Episode 4: What is Depreciation + Latest research from MCG
Joining me for Episode 4 is Mike Mortlock from MCG Quantity Surveyors, a national quantity surveying firm who specialise in tax depreciation reports. Mike and his team also undertake a lot of market research so we’re excited to dive into some of their latest analysis.
Some of the key things we cover off are:
- What is tax depreciation and why is it important to the investor?
- Data on missed or unclaimed deductions?
- Data on investor behaviour and key data points of interest?
- House vs unit
- New vs established
- Average purchase price
- Locations
- How far people live from where they invest
For more info on depreciation, reach out to Mike and his team Home – MCG Quantity Surveyors.
Darcy Milne
Welcome to navigating property with Ben plohl, the podcast that helps you understand the property market, make smarter investments and navigate your way to success. Join your host, Ben plohl, founder of BFP Property Group, as he breaks down real estate trends, interviews experts and shares insights to empower your property journey.
Speaker 1
Hello, coming up on this episode, we’re going to chat about something that a lot of property investors overlook or don’t take seriously, and that is depreciation. We’ll also dive into some new research around investor behavior. We’ll touch on 2024 the year that was, and what we can expect in 2025 here we go. We have plenty to cover off on today’s episode, so I’ve asked someone who’s an expert in the field of depreciation and all things property to join me today. So joining me is Mike Mortlock from McG Quantity Surveyors, a national Quantity Surveying firm who specialize in tax depreciation reports for property investors, amongst other things. And Mike and his team also undertake a lot of property and market research, so I’m excited to dive into some of their latest analysis as well. So Mike, welcome to the podcast. Well, thanks
Speaker 2
for having me. It’s a pleasure, and congrats on the new show.
Speaker 1
Why don’t we learn a bit more about Mike and mcg? If you give a spir a bit about yourself and your business tax
Speaker 2
nerd, I suppose, is the best way to put it, and a quantity surveyor. So we started McG Quantity Surveyors in 2011 I’m the resident tax guy. But of course, quantities phase do all sorts of other things, like estimating construction costs for various reasons, whether it be for a renovation or a new development, or feasibility or insurance and those sorts of things. And throughout the course of what I do and what our business does, we collect a lot of data, a lot of information, where investors are buying, what they’re buying, you know, all sorts of things around under insurance and those sorts of things. So I’m excited to share some of that with you today. I think it’s one
Speaker 1
of those things. Yeah, depreciation is typically an afterthought with most property investors. I know I’m an active property investor myself, and I typically forget about that, and reminds me, I’ve got to follow you up on one property that I’ve recently bought that I need to report with. But what is tax depreciation for the listeners, and why is it so important for investors, and the importance around why you should take it serious?
Speaker 2
We’ll start with what it is. It’s a deduction for the loss of value of the income producing assets. So someone that’s a property investor, they’re almost like a small business owner, right? And every business has income and it has expenses. So the income is the rent, for example, and the expenses might be things like property management fees. It could be the interest on the loan that you have for that property. And tax depreciation is an on paper loss. It is a cost. So throughout renting out that property, it does expose itself to wear and tear, not because the tenants necessarily hard on it, but just by being occupied, it’s really kind of taking away some of the value of that particular asset. So tax depreciation is just a way to calculate what that decline in value of the asset is each financial year. And why is it important? Well, it’s a tax deduction, and we all know why those are important, but why it’s, I think, especially important is it’s probably the second biggest deduction that you’ll get as a property investor, the biggest one, normally being the interest component of your loan on the investment property. Often tax depreciation is a bigger deduction each year than, say, your property management fees, or maybe your repairs and maintenance costs, those sorts of things. Something
Speaker 1
that we’ve come across with our clients is, I think the concept of depreciation, people think it’s more applicable to new properties. So you might get a larger deduction with a brand new property, but older established properties, we’re surprised with some of the deductions that we see come across our desk. I know your team did one for a property that we bought recently. It was an older established home, but the depreciation that still was attached to that home, it was a big eye opener for that particular client. So I guess the main point is, regardless of the age of the home, it’s a good idea to at least get it assessed, regardless of being new or established. Well,
Speaker 2
you can get a free assessment as to whether it’s worthwhile to go ahead and pay the money to get the report. So why people wouldn’t do that? I’m I’m not sure. Certainly there is some truth to new properties having good deductions. But I’ve even heard Quantity Surveyors before say new property is always better for depreciation deductions. But it’s not technically true. So let’s say you you think about a new four bedroom Project Home, and it was $350,000 to build. You know, you might have $20,000 a year worth of deductions. Read More
Speaker 1
put my old accountants hat on. Is that division 40 or division 41 does that still exist?
