Investing in property has historically been an excellent choice for people looking to minimise taxation, generate additional income, or find a safe haven for superannuation. REIWA statistics show that the median house price for Perth has risen from under $200,000 in the year 2000 to over $530,000 in June 2015.
In addition, rents have risen from around $100 a week for units and $150 a week for houses, to an average of $460 a week for units and $480 a week for houses.
However, the most important thing to ask yourself is, "why am I developing?". Is this part of a superannnuation plan, a need to generate short-term profits, a long-term investment strategy, or a way to build a new residence for yourself at little or no cost? It's important to ask because the "why" of your development determines the "how". Where you want to finish tells us where we need to start, influencing our approach to issues such as the subdivision structure, titles and funding.
The general benefits of developing include:
Capital growth is the increase in value over a period of time - if a property purchased in 2005 cost $250,000 and was valued (or sold) in 2015 for $550,000, then the capital growth would be $300,000.
Historically the capital growth in Perth property has risen at an average of 12% per annum as indicated by the medium house price on REIWA’s website. Click here to obtain more details.
Remember: if you’re investing in property that's not your principal place of residence, any capital growth may be subject to capital gains tax when you sell. It's advisable to speak with your financial advisor or accountant about the tax implications of your development before you start, and the Amano Homes team can provide you with helpful information you will need to help you make decisions. We can also show you how to minimise or avoid capital gains tax.
Return on Investment
Return on investment (ROI) refers to the amount of money gained from an investment versus the amount of money spent.
Negative gearing is the term used when the costs of having an investment property are higher that the rental income it derives each year. The difference between the income and expenses is negatively geared against (ie deducted from) your assessable annual income, providing you with a tax deduction.
As always, you should seek expert advice from your financial advisor or accountant before you decide to negatively gear a property, as you are responsible to cover those ongoing losses in addition to your other financial commitments.
The Australian Tax Office considers a percentage of wear and tear on investment properties each year, which can be claimed against rental income.
There are two methods that the ATO use for calculating depreciation:
1. Diminishing Value Method: based on a percentage of the property's residual value after all write-downs, including the previous year's depreciation. Therefore this amount diminishes with each subsequent year's write-downs and is ideal for short to medium term investments.
2. Prime Cost Method: based on a percentage of the property's original value, the amount you can claim is initially lower, but does not reduce over the years as the diminishing method does. Therefore this is more suited to long-term investments.
Speak with your financial advisor or accountant to ascertain which method is most suited to your situation.