G’Day

After a very interesting meeting with a Customer the other day I thought I’d put up a post about Internal Rate of Return

I can’t present this in tables and other stylised formats so bear with me while I write this in text format.

There have been a few recent posts regarding potential for capital growth.

While it is easy to assume that we must chase capital growth even if it means suffering negative cash flow, this is not always the case when assessing a property for investment potential

We have a fine crop of new posters and there are many facets to property investing.

Capital Growth is one and Internal Rate of Return is another.

Here is a simple example I wrote up for a customer of mine and you may find it useful to use your own figures to estimate how your own investments are travelling:

The property under consideration is a twenty year old apartment about $500,000 in the Melbourne inner high density suburbs

These figures are estimates for the first investment year

The second year may eg not have any vacancy or reletting fees

Provision for Repairs & Maintenance is also a Sinking Fund provision for eventual replacement of appliances, carpets etc

Rent @ 5.2% yield = 500pw: $26,000

Allow 2 weeks Vacancy: $1,000

Gross Rent per Annum: $25,000

Interest on 97%LVR Loan of $485,000 @ 6.22%: $30,167

Loan Account Keeping Fee @ $10pm: $120

Municipal & Water Rates: $1,500

Strata Corporation: $1,500

Landlord’s Insurance: $500

Agent’s Letting Fee @ 5.5%: 1,430

Property Management Fee @ 7.7%: 2,002

Phone Calls: $15

Provision for Repairs & Maintenance: $500

Non-Cash Amortisation Financial Expense $13,576 / 5 Years: $2,715

Non-Cash Building Depreciation Allowance eg $100,000 x 2.5%: $2,500

Total Operating Taxable Profit / Loss: -$42,949

Less Rent Revenue: $25,000

PAYG Tax Paid on Ordinary Income: $19,750

Ordinary Income Adjusted for Operating Loss Investment: -$17,949

Nett Taxable Income: $67,051

Tax Payable on Nett Taxable Income: $13,965

Income relating to investment property being Rent Income plus Tax Rebate = Realised Yield 6.16%: $30,785

Cash Contribution to Investment: $37,734

Nett Cost to hold Investment (estimate first year): $6,949

Deposit / Funds to Complete: $51,553

Nett Operating Contribution: $6,949

Total Investment: $58,502

Assume 3% Inflation $500,000: $15,000

Assume 5% Capital Growth: $25,000

Total Growth Divided by Total Contribution: $40,000 / $58,502

Unrealised Internal Rate of Return on Investment: 68%.

Nett Operating Contribution: $6,949

Assume 3% Inflation $540,000: $16,200

Assume 5% Capital Growth $540,000: $27,000

Total Growth Divided by Total Contribution: $43,200 / $6,949

Unrealised Internal Rate of Return on Investment: 621%.

Nett Operating Contribution: $65,451

Estimated Value of Property at end of Year Two: $583,200

Total Growth Divided by Total Contribution: $83,200 / $65,451

Unrealised Average Annual Internal Rate of Return on Investment: 127%.

Even a simple, standard, property purchase can be a phenominal investment.

Don't take anything to do with your investmens for granted. Look at the deal from all angles and you may be very surprised at what is really happening behind that triple fronted cream brick veneer.

Hope this was 'interesting' and helpful to some of our newbies

Cheers

Kristine

After a very interesting meeting with a Customer the other day I thought I’d put up a post about Internal Rate of Return

I can’t present this in tables and other stylised formats so bear with me while I write this in text format.

There have been a few recent posts regarding potential for capital growth.

While it is easy to assume that we must chase capital growth even if it means suffering negative cash flow, this is not always the case when assessing a property for investment potential

We have a fine crop of new posters and there are many facets to property investing.

Capital Growth is one and Internal Rate of Return is another.

Here is a simple example I wrote up for a customer of mine and you may find it useful to use your own figures to estimate how your own investments are travelling:

The property under consideration is a twenty year old apartment about $500,000 in the Melbourne inner high density suburbs

These figures are estimates for the first investment year

The second year may eg not have any vacancy or reletting fees

Provision for Repairs & Maintenance is also a Sinking Fund provision for eventual replacement of appliances, carpets etc

**Profit & Loss Statement:**Rent @ 5.2% yield = 500pw: $26,000

Allow 2 weeks Vacancy: $1,000

Gross Rent per Annum: $25,000

__Less Cash Expenses:__Interest on 97%LVR Loan of $485,000 @ 6.22%: $30,167

Loan Account Keeping Fee @ $10pm: $120

Municipal & Water Rates: $1,500

Strata Corporation: $1,500

Landlord’s Insurance: $500

Agent’s Letting Fee @ 5.5%: 1,430

Property Management Fee @ 7.7%: 2,002

Phone Calls: $15

Provision for Repairs & Maintenance: $500

**Total Cash Operating Expense:**-$37,734Non-Cash Amortisation Financial Expense $13,576 / 5 Years: $2,715

Non-Cash Building Depreciation Allowance eg $100,000 x 2.5%: $2,500

Total Operating Taxable Profit / Loss: -$42,949

Less Rent Revenue: $25,000

**Operating Loss c/f Tax Return**: -$17,949**Ordinary Income**: $85,000PAYG Tax Paid on Ordinary Income: $19,750

Ordinary Income Adjusted for Operating Loss Investment: -$17,949

Nett Taxable Income: $67,051

Tax Payable on Nett Taxable Income: $13,965

**Refund / Adjustment on Tax Paid**: $5,785__SUMMARY__Income relating to investment property being Rent Income plus Tax Rebate = Realised Yield 6.16%: $30,785

Cash Contribution to Investment: $37,734

Nett Cost to hold Investment (estimate first year): $6,949

**INTERNAL RATE OF RETURN:**__For Example: Year One__Deposit / Funds to Complete: $51,553

Nett Operating Contribution: $6,949

Total Investment: $58,502

Assume 3% Inflation $500,000: $15,000

Assume 5% Capital Growth: $25,000

Total Growth Divided by Total Contribution: $40,000 / $58,502

Unrealised Internal Rate of Return on Investment: 68%.

__In Year Two:__Nett Operating Contribution: $6,949

Assume 3% Inflation $540,000: $16,200

Assume 5% Capital Growth $540,000: $27,000

Total Growth Divided by Total Contribution: $43,200 / $6,949

Unrealised Internal Rate of Return on Investment: 621%.

__Average Years One and Two:__Nett Operating Contribution: $65,451

Estimated Value of Property at end of Year Two: $583,200

Total Growth Divided by Total Contribution: $83,200 / $65,451

Unrealised Average Annual Internal Rate of Return on Investment: 127%.

Even a simple, standard, property purchase can be a phenominal investment.

Don't take anything to do with your investmens for granted. Look at the deal from all angles and you may be very surprised at what is really happening behind that triple fronted cream brick veneer.

Hope this was 'interesting' and helpful to some of our newbies

Cheers

Kristine

*Thanks Trogdor for the forumulas: I have edited and included a 'back of the envelope' calculation for the Two Years' Average - I leave it to others to do the detailed calculations for their own particular scenarios.*

My calculations were obviously not meant to be dot perfect and the purpose of my post was to hopefully inspire others to think about the workings of their investments and to get out their calculators so now with the help of your links they will be able to calculate down to the decimal point. Thanks!My calculations were obviously not meant to be dot perfect and the purpose of my post was to hopefully inspire others to think about the workings of their investments and to get out their calculators so now with the help of your links they will be able to calculate down to the decimal point. Thanks!

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