Am I missing something

[wagnman]

Gday all.

i have been looking and looking around Brisbane and I am finding it hard to find a "good" investment. I am starting to think that I am missing a part of the puzzle when I am looking at properties.

Here is what I have been doing.

I look at a property on RE.com.au.

I take the purchase price and plug it into a mortgage calc (i usually use the one off the CBA web site purely because it opens in its own little window and gives IO figures). This gives me the monthly repayment on the loan amount.

I then get the monthly rent, body corp and council rates. (usually already stated on RE.com or I email the agent).

I also allow 8.5% of the rent for management

With this info I work out what the property will cost each month to own (not allowing any extra for maintinence).

I then take the monthly loss and multiply it by 12 months to get the annual loss.

I then use a basic 45% (good salary) figure to estimate how much of this annual loss I will be able to claim back which I then divide by 12 months and take it off the loss to give me my final monthly net loss.

for example.

a $295K property
Monthly rent = $1083.33
Monthly IO repayment = $2206 p/mth
Monthly Body Corp = $110 p/mth
monthly council rates = $110 p/mth
monthly management fees = $92.08

Gross monthly cost to own property $1434.75 ($17217 P/a)

Claim back 45% of the $17217 loss at tax time ($7747.65)

$7747.65 divided by 12 months = $645.63 p/m in tax return making the cost of owning the property $789.12 p/mth (after tax return) (or $182.10 per week -ve geared)

Am I working this out correctly?

Its just that when looking at sooo many of the properties on RE.com it is obvious to me that the sellers are doing a few things.

1: they are trying to sell their properties for what the properties will be worth in a year or so's time not what the areas median prices reflect to be the current value.

2: rental returns are very low in alot of areas making properties so -ve geared that by buying one property you basically kill your borrowing power for any more.

3:Almost every property that is listed on RE.com.au with the words "investor" or "perfect investment" or "great first starter" or other things along the same lines are in actual fact really crap investments. I.E a 1 bedroom unit in an area that has had falling price growth rates for the last 3 years returning a poor 4.5% rental return.

I am getting a pretty bleak view of this and I have come to the conclusion that I must be missing something very basic from my calculations.

I do know that I dont know how to factor in predicted price growth into the equation to make the investment look more inviting.

How does that work.

Also am I missing anything/doing anything wrong in the figures that I have worked out so far?

Cheers all.

 

[Bill.L]

Hi wagnman,

You have left out depreciation from your after tax calculations. This would have the effect of lowering the out of pocket expenses.

To answer your question about the investment in property at these returns/prices/interest rates, then you are correct that it is not as easy as it was 5-7 years ago, and looks much less a 'good thing'.

bye

 

[MarkB]

i have been looking and looking around Brisbane and I am finding it hard to find a "good" investment.

First IP?

See, here's the thing.

What's a good investment for one person, might not be for another.

What makes a good investment for you, depends on the answer to this question....

What am I looking for in an investment?

Is it:

• cashflow?
• capital growth?
• ease of management?
• future development site?
• a reno?
• etc, and so on....

If you can answer that question honestly - then you're well on your way towards finding a good investment - largely because you'll be able to quickly discount properties that don't meet your criteria.

As investors we focus alot on what we do buy - but the truth is that we are defined as much by what we don't buy.

That (major issue) aside, your maths looks good, though I haven't checked it on a spreadsheet and you haven't allowed for depreciation (which on new/ish properties can be quite significant).

M

 

[alexlee]

Just a quick look suggests your numbers look about right. You're talking 100% LVR, 4.4% rental yield, 8.3% rates? You're not actually putting any money into the property, so it's no surprise that it's killing your borrowing capacity. Remember with that sort of LVR you're getting the growth of the property for nothing about 4% of the purchase price a year.

I think you're looking at this from the wrong point of view:
1) You're borrowing EVERYTHING. Why shouldn't it kill your borrowing capacity? You get to play this game cheaply by borrowing everything.

2) 4.4% yield is pretty low, historically speaking.

3) If sellers price their properties above market, they don't sell. Simple as that. Properties that don't sell will lower their asking prices, or accept offers lower than the asking price.

4) Over time (years) rents go up, and the numbers look better. Even if you buy a property every couple of years you'll do better than most people. You don't have to buy a dozen properties in the first year to make it.
Alex

 

[crc_error]

As mentioned earlier, you forgot to include deprecation, which could add another $7000 deduction in the first year (drops lower as years go on, but rent should go up as well)

But using your example, if the property is costing you $10,000 after tax to keep, and you get the long term average of 8% PA capital growth, your property will go up $24000 in the same 12 months, so essentially you have doubled your $10,000 investment.

