Capital gains required for profit

Hi everyone,
Want to contribute to the experiences shared on this site. Constructive comments only please...

I have held an investment property in victoria for 9 years, and have just done the sums to see how I have done… Here is what I found.
I started with $35000 saved (my initial investment)…

Purchased a 3x1 house for $260,000
Stamp duty $10,000 or so
Loan value $235,000 (interest only)

Rented it out for $240-270 per week.
Average annual rental income around $13,000
Average annual realestate fees around $1,000
Average annual interest payment around $18,000
Average annual loss around $6,000
Average annual Tax saving around $3,000
Therefore the property cost me about $3,000 per year.

Property now worth about $360,000 which is a 40% gain over 9 years which is pretty ordinary I guess.

Capital costs over that time…
New roof $10,000
Landscaping $15,000
New window-frames $10,000
New gas, dishwasher, etc $1000
So at least $36,000 paid in capital costs.

So I have some equity. If I want to get this money I need to sell it. Pay 3% of sale price to a real-estate agent to sell it ($10,000) and then pay capital gains tax with 50% reduction because I have held it for more than 12 months ($100,000-selling fee-capital costs if I can find the receipts=$54,000x0.47x1/2=$12,000). So I am left with:
$360,000-$10,000-$12,000=$338,000.

And I have to pay off my loan ($235,000), so I am left with $103,000.
So I put in $35,000 at the start and then chipped in $3,000 per year for 9 years ($27,000) and paid at least $36,000 in capital costs, so the property cost me $35,000+$27,000+$36,000=$98,000.

So this property turned $98,000 of my money into $103,000 over 9 years. Which means a property that appreciated 40% ended up losing me money (after inflation)!

Now, if it had doubled after 9 years I would instead have been able to sell if for $520,000 and would have turned my $98,000 into over $160,000 cash in my pocket after selling, which would be just fine. I have another property, but it is not doing quite as good!

So, from my experience, would it be true to say that one needs at least 4% capital appreciation each year just to break even? Or did I just pay too much initially / spend too much on maintaining it for my tenants / not charge enough rent (the market usually dictates this, not me)?

I'll update you again in another 9 years (hopefully).

Share your experiences!

Cheers
 
Thanks for sharing your experiences.

Here's what I think you did wrong:
1. Bought a property that needed a new roof within 9 year - new rooves are a $0 value add. :(
2. Spent $15K on landscaping - What The??:confused:
3. Bought a property that needed new windows @ $10K - yikes!! don't do that.

Other than that, your figures look about right.

The only other thing I'd add, is that you expected the property to double in 9 yrs. But where is the property? It was obviously in need of major repairs when you purchased, so that was always going to suck up your cash. Remember that the keyword in the addage "property doubles on average every 7-10 yrs" - is "average". Over 7-10 yrs some properties will double, others will triple or quadruple. Some will stay flat, some will go backwards. But on AVERAGE they they tend to double historically. The problem is you did not buy the average property. No-one can. You can only buy a specific property.

Cheers, Alan.
 
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Agree with Propertunity, you've picked a property that has under-performed in capital growth but over-performed in capital maintenance. Sorry to say but doesn't sound like bad luck, it sounds like bad property choice.
 
Thankyou for your responses, excellent points.
I guess the major failing was purchasing with the intent to live in the property, so it was not viewed through the prism of a business transaction initially. The initial building inspection did not identify the roof problem, but after two years of frequent leaks I just decided to replace the tiles with zinc alume job so I wouldn't have to worry about it any more. I think on one of our other properties we just got someone to re-seal and paint the tiles which was only a fraction of the price of replacing with corrugated zinc.
The landscaping was a bit ridiculous, but again was done because we were actually living there for the first 2 years (I fudged the analysis previously to ignore this) and wanted to enjoy what little sun there is in Geelong, outdoors. So I guess you could potentially take $20,000 of the capital expenses if you were stingy, but I hoped the improved ambience would improve rental yields and decrease vacancy over the indefinite period I intend to keep it. For the record, we have had only one tenant since renting it out so I think we have achieved the aim of providing a place which is satisfactory for the tenant. Rental yields have not gone up much but this reflects the local market. It takes a long time to make back the loss when you lose a tenant too, given the time the property is vacant and also the fees that RE charge to put a new tenant in.

So, in summary, I guess the lesson is that it takes a long time to make back capital expenditure, so spend wisely.

Cheers.
 
Living there for the first two years will put a different slant on things.

That will reduce CGT payable by about 2/9 (about 22% give or take).

I think that's right. Someone can correct me if I'm wrong.
 
Living there for the first two years will put a different slant on things.

That will reduce CGT payable by about 2/9 (about 22% give or take).

I think that's right. Someone can correct me if I'm wrong.

Living in it as a main residence initially will dramatically change things for 2 reasons:

1. It could be totally exempt from CGT, or
2. CGT would be calculated based on the value of the property at the date of it first becoming a rental. ie value rather than time based.
 
my understanding is cgt can be either calculated like that, or if you have a valuation of the property at time of moving out, then calculated by that val minus the eventual selling price.
 
CGT is actually calculated differently depending on

1. Whether it is a main residence becoming a rental, s 118-192 ITAA 1997 or

2. Whether it was a rental first and then became a main residence. s.118-185 ITAA 1997

1 is based on value at date it became a rental, 2 is based on time the property was a rental.
 
CGT is actually calculated differently depending on

1. Whether it is a main residence becoming a rental, s 118-192 ITAA 1997 or

2. Whether it was a rental first and then became a main residence. s.118-185 ITAA 1997

1 is based on value at date it became a rental, 2 is based on time the property was a rental.

That's why you use accountants.

I really need to add this disclaimer to my posts.

The information provided is garbage and should not be relied upon by an individual. You should speak to a professional who really should know this stuff a lot better than me and not take my half cocked advice.
 
So I have some equity. If I want to get this money I need to sell it.
Cheers

This is the common misconception people have when wanting to access equity in their property. It's possible to refinance and 'release' the equity in the form of a LOC which eliminates the need to sell and the associated costs. Better still, you get to keep the asset and benefit from future gains in both capital value and rental returns.
 
not sure where in Geelong it is - but I guess averages can be deceiving. According to SPI prop stats Geelong grew 56% over the last 5 years (and has averaged 8% annually over the last 10) Geelong west was 49% over same time.

One question though - why do you need to sell to access the money. You have equity there - y cant you just use that?
 
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