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**From:**Ric Gordon

Guys,

Quite a long and technical post- would like to know if I've got it right (get those spreadsheets working guys)...

I'm reading API magazine and something's distrubing me. On pp 30-33 there's an article entitled "Property Peas and Profit" by Ian Ryan. Now Ian's talking about how financial advisers often mislead property investors. But the result I intuitively get from his calculations (see table bottom page 31) differ considerably to his.

Here's what he gives us:

$300 property

5% yeild ($15,000 rent p.a)

7% interest ($21,000 p.a)

$3,000 expenses p.a. (or 20% of rent)

Now he says our deductible losses are $3,000 = ($21,000-$15,000-$3,000)

But I figure they are $9,000:

Deductible losses:

$21,000+$3,000 =$24,000

Rent: $15,000

Therefore net deductible losses: $9,000

Therefore, the tax deduction @48.5% is $4,365

leaving the investor to pay $4,635 per annum (as opposed to Ian's $1,455 and $1,545 respectively).

So after 5 years the investor has paid $23,175 (NOT $7,725 - ie. they have paid about 3 times what Ian Ryan reckons they paid).

But this isn't where it stops. Capital gains tax is no longer indexed: you take 50% of the nominal gain and then are taxed on that. So in year 5 the CGT would be [($356,305 - 300,000) * 50% * 48.5%] = $13,653 (instead of $8,696). This leaves an after tax gain of $42,651, before inflation.

Sooo (I'm getting there) nominal ROI is 184% [(42,651-23,175)-1], over the 5 years, NOT the 510% that Ian would have us believe. SO, rather than an IRR of 39% per annum (after inflation), the actual IRR is 11% BEFORE inflation (after inflation would be worse). When you consider that the (adjusted, reconstructed) All Ords have returned about 14% per annum (after tax, before inflation) since 1926 this is fairly similar. As far as I can see I think Ian shouldn't be so quick to have a go at the accountant's/advisers. I can only assume he works with a Gold Coast marketing company.

So, should I

a) go back to high school and repeat my maths courses

b) reread the info (have I misinterpreted assumptions)

c) write to API and complain about such misleading, disgraceful journalism -

Did anyone else feel this was wrong? Can anyone confirm/deny my calcs, or am I just a technical geek

Ric G

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