Is this a good return on investment? I think it is.

Property works well when you can gear highly, when you get to your 2-3-4th properties, you loose your negative gearing benefits so your actual holding cost becomes higher on subsequent properties. (this is realized depending on your income) This is when I believe your better off to start to invest into shares, which don't have any holding costs, but historically a higher long term capital growth/dividend return of 14% PA rather than property which is about 12% including yield, less 1% in holding costs. so this means property returns about 10-11% real rate of return after costs whereas shares are about 14% PA.

 

[BayView]

The Body Corp fee seems astonomically high;

Is it an apartment in a complex with pool, gym and elevators, etc?

If not; that's very suss.

There are plenty more areas around the country where you can get cheaper Body Corp fees, and if you buy a house with land there are no B.C fees at all, and plenty more areas where you can get rental yields up around 6-7%, and with depreciation and decent cap growth.

In response to your points;

1. offer a low figure.
2. look in a different area, as mentioned above.
3. most r/e agents aren't investors, and just use those terms to try and entice the unwary.
4.

 

[wagnman]

Cheers for the replies guys.

I was just using basic figures to see if my maths was right.

my wife and I have about $50k in equity we can get out of our PPOR and we can buy an IP worth at least $200k before we have to worry about mortgage insurance so Ideally we would like to buy an IP under $200K(yeh right LOL! fat chance!) or under $300K if possible to keep the cost down on our first IP.

Our priority is to find a property that is not too heavily geared, (without taking into account any depreciation) say $100-$150 per week out of pocket before deductions. This property does not need to display massive capital gains as we will keep it for the long run but it needs to be in an area that is not going to be affected by floods or new roads/busways etc.

We would prefer a house to avoid body corp fees which always seem so high for what you get.

I would like to view any depreciation benefits as being iceing on the cake not something I am relying on to get the deal over the line.

Tell me something.

If we borrow $50K equity out of our PPOR to use as deposit on the IP (say a $200K ip) we would still be borrowing $200k just n two different loans (one for the $50k equity and one for $150k on the remainder of the IP's purchase price).

How is this any better than just trying to borrow $200k for the IP straight up?

We also have $25K in an offset bank account on our PPOR. I know that if we paid this $25k down on the $200K ip it would not be good from the view that we would not be getting the benefit of lowering our non deductable debt through the offset account but that $25k would mean we were only borrowing $175K to buy the $200K IP and that would make the IP closer to neutral geared quicker.

Cheers

 

[alexlee]

If we borrow $50K equity out of our PPOR to use as deposit on the IP (say a $200K ip) we would still be borrowing $200k just n two different loans (one for the $50k equity and one for $150k on the remainder of the IP's purchase price).

How is this any better than just trying to borrow $200k for the IP straight up?

You might pay less lenders mortgage insurance in the first case because your LVR for each property is lower.
Alex

 

[crc_error]

How is this any better than just trying to borrow $200k for the IP straight up?

probably better to get the IP with 100% finance, as if you default on your loan, it doesn't affect your PPOR. ie you loose your deposit drawn from your PPOR. But you will get slugged with mortgage insurance.. You need to make the decision if its worth the price or not.

 

[wagnman]

Cheers again guys.

Here is a scenario to check my figures on.

"copy and pasted from RE.com.au"


Consider the Potential
Offers Over $299,000
DUTTON PARK
Located in a small block of only six, this entry level unit would suit an astute investor looking for a low maintenance investment.

Features include great sized bedrooms with built-ins, neat and tidy kitchen in original condition with combined dining and living areas. In addition it is only a short walk to train, public transport, the Mater Hospital and the new Boggo Road urban development.

The body corporate rates are only $1600 per annum and with a tenant paying $240 per week until December, what more could you want?

Entry level unit
Built-ins
Combined living/dining
Small block
Convenient position
Click to Contact Agent
Property Summary:

Category:
Unit
Bedrooms:
2
Bathrooms:
1
Garage:
Single
Land:
735.00sqm (approx)

* Show Visits
* View sold properties in area

Property photo
Property photo
Property photo
Property plan
Property Location Map



just using this as an example mind you.

IO repayments on $299K = $2236 p/mth
B/Corp = $133.33 p/mth
Council rates = $110 p/mth (dont know this figure so the $110 is a guess)
Management = $88 p/mth

Rent = $1040 p/mth

Leaves the property $1527.33 -ve geared per month before depreciation and tax deductions. which is $18327.96 PA -ve geared.

