most in demand?
To determine the type of rental accommodation that will be most in demand you need to know what type of people make up the local renting market.
Where can I find this information? Council websites and the Australian Bureau of Statistics (though be aware this information can be out of date) can usually provide you with information pertaining to the area’s demographics, type of housing and the proportion of the population that is renting. But to ascertain the demographics of the renting population, you’ll need to speak to several local agents. They will be able to provide you with a profile of typical renters in the area which will enable you to identify the type of housing most likely to be in demand, whether it be houses, units or apartments and whether there is a preference for new or older style accommodation.
5. What is the worst case market scenario?
Understanding and planning for the worst is an essential step for stress-free investing. A solid back-up plan that you can easily initiate if the going gets tough will give you complete peace of mind. The worse case scenario with any property investment is negative growth and a vacant property.
How do I plan for it? Property in general is a fairly low risk and stable investment. Having done thorough due diligence to this point, you should be in a position to make a well-informed decision. But successful and experienced investors know that you still need a plan B. You need to know your financial limits.
For example, if you plan to negatively gear a property, at point would you no longer be able to afford the interest payments if rates were to rise or the rent dropped? Reducing the risk of not being able to afford your monthly payments is one reason why positively geared property has risen in popularity in recent years. But regardless of gearing, how long would you be able to maintain the interest payments with no rental income if the property was vacant? A rule of thumb is to give yourself a buffer in case of emergency by having the equivalent of four weeks rent in a savings account.
Taking the time to work through these key points will arm you with the knowledge and understanding required to make an informed decision on where and when to buy. Investors who do their due diligence stand a much better chance or getting their investment purchases right the first time and creating a successful portfolio sooner.
NEXT WEEK – Due diligence made easy – your step by step guide: Part 2 – The Property
Investors achieve wealth quicker when they buy against the pack
Property investors in the nation’s mining towns have been faced with some negative market reports in recent weeks.
SQM Research reported rental vacancies in mining towns across Western Australia and Queensland had risen over the past 12 months, while the Pilbara Development Commission released its latest quarterly housing market update (based on data from REIWA) observing decreases in the average advertised prices for rentals and properties for sale in Hedland, Karratha and Newman.
Long term investors in these markets will have experienced several cycles over the years and will know that regular market movements and seasonal fluctuations are commonplace; understanding these markets’ unique characteristics and how market data correlates is the key to maximizing returns and minimizing risk.
Mining town markets differ significantly from capital cities. They can turn a full cycle in 12 to 18 months and downturns (lasting from three to 12 months) have occurred regularly over the past decade. In contrast, capital cities generally experience a full market cycle every five to eight years.
During a down cycle, prices and rents in a mining town may roll back 10% to 15% over a six month period providing opportunities for informed investors to take advantage of these short term market changes. Investors can make outstanding capital gains in short periods by purchasing in a slow market and waiting six to 12 months for the upswing – as opposed to waiting for capital growth in the slower capital city cycles. Buying against the pack is often the quickest road to wealth creation and well-researched investors are likely purchasing now in preparation for the next market upswing
Mining towns also typically experience two quiet and two busy quarters each year which can be used to investors’ advantage.
The Christmas period to March produces a larger supply of homes for sale and lease making it an ideal time to buy. The busy period, usually June to October, is generally a result of an increased workforce for new projects awarded in the towns which drives demand for sale and rental stock and creates a sellers’ market.
Looking at the workforce demands on these regional towns, the FIFO populations and their average wages in these towns have never been higher. And despite reports of an industry slow down, there is still significant current infrastructure spend, and plenty more in the pipeline. The government is also committed to transforming these towns into cities through a billion dollar civil infrastructure upgrade.
While recent reports should not be ignored, it is equally important to consider that these towns remain some of the best locations to build property wealth, with the highest yields in the country. Our investor clients continue to average 10% to 13% rental yields from their Pilbara investment properties.
Invest Outside the Box to get ahead in 2013
It’s a tradition every January for real estate experts to give their predictions on the outlook of the Australian property market and pick hot spots for the coming year.
2013 is shaping up to be a very interesting year globally with all indications pointing towards the Australia property market during 2013 mirroring similar trends which occurred during 2012.
Property prices in most capital cities are expected to remain relatively subdued with marginal increases in rental returns, with the exception of Perth which is expected to benefit directly from the on-flow of growth from the WA resources sector in the second half of 2013.
