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It is my understanding that you can claim between
1%-5% depreciation on the property as a taxable expense depending on it's
construction. In addition, fittings inside the house can be depreciated at a
higher rate.
Rates and insurance are also taxable expenses. If you are
getting a mortgage, the interest payments on the mortgage (not the capital
portion) are also taxable expenses.
All this will increase your yield.
Of course the income from the property will be
taxable also!
Don't quote on this, I'm not a tax accountant (or an
accountant for that matter (thank god!)).
----- Original Message -----
Sent: Monday, May 07, 2001 1:29 PM
Subject: [sharechat] Residential
Property
This is off topic so apologies in
advance, but I’m sure someone in this forum has knowledge of investing in
residential property and I could use some help. I’ve recently been reading "8
Secrets of Investment Success" by Martin Hawes, a book of interest to market
investors although not solely about sharemarket investing. In this book, Mr.
Hawes talks about valuing a residential property investment. His equation goes
like this: Take the income from the property AFTER expenses (rates, insurance
etc.), divide by the yield in percent you expect the property to return,
multiply by one hundred and you have the property’s value. For example, if the
rental is $20,000 and you expect a 9.5% yield, then 20,000 divided by 9.5
equals 2105 times 100 equals property’s value of $210,500. This equation is
preceded in the book by a discussion about yields for property investment in
which Mr. Hawes states that yields fluctuate a little but over time are pretty
constant. He said yields might be as low as 8% for commercial property in
Auckland but that the market might require a higher yield, say 11%, if the
property were located in a place like Cricklewood (I think a fictional small
town he made up for the purpose of an example). OK so far so good, all simple
enough to understand, problem is my fiancée and I have been looking at homes
lately and I have noticed that the houses we have looked at in Wellington,
admittedly not very many yet, have come out at around 6-6.5% yield when I do
the equation on the asking price. For example looked at a place in a
Wellington suburb on the weekend asking price $150,000 recently renting $220
per week according to the agent, currently unoccupied. Frankly we were pushing
it to believe it was renting at that much but even if it was, yearly rental
would be $11,440 minus say $1,500 for rates, insurance, etc. (would be more
than that surely) divide by yield of 9% times 100 equals a generous valuation
of approx. $110,000. So I wonder what’s going on. Is it that yields are
unusually low at present? Have we only looked at overpriced homes so far? Are
they asking too much and we should put in a really cheeky offer? Is Mr. Hawes
talking only about professional investors and are they a different animal from
homebuyers, picking up only occasional real bargains? Questions, questions!
Well once again sorry as this is off topic but if anyone can share some info
with me, I would really appreciate it. Regards Michael
P.S. read your comments about property
Hugh. Interesting and scary and made sense I must agree but when the
wife-to-be has her heart set on owning her own home, well what to
do?
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