01 Oct Bring in the Reins with Capital Gains: Kym Nitschke (Pt 2)
In this week’s episode, we’re covering part two of our chat with Kym Nitschke.
In this episode:
- Kym talks about his strategy around going for capital gains
- How to spot a unique property
- Some of the things you can look out for
- Renovating and how to add value and capital gains to it quickly
- How to spot good suburbs
What is depreciation, what are the changes flagged and the impact on investors?
Depreciation is a crazy rule that enables you to identify all of the equipment in the property like air conditioning, hot water, kitchen covers, light fittings. You can get a report by an engineer (I use Depro its about $600 for a report and tax deductible) they will come up with a list of items you can claim an expense on because they depreciate. You can put it on your tax return and claim each year.
If you bought a property in the right period of time (more applicable to newer properties) you can claim 2.5% deduction on the building component on the property. So if you paid $400k, the land is worth $200k and building $200k you can claim 2.5% on the $200k building component. This all needs to be clarified from the depreciation report from the expert but provided that it’s approved, it can add up to a big amount.
My mindset is that land goes up buildings go down, so the more valuable the building the more you’ve got to lose. I’m always trying to get the most run-down house so my building depreciation claims aren’t anything spectacular but I’m happy to do that because I know the true value is the land.
If my land is going up the value of my property over time is increasing rapidly.
You’ve got to look beyond the short-term and look at the bigger picture of where the property might go. I’d never chase a property for a big depreciation claim, chase properties where you can get a big capital gain on instead.
What are some of the principals you look for in a property with capital appreciation?
What I look for are unique properties, I went on a holiday to Indonesia, and when I came home it was clear to me there are three things we can do here you can’t in anywhere else in the world.
The first is, buy close to the CBD. It’s still quite affordable, I aim for 5 – 10km to the CBD and preferably the eastern suburbs. The next is buy near the coast, the Eastern suburbs. This is because as soon as people retire they want to move to the coast. The third is buying a property with a lot of land. I bought a 22acre farm with a stone cottage on it. I try to chase one of those three types of properties.
I read a book called ‘7 Steps to Wealth’ and it changed my view. So the next property I bought following these principles was for $225k and sold it 10 years later for $630k. So when you get the parameters right you can make a lot of money and be successful through it.
What are some rules from the book you read?
Get as big block as you can get with the most run-down house that you can get. It’s got to have running water and electricity but the rest can be replaced and upgraded. Every weekend I’m at Bunnings all the time renovating, I buy run down and I try to artificially value-add through renovations.
I look for properties which I think are underpriced through doing research, I check RealEstate.com.au on the app and watch the price. I’ve also moved over to Domain now because you can sort them and have them show up for you every day. I’m always on the look out for an undervalued property.
How do you know suburbs intimately? What are some of the critical factors for the suburbs?
I look for a suburb that is being gentrified, it’s going from an old daggy suburb that people from a lower socio-economic area can afford but because of the location, it’s becoming an up and coming suburb. Look for groovy coffee shops that are there, young yuppies that are moving into it and whether it’s becoming the place to be seen.
I’m always doing research on the sale price of the properties in that area too, I can tell what a basic home and block of land would generally sell at the auction for. I’m looking for those outline properties that sell below that price. It could be a big tree out the front that everyone is too scared to cut down because of power lines; I’m looking for cosmetic things that scare people away. All of those factors are aesthetic things that won’t cost a lot to change but will bring a wow factor.
The other things are that I love deceased estates; they’re good to start with. Poor old grandparents have enough work to look after their own health so the property never looks that great. No one wants to buy these sorts of houses because they’re not attractive and appealing, but it’s so easy to go in there and give it a cosmetic upgrade. I don’t like the structural upgrades; they’re too much work.
Renovations in the existing footprint are where you get bang for buck.
So Kym how can we find your podcast? Go to iTunes or here through Accounting Insider, please feel free to reach out for a chat too!
- Depreciation – 2.5% on the value of your building. If you have a property that is an investment, go and get a depreciation report. If you’re looking at buying remember to take this into consideration too.
- Spotting a unique property – worst house, best street. Some of his mantras are buying close to the city; if you can – look at Eastern suburbs, buy land within your budget.
- Using Domain or RealEstate.com.au and pick a suburb intimately and watch it every day.
Tell us what you thought about this episode by leaving us a review on iTunes and send us your questions through here for Q&A Wednesday.