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Chattels Valuation Explained

In the majority of circumstances it is worthwhile having a chattel valuation completed for tax purposes. What do we mean by worthwhile?

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In the majority of circumstances it is worthwhile having a chattel valuation completed for tax purposes. What do we mean by worthwhile? You will receive more than the valuation fee back in the first year in increased depreciation that you will be able to claim by having a full apportionment completed.

It has been said that Chattels Valuations for claiming depreciation are probably only worthwhile for commercial or high value domestic properties owing to the cost of getting one done.

Not so. Here are a couple of examples:

  1. A commercial warehouse that is literally a shell would result in one finding it hard to get sufficient increased depreciation out of that property. In this instance the Valuer should talk to the investor about the options and other benefits of the chattel valuation.
  2. Property was purchased for approx $500,000 as an Investment Property. A chattel valuation for this property would not be worthwhile as the land was worth $495,000 and the “outhouse” was worth the remaining $5,000.

What you need to consider is the proportion of the land from the Registered Valuation as a percentage of the Market/ Capital value. This has a large bearing on as to if a chattel valuation is worthwhile.

What you are doing by having a chattel valuation is claiming the correct depreciation rate for that particular asset (as advised by the IRD). Let’s take carpet as an example. By breaking the carpet out as a separate identifiable item, placing a specific value on the carpet, you are able to claim depreciation at 33% (diminishing value) giving an estimated life span of 5 years. (The longer the estimated life span the lower the depreciation rate). If the carpet had not been identified as a separate item depreciation could have still been claimed but possibly at 4% (estimated lifespan of 50 years) with the rest of the house.

In effect what is happening is the depreciation reflects the approximate lifespan of the asset so that you can replace it when it wears out. The asset will depreciate to the same nominal value. In the case of carpet it is whether this happens over 5 years of 50 years.
The depreciation then reflects the expected lifespan of that particular specific item.

A chattel is not necessarily just an oven but can include pretty much everything from the letter box at the front gate, the concrete path to the front door, curtains, carpets, stoves, kitchen cabinets, bathroom fixtures, floor coverings, internal non-load bearing walls, TV aerial on the roof, the garden shed, to the back fence etc. (As per the IRD Tax guide).

Other benefits for a Chattels Valuation include:

  1. A full breakdown of chattels, their values and the IRD depreciation rates.
  2. Reduced risk of penalties. This means if you are ever audited by the IRD you have substantiated values by a specialised independent third party (See our comment in the January 2005 edition of KPI in the Experts Forum)
  3. Easy disposal of assets. If you ever replace an item you have an accurate book value that can be written off (as opposed to your accountant taking a (conservative) guess as to its value). The new chattel is depreciated at its receipted costs.
  4. Minimise depreciation recovery. The report can be utilised to assist in minimising depreciation claw back when you sell the property.
  5. Increased cash flow by maximising the depreciation you are able to claim.
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Renovate before Selling? Yes or No?

If you own a property and thinking of selling, you might be wondering whether to invest any money in renovating – or just to sell it as is. This is an extremely common dilemma – and one that I am talking to people about just about every day.

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If you own a property and thinking of selling, you might be wondering whether to invest any money in renovating – or just to sell it as is. This is an extremely common dilemma – and one that I am talking to people about just about every day.

There are a couple of pros and cons to renovating before you sell. Following is some food for thought, before you decide one way or another.

On the ‘for’ side of the renovation argument is the fact that it is better for you to add the value to the property, rather than leaving the potential profit for someone else to take advantage of. If your property is well renovated, you also minimise the amount you are likely to be beaten down on price.

A well renovated property (one that looks great but didn’t cost you a lot to achieve) will represent good value to potential buyers – and therefore be more likely to be considered over any others for sale in your suburb.

The last thing you want to do is spend too much money on your renovation and end up having to ask more for the property. If that were the case, you would have been better to leave it as it was and sell it un-renovated (and not have to go through the renovation process at all).

If you want to sell your renovated property asap, then you need to be realistic about your asking price and this is only possible when you have been smart with your renovation choices. A smart ‘sellers’ renovation is where the property:

  • Looks and functions better than competing properties in the same price bracket
  • Is renovated to meet to needs of the property’s target buyer audience
  • Is attractive to 95% + of the buying population
  • Offers excellent value in the eyes of the buyer

In many cases, a pre-sale reno with help you add huge value to your property. In other cases, your reno is simply a necessity to bring it up to standard to even be considered by potential buyers. Get your renovation right and it will be your property that draws buyers in as the best option for them at the time.

