350K house let for 300pw - madness??? Can you verify???

Guys,
please tell me I'm wrong somewhere...:eek:

I am considering rent my house instead of selling it. But this is madness!!! I will be adding 10K per year for this silly "investment" until rent will double...
The only hope is capital gain - and by the way, it will be taxed.
How much appreciation anyone can expect??? 25K per year? This is unrealistic...

Scenario: 350K house is let for 300 pw. Excel file is attached.

Income:

weekly rate 300
Agent commission 7%
effective weekly income 279
weeks in a year 52
weeks vacant 3
effective weeks 49

yearly income 13671

Expenses:
Loan amount 320000
(Investor will pay 5% of the value plus 19K stamp duty up front.
I'm not paying anything up front because I already own the house....)

Interest rate 7.46 (best rate - Homepath)
Monthly interest only repayments 1989
Yearly repayments 23868
Landlord insurance 300
Maintenance 500
Council rates 780
Accountant fee 80


Yearly expense 27517

Yearly cost 13846
Tax Concession(neg gearing) 4153.8

Effective cost 9692.2

Try to play with the weekly rate. You need to DOUBLE IT - 600pw in order to get even....
 

Attachments

  • landlord expense.zip
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Sounds about right. You haven't put in depreciation, though. A $350k place that's sort of new would give you a good couple of k depreciation a year. That might translate to 2-3k cashflow.

Yes, at current interest rates you do need 600pw (about 9%) yield for it to be break even. Unfortunate but true.
Alex
 
$300pw sounds like a reasonable return for a $350K house in Melbourne. You wouldn't expect much more than that.
 
Sounds about right. You haven't put in depreciation, though. A $350k place that's sort of new would give you a good couple of k depreciation a year. That might translate to 2-3k cashflow.

Yes, at current interest rates you do need 600pw (about 9%) yield for it to be break even. Unfortunate but true.
Alex

Hi Alex,

It's thoroughy renovated but far from new - about 30 years old.
I renovated it while I occupied it myself.

Can I offset some of renovation costs?

600pw rent for my place is absolute crazy. I can imagine people paying 350-400 pw in couple of years time but they simply won't afford to pay 600pw, no way.
 
$25k appreciation per year on a $350k house isn't unrealistic. That equates to 7%. Don't expect this to happen every year. You will have some average years and some above average years.

As Alex said, depreciation will help reduce holding costs. You can depreciate the rennovation costs - Did you keep receipts ?

Cheers
 
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Hi Alex,

It's thoroughy renovated but far from new - about 30 years old.
I renovated it while I occupied it myself.

Can I offset some of renovation costs?

600pw rent for my place is absolute crazy. I can imagine people paying 350-400 pw in couple of years time but they simply won't afford to pay 600pw, no way.

Get a depreciation report done. Those renovations will be depreciable if you rent it out.

Maybe when rent hits 600pw your place will be rented by a different type of tenant, or wages would have increased strongly.

Either way, your figures for the current market looks about right.
Alex
 
$300pw sounds like a reasonable return for a $350K house in Melbourne. You wouldn't expect much more than that.

So that's the strategy? Sorry but I totally missing the point...

Do you expect real estate prices to soar like in 2002?
Or, do you expect rental income to DOUBLE soon enough?
Or, do you expect interest rates to go back to 5.25%?

I should expect to pump into this funny "investment" around 50K over next 5 years, plus initial 50K, plus interest on all that....

How would I get the money back?
 
$25k appreciation per year on a $350k house isn't unrealistic. That equates to 7%. Don't expect this to happen every year. You will have some average years and some above average years.

As Alex said, depreciation will help reduce holding costs. You can depreciate the rennovation costs - Did you keep receipts ?

Cheers

Yes, I'm keeping receipts... Perhaps 15K in total or so... Not that much.

What about the work I've done myself? I spend countless hours renovating the place... Can I offset this somehow?

Another problem is CGT. I bought the house for 267K in 2003. If I sell it now, I pay no CGT.
If I hold it for 5 years with tenants, I will have to pay CGT.... :(
 
So that's the strategy? Sorry but I totally missing the point...

Do you expect real estate prices to soar like in 2002?
Or, do you expect rental income to DOUBLE soon enough?
Or, do you expect interest rates to go back to 5.25%?

