Property Hub - Investment Insights & Inspiration - Realty Talk: When it is not wise to ‘move in’ + Is the party about to end

Starting point is 00:00:00 Welcome to Realty Talk, the show that brings together the country's most authoritative and respected property experts. Follow us on all the socials and subscribe for updates and exclusive offers. Realty Talk is powered by realty.com.au, connecting buyers, sellers and agents differently. Hello, welcome to the show. If you decide to move into an investment property and it becomes your primary place of residence, You'll need to declare this for tax purposes. Now, there are certain scenarios where an investor can end up living in an investment property, but it's important to be wary of the rules and regulations before doing so.

Starting point is 00:00:46 That's what Bushy Martin will discuss in today's show with Brad Beer from BMT Tax Depreciation. The Australian housing market is booming, with predictions that prices will rise by as much as 20% in total across this year and next year. But one of Australia's leading economists, Dr Shane Oliver, who's Head of Investment Strategy and Chief Economist at AMP Capital, believes the bull market may be getting close to the end. And when someone like Shane Oliver says that, well, we listen. Bushy talks to Dr. Oliver today about that. According to the most recent Australian Taxation Office statistics, just 8.8% of Australians have an investment property.

Starting point is 00:01:42 That's just over 2 million investors. Pretty impressive. But dig deeper and we discover that the number of people who have scaled their portfolio is a very small minority within a small minority. The numbers that Bushy discusses with Arjun Palliwell are very revealing today in the show. And then to round out the show with a piece of wisdom from Bushy that deals with allowable claims. What costs can you recover from the tax man? Pretty important advice. Okay, without further ado, let's get underway. Welcome, you're watching Realty Talk. Now, there are situations when you may end up living in your

Starting point is 00:02:36 investment property, but how your property is defined for tax purposes will affect the claimal deductions that you're able to achieve. So to discuss this, I'm joined by Bradley Beer, an actor investor himself, and the chief executive of the leading tax depreciation company in Australia, BMT. So welcome back to the show, Brad. Great to be here as always, Bushy. I'm talking about tax and properties, of course. They're very interesting. Yeah, likewise, mate. And you've always got some great wisdom to share with us and some tips and tricks that make a big difference to the cash flow of a property. So what I would like to do today is just delve into a number of situations and impacts of those investors who end

Starting point is 00:03:19 up living in their investment property at some stage. So to kick that off, what's the impact of moving into an investment property and then converting that into your home? Yeah, it's like the accidental investor often bushy we um funnily enough over 20 of the schedules we do actually have someone live in it first um that data's changed up and down not over time it's actually quite substantial but living living in the investment property the first thing that happens is all those wonderful tax deductions you've got while you were there um and become no longer tax deductions and that includes all of your things like interest um your rates your management fees, things that, well, you probably don't have management fees if you're living there

Starting point is 00:04:04 yourself, but the costs associated with that property no longer become deductible. And that includes the depreciation claim. You claim that depreciation when you're using it as a rental, obviously, but not when you're not. So it needs to be apportioned accordingly. The other thing that happens is to consider with the current legislation around depreciation, once you actually live in a property uh it actually means that some of the things in there the plant items become used so if they were being claimed and you want to move out and use it as an investment property again later at a later date you do lose the depreciation that may be left on a lot of those items um on a positive note uh the the capital gains tax that is applicable as an

Starting point is 00:04:55 investor uh on on your property when you're living in it if it's as your principal place of residence uh then uh you you you you trigger a no capital gains tax period in that property's life um it's the one sort of tax haven we have in our own principal place of residence in australia uh and it means that you won't have a key cgt liability uh potentially if it is your only principal place of residence for that period of time that you live in it which is good yeah and that what's very clear there is that the actual cost of holding the property if you're moving into it is obviously going to go up but you won't pay capital gains at the end on that portion of time that you're living in it when and if you sell the property so i know that's good