Buyers know they’re in a ‘buyers market’ at the moment and they will sniff out any reason to knock you down on price, so you need to offer them the sort of property they want to buy (see above bullet points). If you do this, then you will have more interest from more buyers and the price will become less and less of an issue. Research suggests that when purchasing anything, price actually comes about 5th or 6th on the list of what people consider. They are more interested in getting just what they want, than getting something cheaply.

If your property is located in an area likely to attract families and professionals, you may find that once renovated, it is more likely to sell. Professionals in particular are less inclined to want to worry about doing a renovation – and prefer to have it all done for them. This is the same with families – particularly those with younger children.

On the other hand; singles, empty nesters or families with older children may be happy to carry out a renovation of their own.

On the Con’s side of the renovation argument is the fact that in this market, people are out to hunt down a bargain. The less you spend on your property to prepare it for sale, the less you need to sell it for to recoup your costs.

If you leave your property as is, you are more in a position to sell it cheaply which is what many people are looking for. They would rather buy cheaply and then recreate the home that they want from a blank canvas. However, is it what you want? Will you get out of the sale the amount of money you need doing it this way?

The other thing to think about is that if you were to renovate, your renovation tastes may differ to that of your potential buyers. If you renovate in the wrong way (using inappropriate colours, materials, fixtures and fittings), then your property may not be one that is attractive enough to have the offers flooding in. This is a big mistake and I see it often!

To decide whether you will renovate – or not – ask yourself the following questions:

  • What do you want your property to sell for?
  • Can you leave your property as it is to achieve this price (tip: ask 3-4 respected Real Estate agents their opinions of the expected selling price for your property)
  • If you do need to upgrade your property to get the sale price you want, what do other properties around this asking price in your area look like (ie the traits of your competing properties)?
  • What exactly do you need to do to your property and how much can you get away with spending to bring it on par with these other properties? (tip: Hotspace Consultants – www.hotspaceconsultants.com – can help you with this one).
  • How much time have you got?
  • Do you have the confidence and motivation to carry out a renovation yourself?

Beware of Real Estate agents who say NOT to renovate your property. In many cases, this is because they want your listing right now – not in a few months time. On the other hand, they may be quite right in advising that selling an un-renovated property is the better option in their area.

Do your own research about whether a renovation on your property is worthwhile for the result you want.

If you’ve decided to renovate before you sell, then knowing exactly what you are going to do – before you start – is essential. Extra confidence in knowing you are doing exactly the right things to add the most value without wasting a single cent is available through Hotspace Consultants’ Renovation Action Plan service (www.hotspaceconsultants.com).

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Renovating for Student Accommodation

Renovating property to suit students specifically is a task that if done expertly, will reap an investor real long term rewards. Different to renovating a property for sale, or even a property to rent to a ‘standard’ tenant or family, student accommodation design must be, more than anything – practical.

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Renovating property to suit students specifically is a task that if done expertly, will reap an investor real long term rewards. Different to renovating a property for sale, or even a property to rent to a ‘standard’ tenant or family, student accommodation design must be, more than anything – practical. Practicality does not have to be boring or plain however, and designed well, a student house or flat will reward you with a higher (and consistent) rental income.

Think about renting each room out individually rather than as a whole house. You can often get an additional 10-20% income from doing it this way. However, there is a down-side – managing the individual students and ensuring each persons rent is paid on time every week.

The ultimate goal is to provide your tenants with a good’ ‘living experience’ so that they stay (and pay) long term – and this can be achieved by following some simple guidelines. It may sound an easy thing to do once you’ve read the following pointers, but every property is different, so take guidance from fellow investors and professional renovators (such as Hotspace Consultants) to give you expert, independent advice that will, in the end, make you more money from your property.

Exterior:

  • Create a completely hassle free, low maintenance garden and include the maintenance of it in the rent. Avoid feature gardens, bark and flowers if possible and remove any existing plants that cause excessive untidiness as they lose their leaves.
  • If possible, provide several spaces for bicycles to be locked up – under cover is preferable – and somewhere easy enough to carry to. Providing such spaces will help avoid bikes being stored in hallways and balcony areas which can prove unsightly and detract from the appearance of the property.
  • Extra off-street parking is a bonus but can be expensive. Consider this as important as long as it fits within your budget.
  • Provide an under cover smoking area where possible to discourage tenants from smoking inside the house. This should ideally be at the back of the property where the sight and smell of these activities does not impact on the aesthetic quality of the property. Providing large ‘butt bins’ will help eliminate the lawn becoming littered.
  • A suitable washing line in direct sunlight will help avoid tenants drying their clothes over balcony handrails and out windows – relocate the existing if necessary or provide new to avoid this potential negative visual impact on the property.
  • Provide good quality entry mats to save the flooring from inconsiderate wearers of dirty footwear.

