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
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: -$37,734
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
Operating Loss c/f Tax Return: -$17,949
Ordinary Income: $85,000
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
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!
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: -$37,734
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
Operating Loss c/f Tax Return: -$17,949
Ordinary Income: $85,000
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
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!
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