I should expect to pump into this funny "investment" around 50K over next 5 years, plus initial 50K, plus interest on all that....

How would I get the money back?

Well, you would be losing something like 2-3% in cashflow. If the property goes up 7% a year over the long term, you're winning by 4-5% the first year, and this increases are rent increases.

As willg said, your depreciation should be reasonable for a renovated place so the $10k -ve cashflow a year is a bit overstated. Probably more like 5 or 6k the first year. Now, if you expect rent to go up 10% ($35pw the first year) then your cashflow improves by $1k at least a year. So in 3-5 years the property should be cashflow neutral. After that, it starts to be come positive.

You get your money back if the property appreciates, basically. And over the long term, property has gone up. You can use the equity from appreciating prices to refinance and buy other properties.

If you do not believe property goes up over the long term, it doesn't make sense.
Alex
 
So that's the strategy? Sorry but I totally missing the point...

Do you expect real estate prices to soar like in 2002?
Or, do you expect rental income to DOUBLE soon enough?
Or, do you expect interest rates to go back to 5.25%?

I should expect to pump into this funny "investment" around 50K over next 5 years, plus initial 50K, plus interest on all that....

How would I get the money back?

Azza,

The questions you are asking suggest 'to me' that further reading will give you a better understanding of property investing and will give you the answers you need. You may come to the conclusion that property investing won't give you what you need in the short term.

McBrain is pointing out that your yields are on par with the Melbourne market (at the moment). I didn't see him state it is a good investment.

May I ask what you are trying to achieve through investing in property ?

Cheers
 
Another problem is CGT. I bought the house for 267K in 2003. If I sell it now, I pay no CGT.
If I hold it for 5 years with tenants, I will have to pay CGT.... :(

IF you claim another PPOR in the meantime: the 6 year rule states that if you move out of your PPOR but do not claim another PPOR, you get to extend the CGT free status for 6 years.

Also, you would only pay CGT on the appreciation after you move out, right? Given that you get all the tax breaks from renting it out, that's not unfair.

Azza, what's your purpose in renting your place out anyway? What are your long term objectives?
Alex
 
I would be unlikely to invest in a property like this purely because the rental yield is too low. That said, I am willing to sacrifice some capital growth in order to get good, consistent rental yields. I usually use what I call the '1.3 rule', that is, take the purchase price (or in this case loan value) of the property, drop off the last 3 numbers (ie divide by 1000), and the number that's left should be your target weekly rental. In this case, a 320k property would require $480 per week to be viable. Of course, not many properties get there, but unless a property is likely to get above this threshold within 3 years, I won't buy. 2 of my IPs currently meet this rule (slightly exceed, actually), and the other IP doesn't quite get there, but not far off.

Bottom line, my opinion is that if you lived in this house and renovated, your are likely to be better off selling it and enjoying the CGT exemption for PPOR, and using some or all of the proceeds to get into a better yielding IP. Bear in mind that a better yielding IP may not have the same capital growth opportunities of the current property.
 
hehe

Azza - it sounds to me that you have just woken up to the realities of the current property market - where have you been mate? The tone of your first message suggests that you had no idea about the current market.

9 pct returns haven't been around for ages. Every report for 3 years has stated that 3-5 pct return is the average.

Yes the returns are crappy and yes you wloud hoping that capital gains happen. Otherwise cash in and put your money elsewhere.

Cheers
 
McBrain is pointing out that your yields are on par with the Melbourne market (at the moment). I didn't see him state it is a good investment.

True. I also don't think this is a sound investment. But I'm trying to understand why other investors still buying it :eek:

May I ask what you are trying to achieve through investing in property ?

Cheers

Well, I glad I bought my own house. After pumping couple of hundreds $$$, the interest I'm paying now is even smaller comparing with the rent for the similar place.
And my house increased 90.000 value in couple of years (minus renovation cost). Great!

Since I want to move, I thought I can keep this house instead of selling it. I am in a good position - no need to pay stamp duty, the house is mine.

I also prepared to pay no more but couple of thousands a year over next 5 years before I break even. I will expect at least 10% ROI over next 10 years. That's 6% in after tax terms - not that great but still acceptable.