Starting point is 00:05:41 let's have a look at another situation then so what about renting out part of your home how is that treated so when you rent out part of your home the the income that you do gain from renting out the property is should be seen as accessible income. So if you rent out that room for an extra couple of hundred dollars a week, then that should be added to your income for the year, just like rental income would be added otherwise. And then there's some partial claims, you've got the cost of maintaining and owning an investment property, or that property, you're now using part of it effectively as an investment so the a portion of the costs and also a portion of the depreciation related to the amount of area or percentage of the house that's used for that

Starting point is 00:06:28 for income in front for producing income should become a deductible percentage so you know assess the income and then you get some deductions hopefully alongside that yeah awesome okay well the the the next one we want to touch on is if you move into your investment property while you're renovating it what are the impacts there look probably one of the one of the big things to consider obviously when you live in a property all these deductions don't become available that we talked about earlier the one other concerning thing more so is if you renovate a property and live in it any plan equipment that you put into that property during that renovation it becomes previously used or secondhand so if you move out of there after you know six months

Starting point is 00:07:15 and all this new stove and hot water service or or carpets and things that you've put in that property because they're now previously used you can't claim any depreciation against them if you rent that property out so i think often you know living and renovating in the house at the same time while it does save some money because you've got somewhere to live even though it's not that much fun because everything's dusty uh there's a there's an impact to that claim afterwards so getting an idea of what that claim would be and whether it's actually worth going through the pain for the difference in tax deductions afterwards is a consideration to crunch on those numbers on the way through yeah you make a very good point there and and there's been since those uh changes

Starting point is 00:07:55 to tax appreciation back in when was it 2017 was that uh when it's 2017 yeah okay well it's had quite a significant impact there and and what uh investors need to think very carefully about is those false economies that you've mentioned and uh whether uh staying out of it and taking advantage of the plant and equipment uh claims actually equalizes anything they might be saving by by uh avoiding the wind yeah okay um actually in may bushy i'm sorry about the if someone lived in it you had to the end of june which is where my july comes from so there's a little period there that's a little odd but the original changes were actually in may so anyone that bought after um after that time yeah okay and just to close off then brad and you've touched on some of this

Starting point is 00:08:43 already but how does living in an investment property affect the capital gains well i guess the big thing is there's just a potential exemption if you uh live uh move into a house and you make it that principal place of residence it's the one one of the tax havens we do have mate you sort of will need to look at the value when you moved in and how much gains happened in that time until when you move out and for that period there should be a capital gains for a free tax free period providing there was no other principal place of residence and that all works so um just things to consider if we can not have to pay that lovely cgt that's always great yeah and i an important note there i guess is to make sure that if you are changing the use from

Starting point is 00:09:28 investment property to owner occupied or or the reverse to make sure you actually get a current valuation of the property at the time you make the change so you've got a basis to to look at the capital gains when and if that occurs that's right coming up with that being able to attain that value at that time is pretty hard if it's 10 years later when you happen to sell the property the other thing is sometimes i'm not so much at the moment but sometimes banks look more favorably from an interest rate perspective in your principal place of residents. So you want to have a discussion with your bank, you might save yourself some interest on the way through as well. That's a very good point. But some very

Starting point is 00:10:03 timely reminders, Brad, I'd really appreciate you joining us on the show today to run through that with us. Thanks, Bushy. Love it. Thank you. Now, it's very clear to all of us then that you need to be aware of the impacts of moving into an investment property for its impact on tax and the cash flow of holding that property. So if you haven't done so already, reach out to the team at BMT before making the move. Stay with us. You're watching Realty Talk. double your fee in the first full financial year deductions. Call B&T on 1300 728 726 today for an obligation free quote. Welcome. Now the Australian housing market is booming with many forecasting price rises in the range of between 15 to 20% over the next couple of years. We're seeing prices

