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steps to take after settlement of your off-the-plan property |
So you have just settled and you're the proud owner of a fantastic new investment property!At this point, many people would mistakenly believe that there is nothing further to do. The fact is, there remain several crucial steps that you need to take. Neglecting to consider these steps can leave you open to loss and financial anguish. You have spent so much time on selecting the right property, it's now time to ensure that you maximise your return on investment. In this issue we review these critical steps you, as an investor, need to take as soon as you settle your new investment property. Step 1: Obtain insuranceThe first step to take now that you're the owner of a valuable asset, is to make sure that it is appropriately protected. Insurance is one of the key areas to attend to immediately after settlement of your off-the-plan investment and should certainly not be neglected. The insurance that you require is dependent upon the type of property that you have purchased, and of course your personal requirements. Careful consideration needs to be given to the value of the property, from an insurance and replacement point of view. It is best to seek advice from an insurance company or an insurance professional, such as an insurance broker. They will assist you in determining how much you need to insure your property for, and what exactly will be covered under the policy they are offering. 'Under insurance' through not understanding the true value of your asset or by seeking to minimise cost outlays by insuring the asset for less than it is really worth, is fraught with danger and can become a major problem if you ever need to make a claim. Don't be frightened by higher costs for your property insurance because remember, in complete contrast to the insurance you pay for your own home, the cost of any expense incurred on an investment property is tax deductible. If you have purchased a free-standing house your insurance will need to cover both the cost of the building structure, home insurance, and a separate cover for the contents, contents insurance. If however, you have purchased strata titled property, such as an apartment, then the body corporate for that particular development will, on your behalf, be responsible for insuring the structural elements of the building — in other words your home insurance. With strata titled property every owner is required to pay annual body corporate fees and part of those fees are used to pay for the building insurance for every property within that development. The body corporate however is not responsible for the payment of the contents insurance for each individual property. That means it is your responsibility to arrange contents insurance. Insurance companies understand this and have products designed to insure just the contents of a property. Contents insurance covers carpets and blinds, light fittings as well as any furniture and personal effects you are going to leave in the property for your tenants use. Which Property? strongly recommend that regardless of whether you are buying a house or an apartment, you organise Landlords' protection insurance. This type of policy is not particularly expensive and provides the best protection for you and your asset. In addition to normal insurance, Landlord's insurance will allow you to claim for malicious damage should a tenant vandalise your property. Depending on your policy, it may also cover loss of rent, legal liability cover, emergency work and temporary repairs and the replacement of locks or lost keys. Whether you have purchased an apartment or free-standing house it is of great importance to organise adequate insurance — it provides peace of mind and protects your investment. Step 2: Choose a property managerSelecting the 'right' property manager can often make or break your investment. A good property manager will help to manage your investment and will do more than just collect the rent. Good managers will take care of regular inspections and maintenance issues and handle the letting of your property to minimise any vacancies. They will also perform credit and background checks on your prospective tenants. Property management fees can vary and you can negotiate directly with your property manager on the level of fees they charge. Whilst lower fees are always helpful, a good manager is worth every dollar you pay and any savings may be insignificant when compared to the benefit of having your property managed well. In terms of how much of your rent you will need to pay to have your property managed, in Queensland, fees for a long-term residential let are generally 8% plus GST. Charges over and above this fee, for example advertising your property for rent, is a separate fee again. Management fees for short-term letting such as holiday letting are much higher, up to 13%, and involve much more work for the manager. When you're choosing a property manager, treat the process with as much (if not more) care as you'd give selecting a tenant. Find out how long they've been in business, whether they have experience (and how much), how they advertise vacancies and how they select tenants. Ask how they collect rent and how it's disbursed to you. Find out their maintenance procedures, how they handle emergencies, overdue rent and what reports they provide. You should consider meeting the property manager who will be directly managing your property, especially if you have some special requirements as to how you would like to have your property managed. These days, many new developments offer on-site management. An on-site manager can offer you considerable peace of mind. Not only do the managers reside in the complex, but they are on call every day. Onsite property managers are often the largest investors in the complex having bought their own property to live in, as well as the management rights to the development. This means the property manager has a vested interest in the management of the complex and in ensuring all the properties are kept in good condition and occupied by stable, trustworthy