If I don't get 10% over next 10 years, I won't get my money back before I will be too old and die!
What's the point? There are other possibilities to invest. Simply investing in my own house brings me 7% PA right now, tax-free. Why bother????
 
Azza - it sounds to me that you have just woken up to the realities of the current property market - where have you been mate? The tone of your first message suggests that you had no idea about the current market.

9 pct returns haven't been around for ages. Every report for 3 years has stated that 3-5 pct return is the average.

Yes the returns are crappy and yes you wloud hoping that capital gains happen. Otherwise cash in and put your money elsewhere.

Cheers

Yep, I knew investing in property offers low returns. Ideally I would put 50K deposit up front, and tenants are paying interest+principal in 30 years. Fine!

Ok, they are not paying any principal. Still OK if they roughly cover the interest.
But hang on, I have to add another 10K a year just to cover the interest???

I knew it's bad. I didn't realise it's THAT bad.
 
Negative to Positive Gearing!

Hi Azza,

Please read post #67 of this thread, this is one of my favourite posts :D (I posted it!), and tell me what you think?

http://www.somersoft.com/forums/showthread.php?t=35797&page=5

Negative gearing works best in the short to medium term when you select a great property, in a great location, in a great suburb AND buy it at the right time. This timing is with respect to a 'boom' in property values and the rental market, and a favourable local supply/demand imbalance.

Another example...here's real numbers (believe it or not) from a good friend of mine who bought in inner Melbourne in mid-late 2005 (sorry, can't disclose more details, so you'll have to take my word on it) when yields were shocking, people were talking about a 30-40% global house price crash :eek: and most people weren't buying:

Initial purchase price 2005: 360k
Initial rent 2005: 250 pw :eek:

Current market valuation 2007: 570k
Current rental valuation: 370 pw

No major renovation in between. Passive buy and hold.

Do the sums yourself!

The KEY to making negative gearing work really well in the short to medium term is excellent property selection combined with excellent timing, and this is most certainly not an easy task.

In the long-term though, negative gearing will still work, you just have to have the patience for this!

Good luck with it.

GSJ

ADD: In the linked post note that I have ignored depreciation and all tax benefits!
 
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I usually use what I call the '1.3 rule', that is, take the purchase price (or in this case loan value) of the property, drop off the last 3 numbers (ie divide by 1000), and the number that's left should be your target weekly rental. In this case, a 320k property would require $480 per week to be viable.
.


I don't understand this rule. Was it typed correctly ?

i.e. take the purchase price (or in this case loan value) of the property, drop off the last 3 numbers (ie divide by 1000), and the number that's left should be your target weekly rental.

Folowing the rule I would take loan amount of of 320,000. Drop 3 figures off = 320. This is the weekly rent.

Where does the $480 come from ?
 
I'm not unique?

Sounds like Azza has jumped on board to subtly point out how insane the property market has become as an investment vehicle. I think Azza actually fully understands this but is just enjoying the conversation with you lot! :) So unless you want another "inspired conversation" thread best you consider how much you engage!

(Azza is not me if you are wondering - I am far more blunt about my thoughts!) :cool:
 
Ooohhh YM...is that a threat? :D :rolleyes:

GSJ

PS: I didn't mean to embarass you AGAIN by drawing further attention to that post of mine :D ...

I am a sucker for punishment! Just keep swinging that bat.

I will try to give the counter argument to my insanity theory (just to prove I have been listening to you lot and aren't just here to be nasty):

1) There is an ownership premium that means rent remains below (sometimes well below) equivalent property prices in well located areas.

2) Therefore house prices can rise separate to rent for quite a long period of time because the markets are somewhat separate. i.e. people will pay a premium to buy in a particular area that renters won't pay. Call it "social status of owning in X suburb" if you like.

3) This ownership premium can grow. Where does the money come from for it to grow you might ask? A well located suburb might have people in the top 20% of incomes living in it when the population of the city is 1M people. As the city population grows to 2M people the population living in that area might now have the top 10% of incomes living in it (same number of people - they are just a different group of people - i.e. those with more money).

4) So if you believed this then yield doesn't matter. You buy in at a crap yield and sell at an even worse yield because the ownership premium has risen.

None of this solves my problems at the macroeconomic level however. But I might leave that for the economics threads ...
 
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