Starting point is 00:11:18 rising sharply. Auction clearances are very strong particularly down the east coast. We're seeing sales surging and housing finance is at record levels. However, today's special guest, Dr. Shane Oliver, who's the Head of Investment Strategy and Chief Economist at RMP Capital, is predicting that the current long-term property bull market may be getting close to the end. So really looking forward to digging into that subject and welcome to the show, Shane. Thank you, Bushy. Thanks for having me on the program. Shane, always appreciate your insights on what's happening at the macro level and its impact on housing. So to sort of kick things off, what's the current property boom being driven by, do you believe? Well, there's a bunch of things, and I've got to admit

Starting point is 00:12:05 it surprised me compared to what I was expecting, say, 12 to 18 months ago at the height of the pandemic lockdown in Australia. But key drivers, I think, are record low interest rates, government incentives, which particularly have encouraged first-time buyers to get into the market obviously everyone thinks of the home builder but also the first home loan deposit schemes we've also had a recovery in the economy and that's provided people with certainty about their jobs giving them confidence to get out there and buy at a time when they still can't go on overseas holidays so maybe that's also contributing to greater demand for housing and of course on top of all of that there's the old-fashioned FOMO fear of missing out people fear well property

Starting point is 00:12:45 market's taken off prices are up say 15% from middle of last year or at least the low point so I better get in now if I leave it later I'll end up paying more so it's a bunch of things driving the market but there's no doubt it has been very very strong. Yeah no question about it but like most things we tend to look at about five minutes in front of our nose I'd like to get your thoughts though on how the latest upswing fits in context with the long-term property market cycles that you've experienced over the last few decades? Look, I think it's always important to put things into a longer term context. So you need to understand where we are right now. You also need to understand that the broader cyclical backdrop

Starting point is 00:13:26 we're in, you know, regarding interest rates and so on. But also there's this longer term picture, which you alluded to there. I've got data going back to the 1920s. Over that period, we've had three very strong booms in property in Australia. Obviously, in the 1920s, the roaring 20s into the early part of the Great Depression. Then we took a hit. We didn't start recovering until really after the end of World War II. And then, of course, through the end of World War II, up until well into the 70s, we had a boom driven by very strong economic growth in Australia. This is the post-war boom in the Australian economy and very strong levels of immigration. And those things saw property prices propelled well above their long-term trend. They then went through a softer

Starting point is 00:14:09 patch, occasional bounces in the late 80s, but really didn't take off again until the mid-1990s. And again, we saw property prices rise well above their long-term trend. The trend norm out of interest is about 3% per annum property growth over and above that due to inflation. So if inflation is, say, 2%, then the norm has been about 5% per annum. But over the last 25 years, we've exceeded that. And that's been driven by a combination of a shift from high interest rates to low interest rates. From the middle of last decade, we saw very high levels of immigration coming into Australia. And of course, that's now left prices on my very rough estimates, pushing up towards about 15% above trend. So we're at the end, sorry, we've just come through,

Starting point is 00:14:54 we're still going through what is, I think, the third major bull market Australian property over the last 100 years. Interesting. So we're sort of given that context, and the research that you've been doing. What's your read on what property growth forecasts are likely to be in the short to medium term? Well, to be honest, in the short term, I reckon we've still got more upside here. We've still got low rates. Rates are starting to edge up a little bit, but that's still going to be a driver. We've still got reopening in the economy. Some of the government incentives are still in place. So I think we've still got more upside to go, maybe another 10% to 15% over the next 18 months. But by the same token, you do have to allow we are getting closer to higher

Starting point is 00:15:41 interest rates in Australia. And I think we'll probably start to see that around 2023. So that's probably going to be a bit of a dampener on the property market around that time in a couple of years time. And of course, we've still got very low levels of immigration. And so that's taking us into a period, I think, of relative oversupply at a demographic level. I'm not talking about number of listings each weekend. I'm talking about the underlying population driven demand relative to the supply of new houses. We've got pretty strong supply at the moment. That combined with weak immigration will eventually get us into a bit of an oversupply. So these things will probably start to dampen the market from around 2023. Yeah, okay. And I guess the question that's