renters. An on-site manager can often carry out minor repairs at no or minimal cost. This means tradesmen are not always required for small repairs that could otherwise be quite costly. An on-site manager is also better placed to keep you informed about the complex, its performance and condition. There is no rule that says you are compelled to use the on-site manager to manage your investment. It is our experience however that a good on-site manager clearly has more to gain if your property is managed well as they are building the value of their own considerable investment in their property and business. Step 3: Decide on whether to furnishThese days, most properties for rent and certainly most apartments come with basic appliances — stove, oven, plus a dishwasher and dryer. Still, apart from that most properties are generally unfurnished. For the investor, furnished properties generally attract much higher rents and it may be $100 or even more per week. The downside to furnished properties is the initial outlay of cash for the furniture — a cost that can quickly add up. Of course, of even more significance is whether there is a demand for furnished properties in the area where you have just purchased. This is where you really need to do your homework. Your property manager will be the best source of information as they know the marketplace. If your property is within walking distance of a CBD then there is every likelihood that there will be strong demand for both long-term and short-term corporate lets. This market segment generally requires a far greater investment in the furnishings because of the style of tenant you are likely to attract. With this type of property you may need to provide everything from the sheets and towels to the cutlery and crockery. If you get it right, a furnished property in a suitable area can provide handsome returns. Perhaps you've purchased in an area near educational institutions such as a university or a TAFE college. Here also, a furnished property may improve your chances for a good tenant and great returns. International students, in particular, are more likely to choose a furnished property over one that is unfurnished. Properties in the suburbs are more likely to be rented unfurnished. Most tenants will have their own furniture and a furnished property may not provide many benefits in terms of attracting and keeping tenants. Part of the decision making process will depend on your personal circumstances and include the tax depreciation benefits that you will be entitled to when investing. Furnishing an apartment will provide additional tax benefits through increased depreciation that can be claimed against your income. It's critical to discuss the impact of this with your accountant, who will be best placed to advise on whether this strategy will be beneficial to your personal circumstances. Your decision to partially furnish, fully furnish or not to furnish should at the end of the day be based on the information you receive from your property manager and your accountant. It is after all an investment and you need to ensure that you're in the best financial position possible. Step 4: Organise your tax depreciation scheduleOne of the most important steps to take after purchasing an investment property, and certainly before the end of the financial year in which you have purchased, is to organise a property depreciation schedule. These depreciation schedules generally cost between $350 and $650, and they are certainly worth there weight in gold as the schedule will maximise and legitimise the depreciation benefits that you can claim on your property. Today and even more so in the future, the taxation department will be scrutinising our taxation returns to ensure we are not claiming more than we are entitled. A tax depreciation report prepared by a professional quantity surveyor will ensure that you receive the maximum depreciation benefits available and that these benefits are allowable by the tax department. This way you can always be confident that in any taxation audit, your claims can never be contested and you will always be protected. Residential investment properties can be depreciated over many years and can reduce the holding costs for investors whilst they are still acquiring assets to provide for income in later life. The building write-off allowance (division 43) allows you to depreciate the construction cost of the building from new at its original cost, for a period of forty years at 2.5% per year. If you already own property as an investment and it is less than forty years old, you are still able to legitimately claim depreciation benefits on that property. In addition to a building write-off allowance, your tax depreciation report will also detail additional depreciation benefits you are entitled to claim for plant and equipment (division 40). These extra depreciation benefits are for such items as air-conditioning, carpet, clothes dryers and hot water systems. In the case of strata titled property, these additional depreciation benefits can also include some of the items in the common areas of the property such as fire extinguishers, gym equipment, closed circuit televisions and monitors, barbeques and so on. All of these items are depreciated over a much faster period of time than the building cost allowances. Together, the building write-off allowance and the depreciation of the plant and equipment will provide you with substantial taxation benefits. This is even more so the case if the property you purchase is brand new, as the cost base for depreciation is much higher. So you can see a professional tax depreciation schedule has the potential of substantially reducing your taxable income. Thus, by claiming these depreciation benefits, you as an investor, can significantly enhance your after-tax return from your investment and generate a healthier cash flow. At the end of the day, managing your investment property doesn’t need to be stressful if you have everything in order. Most of the time it comes down to doing your research and knowing which steps you need to take and what to expect. We hope that this information has been useful. |