Speaker 2
Yeah, so there’s division 43 and there’s division 40. So division 43 is the structure and division 40 is the plant and equipment, items like your ovens and your cooktops. That’s
Speaker 1
great. So I guess the key message is, any property investor, get it assessed. Get someone to, like MCG, to come in and do a desktop assessment, and they’ll be able to give you, I guess, the you know, the yay or nay on whether it’s going to be feasible to go down the route of doing a full blown inspection? I guess, just to touch on that too, there’s if you’re going down the path of getting a depreciation report done, having a physical inspection is is paramount. You agree?
Speaker 2
Yeah. I mean, I really think it shouldn’t be an option. Now, the governing bodies that really sort of oversee what we do with the Australian Institute of Quantity Surveyors and the Tax Practitioners Board. So we actually have to be registered tax agents. We’re not accountants, but whenever you’re putting a depreciation schedule together, you need to be a registered tax agent. And the Australian Institute of quantity surveyors came out with a white paper for industry people, for consumers, a couple of years ago, and it basically says that there are very infrequent examples where a depreciation schedule can be done without an inspection. An example would be if you’re buying a brand new property, and the construction cost is known and we have all the plans and the schedule of finishes, but certainly if you’re buying an established property, which most property investors, do you really have to get a depreciation schedule, not only to maximize the deductions, but also to ensure compliance with the tax office as well, in terms
Speaker 1
of some of the data that you may have on missed or unclaimed deductions, anything to share along those lines? Well,
Speaker 2
it keeps me up. Nice Ben, in a cold sweat, because the idea of investors not claiming their entitlements is just, it’s it’s too arduous to bear. So what, what we actually did is we looked at a sample size of 1000 residential property investors that came through our business. And that’s an important point. We can only analyze the data of what we get. We’re doing so many depreciation schedules a year, it is very representative of the greater population. But what we found is that of those 1000 investors, 6.7% of them waited so long to get a depreciation schedule that they missed deductions. Read More
Speaker 1
wow. That’s huge. That’s a good overview of of depreciation. Mike, I think we’ll dive into into some of the latest research on investor behavior that I know you and your team compile. So you published a lot of data on investor behavior. What are some of the key data points that that might be of
Speaker 2
interest. Well, one of the first ones that we released was the average depreciation deductions that investors get. It was $9,813 from memory that varies day to day and month to month. It normally sits around that 9000 figure. The second bit of data. Data that we released was the percentage of people that actually live in their property prior to turning it into a rental property, and that data was about 23% at the time, and it hovers between 22 and 25% so that kind of leads us to believe that there are some people that may become accidental investors, because they upgrade their principal place of resonance, and they retain it, so that can be perhaps sometimes where the knowledge of tax depreciation isn’t there because they’re not strategically setting out to do that. One that I think probably got the most interest is the average distance that people buy from where they live. Read More
buying in Perth. Well,
Speaker 1
I think that is probably the most meaningful ingredient to that increase. I think part of COVID sort of enabled us to look online to markets around the country and in concert with buyers agents like yourself, people have a lot more confidence to buy, looking at Australia as a potential investment hotspot, rather than just areas that they’re familiar with. But yes, it actually absolutely speaks to the rise of Perth, because you look at quarter 120, 22 we had about 9% of all property investors that we worked with buying in Perth, and you fast forward 12 months to q1 2022, 2023 sorry, and it was 33% and again, hot off the press. WA was the biggest state for the majority of 2014 it was always sort of playing second fiddle to Queensland. But for the 2024 calendar year, we saw 35% of investors buying in WA remember, that was a jump from the 9% originally, but it’s actually just been overtaken by Queensland at 41% and the real kind of victims of of investors voting with their feet around the country probably was Victoria. The long term average for Victoria sort of sat around 16% we saw it at 9% in the months preceding the land tax changes, and then it dropped into the 4% it’s since rebounded to seven because, of course, there’s a lot of people saying now that there’s, it’s a market that has legs, because it’s been in the doldrums for so long. But yeah, it’s amazing to see WA and Queensland taking the lion’s share of all investment across the country. Crazy.