Starting point is 00:16:22 on all of our lips is, why do you believe then that the long term boom in Australian property is is close to its end well the three reasons why i think it's close to an end you've got to be careful here because this boom has gone on for longer than i initially expected if you go back a decade or so ago it certainly surprised many um but i think one of the big drivers of it of course has been the shift from very high interest rates uh in the late 1980s early 90s you were paying 17 for a mortgage today you can get them more recently we've been able to get them down around two percent it's that meant has with means or has meant we've been able to borrow more and therefore when you borrow more you can pay more for housing another factor of course over the last 15 years

Starting point is 00:17:03 has been very high levels of immigration compared to the supply of new property um that's been a factor as well but i think there's three factors here which are changing one that long-term downtrend in interest rates is probably coming to an end i don't think we're going to go much lower than that two percent number this so this this ever uh lasting uh sort of situation where interest rates keep going to lower and lower levels enabling you to borrow more and more and more is probably coming to an end that's going to put a bit of a break on what people can pay for for property on top of that uh we have seen a lot of construction recently that will start to slow down as the incentives start to slow down but for the time being it's very strong at a time of zero

Starting point is 00:17:47 immigration in fact negative immigration that means we don't have the same degree of population driven demand now eventually that will lead to a bit of an oversupply so we're going from a situation of chronic undersupply over the last 15 years to i think a bit of a chronic oversupply and finally the pandemic driven work from home phenomenon i think will enable more and more australians to realize they can afford a house out in the regions and at the same time get a better quality lifestyle but not pay the top city prices that may take a bit of pressure off city prices so I think all of those factors combined will lead to a bit of a slowing in property price gains I'm not saying prices are going to collapse I think those sort of forecasts are incredibly

Starting point is 00:18:30 dangerous unless things really go wrong with the economy prices are not going to collapse but I think we'll come into a decade or so of more constrained property price gains a time where I think buyers, investors need to be more selective in terms of the areas they go into because that rising tide of ever-rising prices will start to slow down. Absolutely. And quality always rises to the top and average stuff is always going to struggle.

Starting point is 00:18:56 I just think that's likely to be exacerbated given the factors that you've mentioned moving forward. So really appreciating you coming on the show today to share those thoughts, Shane. Some great food for thought. My pleasure, Bushy. Okay. So it's quite obvious that the property market continues to surprise and has done, as Shane mentioned, over the last few decades. It'll be interesting to see how that rolls out

Starting point is 00:19:21 as the dynamics of the economy roll through. So watch this space. And in the meantime, keep watching Realty Talk. Property depreciation is the natural wear and tear of a building and its assets. Property investors can claim depreciation as a tax deduction each financial year. Depreciation is a non-cash deduction. This means you don't need to spend any money in order to claim it. On average, BMT tax depreciation find residential investors almost $9,000 in first full financial year deductions. Call BMT on 1300 728 726 today for an obligation free quote. Welcome. Now, despite the property boom, there's very few investors that have actually achieved scalable portfolios. And recent ATO

Starting point is 00:20:13 stats confirm that only 8.8% of the national population have an investment property. And of these, 71% only have one, 19% have two, and only 6% have three. Now, this means that there's only 84% or 0.2% of the overall population that have more than three properties. So to discuss the critical real estate indicators that are going to help you to build a scalable portfolio, I'm joined by a successful investor and the founder of Investor Kit Buyers Agents, Arjun Palliwell. Welcome to the show, Arjun. Thank you for having me on. Arjun, I'd just like to kick off by getting you to define for us what you see as a scalable portfolio.

