Property Investment Analysis Software - Common Questions

In recent years, the Australian Tax Office has a category to cover depreciable items under $1000. This category is called the Low Value Pool and all items are written off at a diminishing value rate of 37.5% per year, except for the first year for which the rate is 18.75%. Hence, if this category forms a large component of the total depreciable items, the depreciation claim for the second year may well be higher than that for the first year of the investment.

I bought an investment property several years ago. How do I include that property into my analysis?

The way to do this is to define it as part of your existing investment portfolio. You must first create a PIA file which simulates the existing property so that when you create a portfolio, you simply need to specify which files are to be included. You can either simulate the investment cash flows from the year of purchase (specify the year in the year row of the Input column in the spreadsheet) or simulate them from the present year (in which case you would need to specify your existing equity in the property in the Investments dialog). Either way, PIA will extract the synchronised projected cash flows and property values etc from the specified files in order to adjust the taxable income used in calculating the correct tax credits for any new property that you might evaluate. Furthermore, the existing portfolio will also form part of the base of your investment portfolio in the Wealth Builder spreadsheet.

Do I need to enter my home loan details every time I evaluate another investment property?

No, but you will need to have specified your home loan status, repayment commitments, and personal living expenses if you want the software to calculate whether or not you can afford the property (Investment Capacity dialog), when you can afford the next one or whether the bank is likely to lend you the money needed (Wealth Builder spreadsheet).

Once you have entered such details, you can make them part of the starting template (Save Default Template under the Settings menu) for any new property files that you create so that you do not need to enter them each time.

How do I specify interest-only payments on my home loan?

Normally home loan payments are based on a principal and interest loan. However, in the Home Loan Analysis spreadsheet, you are able to modify the monthly repayments to anything you wish (to see what impact it may have on the term of the loan). Simply calculate the monthly interest-only repayment (Loan Payments calculator under the Calculators menu) and enter that into the regular monthly payments field of the Home Loan Analysis spreadsheet.

How do I analyse an investment property which is being purchased by myself, my brother and my sister?

The financial model in PIA is constrained to a maximum of two people (investor and partner) as it is assumed that the cash flows will be joint cash flows and all of the more advanced tools in the program (e.g. Wealth Builder spreadsheet) assume that borrowing capacity will be based on joint incomes and joint living expenses etc. Thus, in situation where this assumption does not hold (e.g. when there are three or more involved in a syndicate), it is simply a matter of dividing the investment into equal proportions and doing a separate analysis for each individual.

How do I specify lump sum payments off the investment loan?

The program allows you to specify ad hoc lump sum payments at the end of any year in the projected period. To do this you can click on the After Purchase button in the Investments dialog (or click anywhere in the Investments row on the Investment Analysis spreadsheet) to bring up the Annual Investments dialog. This will allow you to specify any lump sum cash investments (or to specify any money borrowed for renovations).

How do I change the size of the spreadsheet font so that I can read it more easily?

The best way to make the spreadsheet larger and more readable on screen is to change the Magnification setting (Preference item under the Settings menu). Changing the magnification from 100% to 150% will increase the magnification by 50%. An alternative is the change the size of the font, but this will also change the size of the font in any printed reports and if the font is made too large, adjacent fields may overlap.

In the investment report summary, what does Net Present Value mean?

The Net Present Value represents the net increase in the total value of the investment measured in today's dollars. In other words, it measures the difference in the projected market value of the property (in today's dollars) less the total cost of that investment (including negative annual cash flows) in today's dollars.

It is a useful index as it is a measure of how much money you are likely to make on the investment given the assumptions you have made. It can always be calculated, even when an IRR can't (e.g. for positive cash flow properties) so it helps to keep infinite rates of return in perspective.

To display the Net Present Value at the bottom of the Investment Analysis spreadsheet, choose it in the Preferences item under the Settings menu.

Is it possible to display actual years (e.g. 2006, 2007, etc) rather than the number of years since purchase?

Yes. Simply choose that option under the Preferences item of the Settings menu. Keep in mind when doing so that the financial model is still operating in integer years after purchase and is not aligned to specific financial or calendar years (as in the date of purchase is only used in the Tax Variation dialog) as the purpose of PIA is as a modelling tool not an accounting tool.

Where do I enter the property description and address in the latest version (7.2)?

This can be done in the Property Value dialog or simply by clicking on the Property Details region of the spreadsheet. The new version of the software has a specific Property details dialog that not only allows you to enter these details, but also a jpeg image of the property.

How do I print the notes that I have entered in the Investor Notes dialog?

It is possible, but not directly in PIA. To print them, just copy them to Notepad or Word. To do this, select the text in the Notes and press Ctrl/C (this puts it on the clipboard). Then switch to say Notepad and press Ctrl/V.

My program will only run in demonstration mode.

PIA will run in demonstration mode if it does not have a corresponding registration file. This might happen if you have replaced the program with a later version or you have downloaded the incorrect program (PIAPro instead of PIAFpu or vice versa). The problem is easily resolved if you check the licensee and registration details that you have received when you first purchased the software. If the program and version number agree, re-enter the licensee and registration codes (Help menu/Register) and all will be well. If not, contact Somersoft.

I have downloaded the latest maintenance edition of PIA but it does not seem to have updated my tax scales.

The tax scale used when creating a property file are always saved with the file. Thus even if the tax scales are updated when a new maintenance edition is released, this scale is only used in new files that are created. To update the tax scale in a previously saved file, open the file, choose Tax Scales under the Settings menu, then choose the latest scale (Australia or NZ, whichever is appropriate).

How do I account for Land Tax in the calculations?

