I work with investors all the time who can’t wait to get into their next deal, but who don’t know quite what to look for.
This was the case with Michelle, who already owned two properties and was considering a third.
The property on her radar was a brand new one-bedroom apartment plus study located in the Sydney CBD. The building was new and very luxurious, with high-end amenities including an on-site gym, 24-hour concierge and rooftop garden.
With the projected rents and depreciation, her 10% deposit and the relatively low fixed-rate interest rate that her bank was offering, the property was going to be positively geared to the tune of around $150 a week.
There was also a rental guarantee in place for the first two years.
Now, I’m always wary of rental guarantees so I looked into the deal and discovered that the projected rents were actually on par with what the market could support. So, the estimated returns were quite accurate.
Still, I advised my client to walk away from the deal.
Well, it turns out that my client and her husband were a young, professional couple who were planning on an imminent move to London.
Living in the UK, they’ll pay UK taxes… and all of the Australian tax benefits of this deal will mean nothing. The benefits of depreciation, for instance, rely on them being Australian taxpayers.
As a result, property that was returning $150 a week would return very little, as most of the positive cash flow was comprised of tax savings, not genuine rental surplus.
We worked out that Michelle would be better off investing in a low maintenance house that was positively geared without accounting for depreciation.
She found an established house that returned $80 per week before depreciation and $130 after depreciation, so it much more comfortably fit in with her future plans.
This is a perfect demonstration of why you shouldn’t make investment decisions based purely on the tax benefits, but it’s also a great illustration of how one deal could be ideal for one investor, but completely wrong for the next.
This is why you need to create your own personal strategy to guide your investing decisions.