Starting point is 00:21:06 So the scalable portfolio definition, in my thoughts, has always been a combination of three simple things. Risk reduction through having diversity in a property portfolio across multiple locations. Number two is an income stream that can be seen or slowly develops to be seen. And then lastly, capital growth. And when you combine a property portfolio that brings in growth, has risk reduction across multiple assets, and you can start to see it bring in some healthy rents, that to me is starting to put together a scalable portfolio. Yeah, brilliant. So given that context and given that we are in the midst of a property boom, what's your thoughts on is now a good time to build a scalable portfolio? So I think irrespective of market times, there's the personal preference and that personal preference is to say, well, do we have an affordable, you know, can you afford the deposit, whether it be 10% or slightly more leveraged or whether it be 20% or anywhere in between funds to cover buffer positions, an understanding of, you know, interest rate changes. So once you get past that personal comforts of investing as a general rule, you then now move towards what the market's doing.

Starting point is 00:22:21 And funnily enough, whilst we are in a national boom, when we looked at the different sub regions across the country, we saw a top end of our positively growing regions have a growth rates of between 18 to 25% in the last 12 months, and on the bottom end with growth rates of zero to 4%. so when we have the split in the bottom end and top end it shows that irrespective of a national boom which is clear because only four percent of locations are declining that does mean still though there is a spread and that spread can mean that yes you will find locations that have started but perhaps aren't that 20 percent up already yeah it's a very good point and it's uh i mean

Starting point is 00:23:03 When you sort of aggregate numbers and start to look at medians and averages, it can not always tell the true story that's happening at a specific location on the ground. So I know that's really interesting. So in that context then, when you start to research around building a scalable portfolio, what are the crucial real estate indicators that people need to start considering? So the beauty about real estate is that I always talk about cause versus effect. And so the cause of things, there are so many things that cause different indicators to move. And when you're an investor, if you ask 10 different people as to why your market's moving, I'm very positive that you won't just get one answer. And this is the confusion that comes with causation analysis in the world of real estate data. It wasn't the train line, wasn't

Starting point is 00:23:57 the infrastructure? Was it the government leadership and direction? Was it simply not enough houses being listed? You know, there's so many different thoughts that people have, but the causing can be quite messy. So instead, I've been someone who likes to work on the indicators. Because the thing is, if someone feels growth is happening for X reason, and it's not showing on the other end, in some of these indicators, which I'll talk through, then it's clear that there's a disconnect between what someone thinks is causing something, and whether are markets moving or not. But when you focus in on, you know, six to eight different indicators or seven indicators that I like to see, what you start to notice is that if you are well and truly

Starting point is 00:24:38 growing, these indicators change. So an example of some of these indicators, asking prices. So that's the end part. This is the, you know, people who are asking for more as you start seeing listings come up. That's a clear sign that something is changing from a growth level. But as well as there's housing demand from a price perspective, you also wanted to show in the rents, because that's true comfort from an investor perspective that people are fighting to live here, not just speculate on its price rise. So this is where gross yields and rents are another indicator, as well as vacancy rates, another indicator. So now you start to see the end pieces, which is prices, rents, and vacancy. What was the pieces before that? Well, before prices started rising, places usually sell faster, because no one tends to pay more for something in something where it's not selling quicker, because they don't have a need to pay more for a property. So days on market is that trend I'm referring to. And so this is where I've already stated four indicators.

Starting point is 00:25:41 a few more are things like inventory levels and sales volumes, building approvals and population pressure. And by population pressure, I don't mean growth. I mean stayers and movers, people who are moving between internal areas or the behaviors of people within those areas. And lastly, some affordability metrics around certain ratios of rent to income and mortgage to income, although they can be slightly outdated with some of their timings of the release of that data. So those are easily six to eight data points that show what I call the market effect, because they don't really care for what's the cause. They only show a positive picture if something well and truly is growing. Yes, and it removes the emotion because you're quantifying actual numbers rather than

Starting point is 00:26:26 the story that we like to, or the post justified narrative that we often place on these things. So given those seven or eight different criteria, which do you believe are the most important and why so i'd say a combination of sales volumes and inventory levels are the most important and i'd probably put it right up there with with days on market because these are the two pieces that show the starting points the level of buying activity versus listings and lastly the speed at which someone's buying so if there is no reduction in days on market but there's a reduction in say listings, then sure, there might be less opportunities available for someone, but there isn't an improvement in the pace at which someone wishes to go for it. So this is where