Claim back about 45% of the $18327.96 ($8247.60, or $687.29 p/mth) making the property $840.07 -ve geared per month with no depreciation calculated.

This is a loss of $10080.83 in the first year of ownership.

If the unit grown 8% in value in this first year it will gain $23920 in value which when you subtract the $10080.83 losses gives you a total of $13839.17 which is the net gain for the year that you have owned the property right?

Cheers

 

[valleymist]

Following on from crc_error's suggestion to go with 100% finance and
copping the LMI

I decided to go that way, as PPOR was in joint names, but IP was only going
to be in my name ( wifes income not sufficient to benefit from tax deductions ).

Would have had to have deposit loan in joint names, or have wife be guarantor for the deposit loan. Either way gets messy.

 

[wagnman]

Thats an interesting point valleymist because our PPOR is soley in my wifes name (house and loan) but the IP will be in my name due to income levels.

this means that we would be better off trying to get the finance in my name and not use any of the equity in our PPOP at all.

This would protect the PPOR from having anything to do with the IP and if we finance the IP through a different lender than our PPOR we will be more likley to be able to use the IP as the sole security on the IP loan.

Am I right?

 

[Bill.L]

Hi wagnman,

Wife borrows $50k from equity in ppor. She lends it to you at cost. You borrow rest against value of IP.

No LMI.

PPOR still separate.

Wife creditor if you go bust.

bye

 

[wagnman]

Hi wagnman,

Wife borrows $50k from equity in ppor. She lends it to you at cost. You borrow rest against value of IP.

No LMI.

PPOR still separate.

Wife creditor if you go bust.

bye

This sounds interesting.

Would the interest on the $50k be deductable seeing as it is being loaned to me at cost?

Regards

 

[The Y-man]

This sounds interesting.

Would the interest on the $50k be deductable seeing as it is being loaned to me at cost?

Regards

Deductible to you (or more accurately the IP owners), not your wife (zero sum for her).

Cheers,

The Y-man

 

[Chris.R_WA]

Cheers again guys.

Here is a scenario to check my figures on.

"copy and pasted from RE.com.au"

Consider the Potential
Offers Over $299,000

IO repayments on $299K = $2236 p/mth
B/Corp = $133.33 p/mth
Council rates = $110 p/mth (dont know this figure so the $110 is a guess)
Management = $88 p/mth

Rent = $1040 p/mth

Cheers

You've missed purchasing costs: Stamp duty, mortgage duty, conveyancing etc...

I generally factor in approx 5% for these costs ie. Borrow 314K if you dont want to put any cash into the deal = repayments go up

Regards, Chris

 

[Ausprop]

This is a loss of $10080.83 in the first year of ownership.

If the unit grown 8% in value in this first year it will gain $23920 in value which when you subtract the $10080.83 losses gives you a total of $13839.17 which is the net gain for the year that you have owned the property right?

Cheers

so you are garuanteed of losing $10k in year 1 and need some pretty big growth numbers to claw it back. Can't say it excites me.

 

[Land]

Who cares about year 1?!!!!!!

Ausprop,

Who gives a stuff about year 1?!!!!!! Man, I only care about year 10 and onwards, as I'm sure every investor (as opposed to trader) does.

Talk about short-sighted........

 

[GoAnna!]

Ausprop,

Who gives a stuff about year 1?!!!!!! Man, I only care about year 10 and onwards, as I'm sure every investor (as opposed to trader) does.

Talk about short-sighted........

I care about year one. There will be heaps of properties that will make you real money in coming 12 months . Why buy one that won't? It will only hold up the plan.

I agree with comment about working out what investments suit you and go look in that pond. Unless of course you are happy to wait and hope......but I am suspecting from your original post that you aren't.

 

[Land]

GoAnna,

I'm not suggesting that an investor shouldn't try and maximise their return in Year 1 because naturally this will assist in building the portfolio quicker. It's for this reason that I'm in the process of a dual occupancy development in Sydney this year, because it will generate immediate equity for me in a flat market so that we can still move forward.

However, what I'm suggesting is the old saying of time in the market, not timing the market, and to this end, the compounding effect of capital growth at 10 years will profoundly eclipse any short term loss in year 1.

Whilst it's very important to crunch the numbers, I think a lot of people, especially beginners, run dangerously close to paralysis from the analysis, and so I am trying to give the broader perspective, which is far and away more important than any 1 year snapshot.

Just do it, I say!