11 Dec Strategy vs tax benefit – Shannon Davis
Shannon Davis defines the difference between having a strategy and looking for a tax benefit. He says many investors get confused and why one is a strategy and the other is an outcome. He talks about the 4 main areas of returns.
Kevin: Quite often, we see property investors get confused between having a strategy, having an investment strategy, and tax benefits. Let’s try to demystify this. Let’s try to pull all this apart and take away some of the confusion. Shannon Davis joins me. Shannon is from Metropole Property Strategists. They are strategists, and they can help you set one up.
Good day, Shannon. How are you doing?
Shannon: Good day, Kevin. Good, thanks.
Kevin: Do you see this often? Do investors get confused between the two, Shannon?
Shannon: Yes, they think “Oh, I have a big tax bill, so I might go and buy another negatively geared property,” and then in a certain time, that property might not be negatively geared anymore. Then they get another one, and they have land tax, and then they might sell these properties for a gain.
Tax deduction is nice, but it’s not the be all and end all. When it comes to investing, we want to make sure our investments are A-grade and are going to get us good capital gains and yields going forward.
Kevin: Yes, there is some confusion, isn’t there? We’ve talked in the show in the past about negative gearing, how some people see that as an investment strategy, but it’s really just an outcome.
Shannon: Yes, it is. It’s an outcome depending on the interest rate of the day, the level of deposit, how rents are rising or falling. So, yes, it’s really just an outcome; negative gearing or positive gearing is not really a strategy.
What there is are four main returns for properties: capital growth, so that’s the increase after purchase. There are also rental yields, so your property is going to give you an income, and that’s important for the investor. There is the tax deduction that can come through such things we’ve mentioned as negative gearing and depreciation. And the one big thing with property is that you should be looking to add value.
We can’t go into Woolies and paint the walls and hope our shares go up, but with property, we can definitely add value, and that’s one of the things that sets it apart as an asset class.
Kevin: Do you look for properties specifically that you can add some value to? And how hard is that?
Shannon: I’m a value investor; I don’t like paying for a renovator’s margin or a developer’s margin. I’m just going to do that myself and get a bit of an upside in the increase that I can create. So, brand new properties are nice and attractive and shiny and new but probably a slow way to wealth because you’re paying a big developer’s margin all the time, and that slows down your capital appreciation.
Kevin: Shannon, what are the steps to setting up a good strategy?
Shannon: I think a lot of the time, it’s getting the work done first and foremost in your head: what you’re comfortable with as a borrowing strategy, what the bank is prepared to lend you. But what you’re comfortable with is the most important thing.
From there, find out form your accountant what would be the most tax effective entity to hold it in, and also you have to consider asset protection there. Then from there, we’re going to look at the strategy and the sourcing of the property. Are you looking to buy and hold and renovate, or buy and develop, even?
Then it’s executing on that: going out, finding it, not paying too much, negotiating well, not getting emotional, and making it a part of your portfolio for the long term.
Kevin: You and I have talked off air and on air in the past about putting the cart before the horse – in other words, why are you getting into investment? Is it for taxation, or is it for wealth creation?
Shannon: Yes. It’s definitely the wrong way around. There have been lots of tax-beneficial investment strategies, like almond farms or investing into movies or even certain types of properties, but it’s not the basis of a great investment if you lose your capital in the first place.
Kevin: Very sound advice always from Shannon Davis. He’s from Metropole Property Strategists, and also the co-host of Buy in Brisbane, which is a great new vlog that you’ll catch on our site, as well.
Shannon, thanks for your time. I look forward to catching up with you again soon.
Shannon: No worries, Kevin. Any time.