How mining town investors can boost cash flow

Just a few years ago, mining towns throughout regional areas of Australia were the darling of property investors. Property prices were booming and investors were achieving annual rental returns in excess of 20 per cent in some areas.

Thousands of property investors poured into these mining towns, whether they were in Queensland or Western Australia. However, the sudden slump in commodities has seen a radical turnaround in the towns, with property prices crashing in line with plummeting rental returns.

The scale of this downturn is highlighted by the latest snapshot of the once-booming Port Hedland and South Hedland property markets, as noted in the March quarter 2015 property market summary by the Pilbara Development Commission:

• Port Hedland’s average advertised rental price dropped for a 10th consecutive quarter, from an all-time high of $2,544 per week in the September 2012 quarter to a seven-year low of $968 per week for the latest quarter.
• South Hedland’s average advertised rental price decreased by $88 to $877 per week, which is the lowest average advertised weekly rental price since the June 2008 quarter.
• For the 10th consecutive quarter, the average advertised sale price of properties in Port and South Hedland dropped.
• Port Hedland’s average advertised sale price of $758,840 in the latest quarter is its lowest since the March 2007 figures.
• South Hedland’s March 2015 average advertised sale price of $653,009 is the lowest it’s been since the September 2009 quarter.
• The 46 residential lots in South Hedland advertised in the last quarter is the highest number  advertised since the June 2009 quarter.

(Source: Pilbara Development Commission)

Falling rental returns mean property investors in mining towns need to fully maximise tax benefits through depreciation to boost their cash flow.

In an attempt to boost cash flow a growing number of property investors in these mining towns are trying to make up for the recent crash in rents by undertaking renovations to make their properties more appealing to investors, thereby boost rental returns until the next market upswing occurs.

Unfortunately, many of these investors throw out many household items during the renovations without understanding that they may claim tax benefits on these materials at 100 per cent of its written-down value in the year of disposal.

However, to qualify for these tax benefits, the investors have to undertake a depreciation schedule for the property as near to the date of purchase as possible.

The depreciation schedule will provide the tax office with a physical snapshot of the property and the schedule will itemise all of the fixtures in the property that can be depreciated for tax purposes.

When the depreciation schedule is undertaken at the time of purchase, it means that the investor can still qualify for depreciation on many of the existing fixtures in the property, providing the investor intends on keeping those existing fixtures/items and waits for a reasonable time to begin renovations. Many people do not realise that older properties still maintain substantial allowance in plant and equipment regardless of their age.

For example, a property that is more than 50 years old can still qualify for thousands of dollars each year in tax depreciation benefits.