For investors who are buying existing properties or building the properties themselves, there are a few key benefits of depreciation that you should know that will help you save money and gain wealth.
But first, what is depreciation? It’s a simple concept that can be used for lots of things in business, but particularly when buying investment properties. As things wear out over time or depreciate in value, you’re entitled to deductions for your business. In the case of property, the items in there and the bricks and mortar will depreciate in value, so the tax office allows you to claim that back. Of course, you want your property to appreciate in value, but depreciation deductions are something that not enough people are taking advantage of, or optimising – but you should.
Depreciation is one of those aspects of property investing that can help you create wealth. Of course, you don’t buy a property for its depreciation value or solely because of tax reasons, but depreciation is key because it has a large impact on cash flow. An important part of the business is learning how to recuperate as much money as you can within the rules that exist and managing cash flow.
Before you even begin the purchasing process of a property, calculate the real cost of the property on a per week basis. Depreciation is one factor that will affect your cash flow of course, but crunch all the numbers before buying a property. Incorporate every cost into buying, building or holding a property. Incorporate the impact of depreciation and other measures into this exercise. By going through this vigorous plan, you’ll be ahead of many other property investors.
Ensure that you enlist an accountant who’s fully supportive of depreciation schedules. To detail the impact of depreciation schedules, here’s an example from many years ago. In those days, you could retrospectively go back four years to re-look at previous returns. Given where we were at, by creating a depreciation schedule, we ended up with $20,000 in our back pocket. This was a real eye-opener about the power of depreciation. A good depreciation schedule will significantly change the whole holding cost scenario for holding a property.
Every investor learns along their own path, but in the early days, we were buying older properties, renovating them and creating some equity to go forwrd. But now, what we’ve done in the last half of our portfolio is to focus more on building because of the depreciation benefits on new properties. So, when you consider your next property, don’t forget to consider the cost and wealth building benefits of depreciation.
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