Bedrooms

  • Ensure each student has a private personal space – not only to sleep but also to study
  • Bedrooms that are large enough to fit a bed (double preferably), desk, chair, bookcase, wardrobe space and a pin-board are ideal.
  • Fitting insulation within the wall cavities will reduce the sound transfer from one bedroom to the next, so consider this a priority.
  • Think about fitting locks to each of the bedroom doors too, as this is a very inexpensive ‘bonus’ – especially for female students.
  • Paint walls a neutral colour to create a blank canvas for your tenants to add their own personality.
  • Carpet should be hard wearing and reasonably dark in colour. Consider an inexpensive commercial grade carpet especially if your accommodation houses three people or more.

Bathrooms:

  • Hard wearing, practical bathroom fixtures and fittings will ensure a space that will last for a longer period.
  • Create a fresh look by cleaning or replacing dirty grout around existing tiles and clear coat to prevent further penetration of mould.
  • Shower door glass can be clear coated to make it easier to clean and prevent unsightly discolouration.
  • Joinery should have robust fixtures and hinges to further increase life-span of the property
  • Replace shower or bath curtains in between tenants and remove any window coverings in the bathroom areas.
  • If necessary, fit textured glass or frosted film to the inside of exterior clear glass windows.
  • Always install extractor fans to eliminate dampness and eventual deterioration of the interior finishes.

Kitchen:

  • Cabinetry made of a low pressure laminate (Laminex etc) is an ideal finish for high wear kitchens. Steer away from 2-pac/lacquered style kitchens which can damage more easily and are expensive to repair.
  • Be sure to install good quality hinges and handles.
  • Bench tops in a high pressure laminate (such as Formica) are as good as any – and reasonably inexpensive.
  • Remove the waste disposal unit if there is one as these cause more maintenance issues than they’re worth.
  • A dishwasher is a bonus – and again buy the best one you can afford (with a good warranty) if there is space.
  • Avoid tiled flooring if possible and instead install timber/vinyl/linoleum instead. Tiles when damaged, are expensive to repair and often impossible to match. Vinyl and timber are warmer under foot and vinyl in particular is inexpensive and quick to install. Cove it up the cabinetry kick strip to allow more effective cleaning of the floor.

General:

  • Provide adequate power-points and data outlets to all areas to avoid and ‘over-load’ situation – and arrange a broadband internet connection in all cases.
  • Ensure lighting is adequate in all areas – particularly study spaces. Sufficient light levels can be achieved using energy efficient fluorescent light bulbs and have the bonus effect of being cost effective for the tenants long term. These however can be harsh and bright, so consider a softer lighting option in communal living areas. ‘Bug rings’ (for suitable fittings) are an additional cost but worth the extra expensive to help maintain a fresh, bright emittance of light.
  • Fitting door stops to all doors will help with eliminating damage to walls caused by knobs and levers from careless closing and opening.
  • Install good quality curtains (ready made selections are ideal) rather than budget versions which are cheap to buy but difficult and usually expensive to have commercially cleaned.
  • Consider supplying a good sized fridge, a large washing machine and a clothes dryer. These are items students are less likely to own and will increase the demand and rental income on your property. Ensure they are serviced regularly. Tip: laminate a small note on the dryer to remind the tenant to clear the filter after each use.
  • Repair and paint any holes in walls caused by picture hooks and insist (and include in the contract) that any artwork etc.. be hung using removable adhesive hooks.

What’s important is that you don’t let the ‘practicality’ aspect of your renovation to over-shadow your opportunity to create a property with a more modern edge – with a distinct advantage over other rentals in the area.

You can easily combine the two (modern looks and practicality) to create a fantastic property that will help you harvest some great gains. For minimal cost you can create a ‘custom’ designed dwelling that suits students to a tee and adds a valuable piece of real estate to your portfolio. Create one that your student tenants will respect and stay in long term – even over holiday breaks!