In contrast, the standout performers for 2013 are expected to be the resource towns.
With property markets in major mining towns during 2013 remaining buoyant and investors achieving rental returns in excess of 10% PA in most locations.
The fundamental drivers that have underpinned the property markets in mining towns throughout Australia still remain the same in 2013 as they did in 2012 – Strong international demand for Australian resources, high ore prices, limited housing stock and a rising demand for accommodation, all contributing to strong trends in the Pilbara region of WA.
For property investors who have traditionally focused on investing in major capital cities, I challenge you to think and invest outside the box for 2013, as this year will be a game changer for the Australian resource industry and those investing in towns that benefit directly from it.
In particular, property investors should understand that the factors supporting the housing dynamics including rental returns and capital values in mining towns are long term trends with extremely positive futures both for the country and these regions in general.
Considering trends over the past 10 years, the median price of a house in Port Hedland, for example, has increased on average by 18.2% each year, twice the annual rate for Perth at 9.8%.
Interestingly taking a 15 year perspective, the annual median price of a home in Port Hedland has risen on average by 13% PA making it a high returning ‘blue chip’ investment using any independent criteria. In Karratha, property investors have achieved on average an 11.4% increase in the median prices per annum over the last 15 years.
The constant hype about boom/bust trends in mining towns should be placed into and considered with this long term perspective.
For those investors looking for the next hot pick and fast movers of 2013, there are specific mining towns in which real estate is currently undervalued and primed for future growth.
During the coming year, I believe the mining towns of Newman in Western Australian and Moranbah as well as Gladstone Queensland will be star performers for investors.
These three mining towns are set to benefit from continued new investment during the coming year, which is expected to place further pressure on the local supply of housing leading to an upward pressure on rents and capital growth.
Diversity is the key to any well balanced portfolio and helps to ensure that the investor is protected through both up and down markets. If your strategy has been focussed on negative or capital city properties, make 2013 the year you invest “outside the box” and add the strength of an income generating property to your portfolio.
100 Billion Reasons to invest in Gladstone
With over $100 billion in infrastructure projects planned or under construction, the city of Gladstone in Queensland can be aptly described as a super infrastructure location for property investors.
Infrastructure investment has historically been a key driver in property values because it results in a rising demand for homes as well as higher living standards. For example, the massive new infrastructure investment in Gladstone is predicted to create a demand for an estimated 8,100 new dwellings by 2018.
Gladstone is now a key hub for the growing energy sector in Queensland and as a result is attracting massive overseas investment both in coal and LNG.
The Port of Gladstone is Queensland’s largest multi-commodity port and the fifth largest multi-commodity port in Australia. It is now the world’s fourth largest coal exporting terminal with coal making up 70% of the total exports from the port. To help cater for the increasing level of coal exports from Gladstone, approval was recently given for the $2.5bn Wiggins Island Coal Terminal Stage 1 project.
In addition to coal, Gladstone is also the centre of a rapidly expanding LNG industry. LNG emerged as a major industry in the city in 2010 with the approval of BG Groups’ $20bn Queensland Curtis LNG (‘QCLNG’) project on Curtis Island, across the harbour from Gladstone. A few months later in January 2011, Santos approved its $18.5bn Gladstone LNG (‘GLNG’) project also on Curtis Island.
This was followed with Origin approving the first stage of its $23bn Australia Pacific LNG (‘APLNG’) project in July 2011 with the second stage further approved a year later. It is estimated that the potential of Gladstone’s LNG industry is capital expenditure totalling $70 billion and thousands of new jobs.
For investors taking a long term perspective of the property market, it is important to understand why Gladstone is attracting such a large level of investment and why it will continue in the future.
International companies are now pouring billions of dollars of new investment in Gladstone because of the surging demand for energy in the world – a demand which will continue well into the future.
This trend has been underlined by the latest predictions by the International Energy Agency (IEA) in its 2012 World Energy Outlook Report.
The IEA predicts that global energy demand will grow by more than one-third over the period to 2035 with China, India and the Middle East accounting for 60% of this increase.
Over the coming two decades, there be ongoing challenges to meet this growing world- wide demand for energy and that is why key energy hubs such as Gladstone will continue to attract the large infrastructure dollars and projects.
For investors seeking property in an established location, offering mining town rental returns in a lower risk environment – Gladstone should be given serious consideration during the coming year.