Insights Into Property Investor Behaviour And Their Tax Deductions
What types of acquisitions is the average property investor making? Mike Mortlock shares his findings.
Since we started preparing depreciation reports for property investors back in 2011, I wanted to collect data that I thought would illuminate the property industry as to the types of acquisitions the average property investor was making. Through the course of doing what we do, we also have to ask some fairly unusual questions that are pretty specific to our reports, but these questions can shed some light into investor behaviour as well. Most notably, our findings on investors living in their property prior to renting it out.
Let’s look at some of the top-level data we’ve collected. Through our analysis of 1,000 residential depreciation schedules, we found that property investors are split across each type of residential property in the following way;
- 43.1% of investors either buy or build a house,
- 8.5% on investors purchase a townhouse or duplex,
- 47.3% of investors purchase a unit,
- 38.2% of all investors buy something brand new.
So, if you add townhouses and duplexes into the ‘house bucket,’ you’ll see that it’s a fairly even split. Now that we’ve identified the split, we’ll be tracking the numbers with interest. If we dive into units individually, we’ve found that;
- the average number of units within the development investors are purchasing in is 68,
- the average purchase price for investment units across the 473 units studied was $539,570,
- 43% of units are bought brand new compared to only 26.2% of housing being bought new. This figure for houses drops to 7.3% if we exclude investors who engage a builder directly.
Clearly, we’re seeing the prevalence of off-the-plan purchases here and it will be interesting to see how these purchase prices hold up over time.
Now let’s look at some average deductions. In our research, we found the average depreciation deduction within the first full year of claim was $9,415. According to the ATO tax calculator, this gives you the following back in your pocket;
- on a $200,000 salary you’ll receive $4,237 back in your pocket,
- on $100,000 you’ll receive $3,484 and;
- for a $50,000 salary, you’ll end up with $3,060 back.
While the above clearly shows that the higher the salary, the better you’ll do with the deductions, in my view, it also shows the difference to be relatively marginal once you earn over $80,000 a year.
What about the budget changes to depreciation? Well, our research finished right when the budget changes were announced in May 2017, but this made us best placed to model the impacts immediately. Our models were confirmed when we analysed the first 100 schedules we completed after the changes, and we found that;
- our average depreciation deduction figure in the first year was $11,628,
- the division 40 plant and equipment component equated to $6,870,
- the division 40 structural component was $4,758.
The prevalence of ‘budget affected’ clients is on the increase as anyone purchasing established property after the 9th of May 2017 is affected and will lose their plant deductions. However, we still see a significant number of schedules not affected simply due to clients not arranging a schedule upon acquisition. Eventually, these clients will fall away and what we’re left with is, as a result, is that in the first full year of claim under the budget changes to depreciation, investors will lose 59% of their deductions for that year.
Now that’s the year were the loss is likely to be the starkest but remember that a house you build for $250,000 is likely only going to have $30,000 worth of plant and equipment items in it, so if you’re buying it second hand, at most we’re talking about a 12% loss of deductions over 40 years. However, the way that plant depreciates, it’s a big whack to the cash-flow for an investor upfront. It certainly decreases the incentives to purchase an established home or unit and coupled with proposed capital gains and negative gearing, we might see some real problems keeping rental increases below lacklustre wages growth.
We look forward to sharing more data and contributing to an informed debate around property investors and the role of investors within our economy. Or at very least, pumping out data more effective at getting you into blissful slumber than prescription melatonin.