Speaker 2
Yeah. I guess the big takeaway I see from that is, yeah, people are getting a growing in confidence around buying well and truly outside their own backyard. But I think it’s the access to research online. There’s massive investment communities in, you know, forums and podcasts and books and and obviously, you know, the the buyers agency space is, is growing, you know, year on year. It just gives people confidence to to go into a market that’s so far from home. And I think the concept of borderless investing is, is definitely growing legs, which is really good. Any data around, you know, houses versus units. Do you track that? Yeah,
Speaker 1
we do way back in probably around 2017 the first time we crunched that, it was fairly even. Normally, houses would do a little bit better than units. But we we got to sort of a point in 2019 where it was about 49 to 51 unit services, houses. So houses slightly more than average for the calendar year that’s just gone. We’ve got 82% of investors buying houses, and 11.9 in units. Now you’ll probably note that that mass doesn’t work out exactly because there’s things like granny. Flats and with in the middle. But it’s very, very clear that investors are favoring the houses by a big margin. And a lot of what we saw in the data in the past was people really gravitating to new property on the back of the legislation change in 2017 where they really took away plant and equipment deductions, or division 40, if you you had to really buy brand new property to be able to get those deductions in. So we saw a bit of a knee jerk reaction there. But majority is houses new versus established is something that we track as as well, and a new property has been really suffering for quite some time, typically around about 16% of what we’re doing where, yeah, we’re speaking up to about half. I
Speaker 2
guess that could be linked back to construction. Has been pretty tight over the last couple of years, post COVID cost rises, etc, so that’s probably resulted in that. But back to the house and units. I’d be surprised if you see investors exploiting units and the next, say, year or two, the disparity in price between houses and units is pretty wide. And I know talking about Sydney, like blue chip Sydney, a lot of hype around, you know, undervalued units, you know, the older style, 70s, 80s, sort of red brick, brylon brick, type of walk ups, solid unit blocks, whether investors start to exploit pretty sharp pricing. Be interesting to see that data in the next page of 18 months.
Speaker 1
Well, I think that’s a very, very sound prediction. I think we will see an increase just because it is so low. And as you say, the price disparity between a house and a unit in some of these blue chip suburbs is in the millions. Sometimes, really, I would consider 2023 2024 was the rise of the affordable markets. Obviously, with the interest rate increases, investor budgets were limited. In fact, again, hot off the press for 2024 the average amount that investors paid for an investment property was $659,000 now begs the question today, where do you go for that 2022 2324 to some extent, although 2024 already, we’d seen some growth in 2023 in some markets. But places like regional Queensland, WA or, let’s say, the greater Perth market, you could do business at that sort of price point. Now that’s where I kind of think, if that’s what you’re limited to, you may need to consider the unit. Mark,
Speaker 2
well, there you go. Liz, and this, that’s some really fresh off the press sort of research and data that Mike’s happy to share on our humble podcast. Thanks for that, Mike. So looking back at the last year or so in property, what did you you come across in terms of your observations and are you? You deal with a lot of people like myself. Chat to a lot of people in property. You also sit on the board with, with with PIPA, you’d be one to probably get exposed to lots of different smart people. What did you see, or what was your take on on the last year, the rise
Speaker 1
of the affordable markets? So when we look at the Statistical Area three locations, it was Townsville as an essay three, that was the top of our leaderboard for investor purchases, which I find quite interesting. And that market has seen very, very significant growth already and is likely to go again. But it’s about the competition within that market as well. I mean, I’ve heard people say to me, if you’re looking to transact in a place like that without a buyer’s agent. Good luck, because if you’re doing a tremendous amount of volume, or you understand or you know people in that space, you do get a little bit of an inside run. I also think that the property market is going through a real fundamental shift, where the power of sentiment and aggregated eyeballs, which I’ll explain in a second, is huge. What I mean by aggregated eyeballs is things like Facebook groups, which some of them have 10s of 1000s of investors. Read More
Speaker 2
spot on. I think there’s a lot of big players in in the market, be it buyer’s agents or, like you said, just massive social platforms, Facebook groups and, you know, property chat and all these other social groups that absolutely can sway markets. And I think that as a business, for our business, we’ve always been, I guess, very mindful of going into some of these towns or cities that that you can see very clearly, there’s a big sway of sentiment. Because what happens when those buyers agencies or that Facebook groups talking about another city 12 months down the track. What happens to all those people that piled into that market and talking to my accountant as well? He’s got a big, pretty strong view on certain parts of Perth, and I do as well. I think there’s a lot of investors that have exploited certain parts of Perth, bought in the droves, but now you start to see a bit of stock on market increasing. A lot of those buyers are now looking to, looking for the exit. It is a risk. And I think for us, we’ve always sort of played it a little boring, a little safe in terms of sticking to some of those bigger cities, but capital cities, or large, sophisticated regional cities, for that, pretty much for that reason, you don’t want to be caught up in that sort of herd mentality as well.