Land tax is a State-imposed tax that has become an increasingly important issue for successful property investors. The land tax rules change from State to State (NZ and NT have none) and, in general, depend on the total land value owned in each State. It is treated by the Australian Tax Office as if it were another rental expense and in PIA, the Rental Expenses dialog is where we recommend you enter the land tax component for any new property you are analysing. While it is not possible to fully integrate automatic land tax calculations in the software because of the complications of joint-ownership and properties held in different States, we have added a Land Tax calculator in the new version to at least help you in this process (Calculator Menu).

What does "?????" mean in the IRR cell in the Input column of the investment analysis spreadsheet?

It simply means that the internal rate of return can either not be calculated or is not applicable. It usually signifies an infinite return and hence a great investment! For example, it would not be possible to calculate the return on investment for a property purchased with borrowed money which also produces a positive after-tax cash flow – effectively a license to print money. With no money invested, it is impossible to calculate a return on investment! Such a situation can arise when you have low interest rates and relatively high net rents and non-cash tax deductions (e.g. high depreciation claims). However, if a positive cash flow is generated simply by capitalising the interest, this can result in a negative equity at the end of the projected period. In this situation, the internal rate of return is not applicable as it would actually be a measure of the effective "interest" being paid on the equity being extracted from the property.

Why is the investment loan being reduced, even though I have specified an interest-only loan?

It usually means that you have inadvertently specified that rental income and or and tax credits are to be used to make principal payments off the loan whereas normally these are used to service the interest bill. Make sure that the relevant check boxes in the rent and tax credit dialogs are unchecked.

How is the capital gains tax calculated?

This is one of the most complicated aspects of Australian property tax law and one that has been changing in recent times. For capital gains tax purposes, fixtures and fittings are treated as separate assets to that of the property. The tax is only calculated on gains over and above inflation and there are special averaging provisions that tend to cushion its effect, especially if other taxable income at the time of sale is low (see pp 140-141 of Building Wealth through Investment Property for more detail). Since May 1997, building depreciation claims must now be written back and the cost base adjusted accordingly when calculating the taxable gain. To help users understand more clearly how the tax liability has been estimated, the Professional versions of the Australian PIA software now include a detailed capital gains tax report.

What value should I use for capital growth rate?

A figure that you think is appropriate for the location, the style of building and most importantly, the time period over which you will be making projections (hopefully between now and retirement, however long that may be). Do not be unduly influenced by what is happening today, or even this year, as it is the longer term growth rate that is most relevant. You may use long-term historical levels as a guide, but it is most important that you do not consider changes to the capital growth variable independently from changes in the inflation and interest rate variables. There is no definitive relationship but, while growth in property values has varied considerably over the years, over any significant period, it has generally exceeded the inflation rate by about 2 to 3%. Interest rates would normally exceed the growth rate by about the same margin.

Can I examine the implications of using a line of credit with the PIA software?

Lines of credit are commonly used nowadays for accelerated reduction of a home loan. By paying all one’s income into the account and withdrawing living expenses as required can result in drastic reductions in the term of a loan. While there is a small advantage gained through using credit cards to extend interest free use of someone else’s money, the major reduction comes about because more is being paid off the home loan. The Professional versions of PIA have a home loan analysis spreadsheet that can be used to simulate the effect of making these additional payments. The living expense budget feature can be used to work out how big these additional payments might be.

What have I done to make my cost per week appear so high?

You may be using a short term principal and interest loan, in which case the higher cost per week can largely be attributed to the significant principal payments. Look at using interest only finance.

You may have inadvertently specified that rental income and/or tax credits be used to repay the principal on the investment loan. If this is the case, the interest bill has to be serviced by you alone and hence your after-tax cost per week will rise accordingly. Make sure that the relevant check boxes in the rent and tax credit dialogs are unchecked (see 2 above).

What does a negative cost per week mean?

The double negative actually means that your cash flow is positive (the investment is paying you money). It also means that you have an early edition of Version 6.1 of the software – you can update it from the web site.

Why does the program have a separate item for furniture in the property value dialog, but not fixtures and fittings?

Some properties are bought with a furniture package as an option in the purchase (e.g. furnished holiday units). However, it is traditional in purchasing and/or selling property that the property price include fixtures and fittings (carpets, curtains, etc). The furniture is thus separated as a separate item in any purchase, however, all items can be separated and identified for depreciation purposes.

How are fixtures and fittings, stamp duty and construction cost are linked to the property price?

To make it easy for someone to get a quick and reasonable bottom line, a number of assumptions are made with the model. By default, when someone enters a new property value, the appropriate stamp duty is automatically calculated, along with estimates of the amount of depreciable items (6% of property value) and the original construction cost of the building (50% of property value). The normal procedure would be to then refine these values where appropriate. However, it is possible to change this default behaviour so that changing the property value does not change these other related items – simply un-check the relevant check boxed in the Property Value dialog.

Why does a $150,000 property cost me almost $160,000?

The cost of an investment property includes the property price, additional purchase costs (conveyancing, stamp duty, etc) and, if there is a loan involved, loan costs. These can add several thousand dollars to the original advertised cost.

Why, when I ask the program to print, does it only give me just half a page of information?

What you see is what you get (wysiwyg)! If the page you are viewing is the spreadsheet interface, that is what will print. To print a full report (up to six pages), you must first generate that report (see Report Menu items). This is a change that has been implemented in line with the change to a graphic interface (the earlier Dos-based versions of the software would generate reports on the fly).

How do I get it to print the contents of the property expenses dialog?

Another change from the Dos version is that some screens (dialogs such as for the property expenses input) do not print at all (a dialog has a grey background). To print a dialog, you would need to copy it to another application such as Paintbrush or Word via the clipboard (hold down the Alt key and press the PrtSc key to copy the currently active window to the clipboard).