A good investment?

[Go Girl]

Hi everyone,

I bought a house off the plan in August 2003 for $480,000. $13,000 was spent on it, blinds, air conditioner, etc.

It was recently had it valued at $565,000

Can anyone provide me with the necessary calculations to see what kind a return it has yielded to date?

Thanks,

Go Girl

 

[Bill.L]

Hi Go Girl,

Assuming a $493,000 start price, the growth rate over 5 years has been 2.75% pa.

Whether you have made any money on it depends on how much it has cost you to own over that period.

bye

 

[Go Girl]

Hi Bill,

Thanks for the feedback. Can you tell me how you got that % (I am a bit mathematically challenged )

You say that “Whether you have made any money on it depends on how much it has cost you to own over that period.” Does this mean that I need to add up all the costs over the period and add them into the calculation? I imagine also the income and I suppose any tax breaks that I have received (it has been negatively geared)?

Thanks,

Go Girl

 

[Rob Williams]

Try using this formula in Excel to calculate the CAGR (Compound Annual Growth Rate). Just replace the appropriate value in the formula with the cell containing the value.
I've tried to get my head around the workings of the formula, but it's got something to do with Natural Logarithms (LN on some calculators) and it makes my brain hurt just thinking about it I'm VERY math challenged.
You will need to change the format of the cell to Percentage with 2 dec places to see the result expressed as a %

=(final value/initial value)^(1/years investment held)-1

 

[investor888]

Yeah, you should factor in all your costs as well. If it is negatively geared, than that is effectively a cost out of pocket to you.
So, say your net shortfall (total income - total expense + tax benefit), was 7000 per year. Over 5 years that out of pocket cost would be $35000.
Which in effect would bring your true profit to 565K - 493K - 35K = 37K.

 

[marg4000]

Don't forget your purchasing costs - stamp duty would have been a fair bit, also legals, bank charges etc. And also allow for selling costs, agents commission etc to get the net figure.
Marg

 

[investor888]

Yes, also need to factor in the purchasing costs such as stamp duty.
But while, short term, the actual profit may be fairly low, don't forget that if you are investing long term (15-20yrs), that over time, your equity increases, the rental income will increase, and you should get to a CF+ situation over time. Then sit back in 20yrs, and have 50K/year in net income from the property.

 

[Bill.L]

Hi all,

Go Girl, I don't use anything as fancy as Rob's excel spreadsheet.

I grab a device called a calculator, plug in a number, and multiply by the starting number. (ie 1.0275 X $493k =, =, =, =, = gives final answer of ~$565k (for 5 years of growth).)

I'll guess the first number (growth rate), if final answer is too high, adjust downwards until correct.

For me, I have the answer before excel would even open.

bye

 

[Trogdor]

Very easy on calculator!!

E.g Bought 400k, sold for 700k, held for 10 years.

1.)
Divide the final price by the initial price.
E.g. 700/400 = 1.75

2.) On your calculator raise 1.75 to the power of 1 over the number of years held.

I.e. 1.75 ^(1/10)

= 1.05755

3.)
Subtract 1 from this number, and multiply by 100.
E.g. (1.05755 - 1) X 100 = 5.755
Hence annual growth rate = 5.755% p.a.

No need to guess anything - takes about 5 seconds on a calculator.

_________________

If you want a mathematical proof you are simply reversing the process of calculating compound interest. For example if something compounds at 7% pa for 10 years it will be worth -> 1.07^10 = 1.967 times more in 10 years (hence close enough to the property spruikers doubling every 10 years at 7% for a nice example!!)

To reverse this - 1.967 ^ (1/10) = 7% p.a. !!

 

[twobobsworth]

What makes a good investment to you?

 

[Go Girl]

Hi everyone,

Thanks for the great feedback! I do have one question. In some of the formulas the ^ symbol is used - can you tell me what button this is or what I should be doing when I see this symbol?

Thanks,

Go Girl

 

[BayView]

What makes a good investment to you?

Something better than an on-line Bank account rate, with excellent depreciation and tax incentives, the ability to create and/or add value, income, and capital protected in an asset that grows in value over and above the said Bank rate.

 

[Sunfish]

You say it was "bought off the plan". When was it completed? If it was a unit in a large complex it may just be completing now, in which case you would still have a brand new unit and you only have had $48k invested.

That would have been OK. But on the theory that in the long run we're all dead, I would consider 2.75% for 5 years (surely medium term?) inadequate.

 

[Rob Williams]

Hi everyone,

Thanks for the great feedback! I do have one question. In some of the formulas the ^ symbol is used - can you tell me what button this is or what I should be doing when I see this symbol?

Thanks,

Go Girl

That's the "to the power of" thingy. I'm no math expert, that's why I use Excel instead of Bill's calculator method.
If you fire up the Windows calculator and change the view to scientific, you will see a button "x^y". If you enter 3 then hit that button then enter 3 (3x3x3 or 3^3) then hit = the result will be 27.
Hope that helps.

 

[Bill.L]

Hi Rob,

I'm no maths expert either, that's why I use the calculator.

Mine doesn't have a 'to the power of' thingy either. It's just a simple calculator.

bye

 

[Go Girl]

I would consider 2.75% for 5 years (surely medium term?) inadequate.

Yes Sunfish, I must agree 2.75 over 5 years is not such a great return. I suppose a greater time frame may (or may not) provide healthier figures.

Cheers,

Go Girl