Speaker 1
It has been a real gold rush mentality to it, and I think that is kind of informing investors now where we’re looking at, well, what’s the next Perth? But Perth was a very, very unusual boom, like we talked about 19% growth in 2024 like, that’s not a normal growth cycle, is it? I’ve actually just sort of Lent down into my rubbish bin to pick up piece of paper that I thought it was an interesting thing to share this based on the core logic figures that were recently just released. If you look at the past 10 years of growth for Perth, it’s sitting at 55% you compare that to Sydney at 68% Brisbane at 90.8% and Adelaide 19.3 even Hobart beats Perth by some margin at 87.2 compared to 55% I think that’s something that investors should be cognizant of. Property Investing is a long term game, and you’re talking about a property market that has under formed quite heavily over that 10 year period, and that includes the period since COVID, because Perth has grown 76.7% since COVID started. So those are the sorts of things that I like to share with people as a little bit of a cautionary tale. I’m not sort of saying Perth is good or Perth is bad, but at the peak of the market, you need to understand, well, what’s likely to happen for that next 10 year period, get the crystal
Speaker 2
ball out. What are you thinking 2025 will look like for property investors, and where do you see the opportunities in the market? The
Speaker 1
big elephant in the room is interest rates, right? So we are very close to the February RBA announcement. I don’t know if this will come out before or after, but that’s a big one. I’m not predicting over a 1% drop for 2025 I think we’re probably likely to get 50 or 75 basis points. I think the market’s probably pricing in 75 that fundamentally shouldn’t make a big difference to the property market, but what it’s already doing is it’s feeding into sentiment, just the idea and that 95% basically consensus that rates will drop in February, you can already see influencing investor behavior. So I think we’re going to see a lot of interest from investors when interest rates start to cut. It doesn’t really translate to the data that much like it doesn’t give you that much more purchasing or borrowing power or cash flow, but I think the sentiment will have an influence. Read More
Speaker 2
no, I think what you said around sentiment attached to interest rates, I think you spot on. I think an interest rate drop, be it 70 basis points or 100 basis points won’t have a material impact on the market or people’s borrowing capacities, but what it will do is it’s just going to improve confidence significantly. Just the weekend passed Saturday, it was such a busy day at Sydney Open homes, it was out of this world. I think. Had a look at a property in Parramatta. Was a three bed unit for an owner occupier, 20 groups through, you know, it’s 50 odd people through a three bedder. And it’s, um, it’s a very competitive negotiation. At the moment, last night, I was at an auction in Marrickville, the in house or the in rooms auctions for rain and on Marrickville, I’ve never seen a busier sort of an auction room in my career. It was quite interesting. Read More
Speaker 1
the election as well, and we know that elections always have some influence. There’s always an awkward interplay between the timing of the election and interest rate movements with the RBA, they’re always a bit nervous about making them connected. And you can guarantee whether they go up or down, one political party will claim credit for it or or assign blame to the other one. And we know that people don’t want to transact in and like, really, really tightly in and around the election, and then we see an increase in transactions on the back end. Whether which particular party wins will have an influence is up for debate. I think the Liberal Party has policy that’s a little bit more favorable to investors. Labor Party, not so much, especially if there’s some greens influence, where they’re talking about rent caps and all those sorts of things. So that’ll be an interesting one to watch.
Speaker 2
Yeah, absolutely. And I’m forecasting a good June, July for me, because I’ll be in Europe. Oh, well,
Speaker 1
you’ll be fine no matter what happens. Looking forward
Speaker 2
to that look, Mike, thanks for for jumping on. It was really, really good to chat. I think we’ve touched on a couple of really good points around appreciation. And you know what 2024 was like, what we can expect in in 2025 so yeah, thanks so much for jumping on pleasure. Thanks for having me. We hope you’ve enjoyed this episode. The key takeaways for you are, first one, always get an appreciation report when you’re when you’ve bought an investment property, and when you undertake an extension or or a renovation to that property. I think it’s crucial. And secondly, consider markets that have underperformed perhaps in the last few years. This might present an opportunity until next time. Thank you.
Speaker 3
Thanks for listening to this episode of navigating property with Ben Paul. Be sure to click follow so you never miss a new episode. And for more insights, visit BFP property.com catching next time you.