Starting point is 00:27:15 that combination of these two pieces happening together, reduction in listings, more people buying, and faster buying, these are great signals for something is happening. Now, if you dissect the why on that something, and you feel happy about the causes, that's if you can dissect it properly, that is because, you know, ask anyone, and they'll keep saying different things about why is good so that's where these two are probably the highest on my radar when it comes to the change in any given market yeah i love it uh some really good eye-opening information there arjun really appreciate you coming on the show today to share that with us anytime my friend well it's it's quite clear the take-home from that that you need to be focusing on objective numbers you need to be

Starting point is 00:28:00 looking at leading indicators, not lagging indicators. And while it can be very confusing, for those of you who are interested in what Arjun shared with us today, just jump on their website at investakit.com.au and grab yourself a copy of their free ebook, which actually goes through in quite some detail the criteria that we've spoken today. So make sure you do that. In the meantime, stay with us for more here on Realty Talk. What borrowing expenses can you claim against your tax? And I ask this because apparently, according to a tax office, 90% of tax returns contain errors in this area. So in today's BushBot, I thought I'd help you to be able to correctly claim your borrowing expenses.

Starting point is 00:28:56 Now, just to make a note, I'll cover off on loan interest expenses in a separate segment. Now, in relation to borrowing expenses, though, borrowing expenses are costs that are incurred when taking out your investment loan to purchase your rental property. And if any of these expenses are under $100, then that amount can be fully claimed in that financial year. If they're over $100, they are claimed incrementally spread across five years. Now, deductible borrowing expenses include things like any lender's mortgage insurance that you might have paid on the property, stamp duty charged on the mortgage itself, any title search fees charged by the bank. They also include any of your mortgage broking fees, if you've used a broker,

Starting point is 00:29:46 and they also include things like bank valuation fees any loan establishment fees and any costs of preparing and filing the mortgage documents. Now on the flip side unclaimable borrowing expenses include anything that's classed as a capital cost. Now these can be associated with buying the property and they include things like any of your conveyancing fees, legal fees, a title search costs, any costs for a pest and building inspection, and of course, the stamp duty. All of these are classed as capital costs, and they come off the cost base of the property, if and when you sell it at a later time. Other unclaimable borrowing expenses include any principal repayments on the investment loan. And interestingly enough, they also exclude

Starting point is 00:30:41 insurance premium costs where the policy actually pays out the loan if you die, you're disabled, or you're unemployed. And finally, you can't claim any portion of a loan that's used for private purposes. So I hope this clarifies it. If you want to get the nitty gritty details, there's a great guide that the ATO produced. So just jump on the ATO site, and it's called the Tax Toolkit for Rental Property. So grab yourself a copy if you want to get the nitty gritties or have a chat to your accountant. I hope that helps. That's food for thought. Stay tuned for more. Well, he's done it again. Really good advice there, Bushy. Thanks. Catch up more on Bushy and all of his good advice at his Get Invested podcast.

Starting point is 00:31:33 Well that's it for another show a very special thanks to Bushy's guests Brad Beer, Dr Shane Oliver and Arjun Palliwell A reminder too that you can see all of our shows at realty.com.au along with one of Australia's most extensive

Starting point is 00:31:50 range of properties for sale and for rent from over 7,000 agencies nationally. Thanks to realty.com.au and BMT Tax Depreciation appreciation for their support. I'm Kevin Turner. Hope you've enjoyed the show. We'll see you next week. Miss something in this week's show or want to catch up on past shows? Do it anytime at

Starting point is 00:32:12 realty.com.au where we connect buyers, sellers and agents differently.

Property Hub - Investment Insights & Inspiration - Realty Talk: When it is not wise to ‘move in’ + Is the party about to end

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