To discuss getting the best return from your property renovation – no matter who your tenants or target market are, please send a ‘Preliminary Enquiry’ via the Hotspace website – www.hotspaceconsultants.com

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What Makes A GREAT Investment Property?

Why do some property investors seem to be able to continually add to their property portfolio, whereas most buy a few properties and then can’t go any further? One of the main things that separates the really successful investors from the average investors is the properties they choose to buy.

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Why do some property investors seem to be able to continually add to their property portfolio, whereas most buy a few properties and then can’t go any further? One of the main things that separates the really successful investors from the average investors is the properties they choose to buy.

Let’s have a look, then, at what makes a great residential investment property.

Firstly, what are the main objectives of property investors? The most common objective is something like this:

“To create a passive income stream to enable me to stop working if I wanted to… to enable me to retire comfortably so I can spend my time doing what I want.”

An ancillary to this primary objective would be to accomplish this without demanding massive risk or huge effort / stress in managing the properties.

Assuming that these are the objectives, then the following are qualities to look for in a superior investment property:

1. High income

  • If your property covers all costs of ownership (the main ones being mortgage interest, rates, insurance and maintenance), it is not going to place great financial strain on your existing cashflow.
  • If you want to grow a substantial portfolio, you can not have properties that place a strain on your cashflow, because that limits how many you can own.
  • Over time, when rents increase, a property that covers its costs today, will produce a positive cashflow in the future, hence helping to grow your passive income stream.

2. High Tenant Demand Location:

  • If the rent looks high compared to the price of the property, but it is located in an area that is unappealing to tenants, you will have periods of vacancy, which equates to periods of sleepless nights, which equates to “I’ve had enough of this property investment game – I’m out!!”…
  • These frustrations are not what you need if you want to be successful!! If the property is in an area that is always appealing to tenants, you will easily be able to replace tenants when they leave… this amounts to sleeping at night, which we like!!

3. Fee Simple Title:

  • A fee simple title is the best legal tenure you can get. With this type of property, you are in control of your asset. For example, you can improve it, extend it or alter it, as you please, without consulting with neighbours, Body Corporates (as with apartments) or common leaseholders (as with cross-lease titles), subject to conforming with the local council rules, of course.
  • This is important because people (including us Kiwis) LOVE control. The more control and flexibility you have, the more control you have over your future and your choices, the more appealing the property is to LOTS of people.
  • Therefore it will be easier to sell, and more likely to sell at a premium price, when it comes time to sell (including if you need to sell in a hurry, heaven forbid!). And there almost ALWAYS comes a time when you will want to sell.

4. Traditional Construction:

  • People do not like things they do not understand. Investors especially like the tried and tested… they don’t want to experiment.
  • Therefore, to make sure your property will appeal to the broadest range of potential tenants and purchasers in the future, make sure it is built in the traditional way… weatherboards, iron or tiled rooves, bricks… this is what us kiwis feel confortable with.
  • If it has a 1990s-style monolithic style cladding system, many people will simply not consider it… don’t give yourself this disadvantage when it comes time to sell!!

5. Difficult to Replace / In Short Supply:

  • If you are going to own an asset for a long time, you might as well own one that is most likely to increase in value faster than most… and this comes down to good old supply and demand.
  • In a decent sized city, with an increasing population, demand for housing is increasing over the medium to long term. But it is much easier to increase the supply of some kinds of housing, than others, in order to meet this increasing demand.
  • For example, in central or city fringe locations, the supply of apartments and townhouses is likely to increase dramatically in order to satisfy the demand for additional housing in these locations. This eases pressure on price increases (supply increasing to meet demand).
  • On the other hand, the supply of free-standing houses in these locations, is really not increasing by much – IF AT ALL!! When you have demand increasing, and supply largely static, this tends to produce strong increases in prices.
  • Therefore I recommend buying free-standing houses, rather than apartments or townhouses.

IN SUMMARY

If you can buy a free-standing property, with a fee simple title, in a high demand location, built using time-tested construction methods, with a strong cashflow (say 7.5-8.0% gross yield or even more if possible), then you are in PROPERTY INVESTMENT HEAVEN!!

Now don’t get me wrong – I never said it was EASY to find these types of properties… and you may have to compromise one or more of these criteria, but if it was easy, EVERYONE WOULD BE RICH!!! And last time I checked, not everyone is rich…

So now for my shameless plug for a GREAT investment property that I happen to be selling!!!

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