Calculating Return on IP2

I have 1 IP, and am doing the figures on purchasing another one.

I have looked at purchasing a $450,000 house. These are the stats:

5 year fixed rate 7.79% CBA: $35,055pa
Rent expected: $20800pa
Costs: $4500

Total gross holding cost: -$18755pa
negative gearing tax refund : $5626
deprecation tax refund: $4000

net holding cost: $9129 or $760 per month

Seems like allot to hold this property, and I dont see how I can buy a third one for like 10 years till this IP becomes cash flow neutral.

Am I working this out correctly?

This seems like a big commitment, its ok while I'm living at home, but I plan to move into IP 1 in a year or two, so add $760pm ontop of mortgage commitment of $1500pm is allot to swallow.

Looks like I need to lower the commitment on IP1 before I move in before I consider a second IP..

Any ideas, how are others doing it?
 
I would expect this IP to double in 10 years, so I would make $450,000 profit, less holding costs of $91200.. so thats $360,000 profit.
 
a) Either you use cash (not equity) to reduce your LVR on the second IP
b) choose variable rate as you are paying over 2.5% premium for the privelage if fixing. At a 5.2% rate, your interest payments are $23,000 not $35,055.
c) pay less than $450,000

Given the relatively low return, what is compelling about the property, that makes you want to purchase it? Can it be improved through some value-add and increase the yield?
 
Either way if I use cash or equity, the calculation is the same. as cash goes into offset account on IP1, which reduces this loan, and once spent, loan on IP goes back up.

yes using variable rate will reduce payments, but we dont expect rates to remain at ~5%

So although holding costs now are low, in the next 2 years when rates creep back into six or sevens, holding costs jump up remarkably.

These figures are not on a specific house, but a suburb. Looking around here, these are the types of rent returns I should expect for such a out lay.

It sound like I need to spend the next 2-3 years saving up $100k deposit and use it for IP2.

You say the return is low, its at 4.6%.. where can you get higher returns on HOUSES (not flats)? around victoria?
 
It sound like I need to spend the next 2-3 years saving up $100k deposit and use it for IP2.

Without going into your figures too deeply which I haven't - you're talking about saving $30k per year to buy that same asset in 3yrs for perhaps say $70k more (at 5% growth).

What would happen if you use that same $30k you're planning on saving per year, buying the house now and instead of putting that $30k into a savings account - contributing it to the property(s) on top of the existing payments?
 
I can see what your saying, but I'm also looking at cash flow. If my holding is to expensive, then I will not be able to save anything once I buy. Essentially relying on rent increases to improve cash flow, which could take years.

So your saying buy with say 10% deposit, 90% LVR and buy sooner, rather than later.

As I should have enough for deposit of 10% probably in the next 6 months.
 
So your saying buy with say 10% deposit, 90% LVR and buy sooner, rather than later.

Not saying either way, just that you should do your calculations on both scenarios and do what suits you best. It's another one of those situations where there's no right or wrong, it just comes down to the individual investor and their preferences.

Put aside for a minute that in one scenario the cash outflow is called 'interest' and in the other it's called 'savings' - assuming the cashflow is the same ie. $500pw from your wallet, what other factors come into play?

If the cashflow is the same for both options, which scenario will see you better off in 3yrs and why?
 
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