Depreciation changes, Buying new V's old examples.

Margaret Lomas examples.

Being able to quickly and easily work out a cash flow on a property is a critical skill you need as a property investor. Since we have been talking about the proposed budget changes for property investors, I thought I would show you two examples of how this change will really affect you, and in doing so provide a simple method of establishing potential cash flows before you buy.

In this example, I compare a property built today which is brand new, and one bought today which is 6 months old. I am using the calculators on the BMT website to establish plant and equipment (for the new property) and building depreciation (for both), bought for $450,000 with medium grade finishes.

New Property

Rent @ 5% = $22,500

Yearly expenses = $5,000

Interest on loan for 100% purchase plus costs @ 4.5% = $22,050

Net yearly before tax loss = $4,550

Depreciation on building and plant and equipment = $13,800

On paper loss = $18,350

Tax back @ 32.5% - $5,963

After tax cash flow = +$1,413

One year old Property

Rent @ 5% = $22,500

Yearly expenses = $5,000

Interest on loan for 100% purchase plus costs @ 4.5% = $22,050

Net yearly before tax loss = $4,550

Depreciation on building and plant and equipment = $4,500

On paper loss = $9,050

Tax back @ 32.5% - $2,941

After tax cash flow = -$1,609.

The new property would give you $27 a week. The established property without plant and equipment depreciation would cost you $30 a week.

After 5 years with rent still at 5% of the property value and property increasing at 3% per annum (conservative).

New Property:

Value: $521,000

Rent: $26,050

Depreciation: $8,500

On paper loss = $9,470

Tax back = $3,077

After tax cash flow = +$2,077 or $40 a week

One year old Property:

Value: $521,000

Rent: $26,050

Depreciation: $4,500

On paper loss = $5,500

Tax back = $1,787

After tax cash flow = +$787 or $15 a week

From these figures, you can see that the brand- new property still has a higher cash flow, but by the fifth year (and probably the fourth year) the one- year- old property is already not costing the investor to hold. You also need to consider that very often that brand- new property comes at a premium and can often be $30 - $40,000 higher in price, and an established property, in some markets, can be negotiated even lower than asking price. Under those circumstances, the differences would be less marked.

To me the illustration shows that it's not the end of the world or as devastating as it might first appear. Investing requires sacrifice, and it might just mean a few less lattes are in order, to create a sound financial future.