Investment Scenario - looking for opinions

Hi guys, I'm new both here and in property investment in general but have done some basic research (including reading a lot of the comments and posts here) and thought of getting your opinion on it.

I wanted to share a scenario of buying an investment property and hopefully get your thoughts on whether it's a valid / realist scenario to work with as far as planning goes. I'm assuming a yearly view here but not sure whether I'm missing something. What I'm actually trying to gauge is whether the actual net cost to me after one year is a relatively good estimate:

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Assuming the below:

Purchase Price $: 340,000
Deposit Value $ @ 20% of value (80% LVR): 68,000
Est. transaction costs (including solicitor, fees, etc.) @ 5% of Purchase Price $: 17,000

Loan Amount $: 272,000
Yearly Interest Rate Repayments in $ @ 5.0% p.a.: 13,600

Yearly Income from Rent in $ (here I'm assuming renting it for 37 weeks in the year on a estimated weekly rent of $325 (calculated as 5% interest times the $ purchase price of 340K divided by 52 weeks). The other 15 weeks I do not include as am considering as costs such as vacancy and/or maintenance): 12,025

Est. capital gain @ 5% p.a.: 17,000
Est. depreciation in $: 5,000

Unrealised capital gain (or loss) in $ (calculated here as the sum of the depreciation value (est. $5,000) plus the difference between the interest paid ($13,600) and the yearly rent income ($12,025) which in this scenario is $1,575): 6,575

Negative gearing value in $(calculated here as an estimate using the top income bracket of 37% on the unrealised capital gain/loss of $6,575): 2,433

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After the above calculation, I would end up with an actual net position of -$858. Does it mean that if this scenario happened exactly as it is shown, I would pocket $858 after a year? Is it how I interpret that? Does this provide me with a fairly good framework to think about it?

Apologies for so many questions and for the time in reading this until here. It'd be great to get your views on this. Thank you!
 
My brain hurts reading that.....can you rephrase it.

Seriously though, if you want to contact me via skype feel free and we can chat in real time to help you out.
 
Does it mean that if this scenario happened exactly as it is shown, I would pocket $858 after a year? Is it how I interpret that? Does this provide me with a fairly good framework to think about it?
Yes, you would be $858 cash better off after completing your tax return with those exact numbers. Obviously there are some large assumptions there.

Things that are also important are;

- You have spent $85k in deposits and costs, is this the best use of the funds?
- You have made $17k in CG, 20% ROI.

Compounding growth is where the magic is and growth never follows a nice smooth % in the short term, hence I don't like single year predictions.
 
Make sure you also do yield calculations. It's a quick way of comparing one property versus another. This has a yield at 5% assuming 52 weeks of rental or 4.8% at 50 weeks rental. This will be approaching neutral cashflow in the current interest environment ( actual cashflow will be significantly impacted by the age of the property and level of depreciation deductions that can be used ).

Some people are achieving 6% - 7% yield or more but capital growth won't necessarily be great ( depends on the area you invest in ).

Yields below 5% aren't great if you want ( or need ) the cashflow. Some people aren't necessarily concerned about initial losses if the property is a keeper and has good growth prospects.

I also keep a spreadsheet in my phone for cashflow calculations that takes into account interest costs, management fees, depreciation and tax. It's a quick and handy way of checking numbers
 
Hi Rixter, thanks for the feedback. And thank you all for the feedback so far! Really helpful! Rixter - I think I over-complicated a bit so let's try again :) Please see below an simplified example (and yes it would be great to have a conversation):

Scenario: 340K property giving 340 pw rent
Loan amount = 340 x 80% = 272K
Mortgage interest = 272 x 5%= $13600
Assuming 15 weeks of rent goes on expenses and vacancy, rent received = 340 x 37 week = $12580
Hence, loss = 13600 – 12580 = $1020
Depreciation = 5000
Paper loss = 1020 + 5000 = $6020
Cash back from tax @37% = 6020 x 37% = $2227
Cash in my pocket = 2227 – 1020 =$1207

It sounds too good to be true. Where did I get wrong?
 
Where you got it wrong is choosing a set of numbers that only tell one possible scenario. Try varying the key assumptions to make sure it still tells a story that you are happy with.

We also have no idea whether $5,100 is a reasonable figure to put on your holding costs. With 2 weeks of vacancy ($680) that leaves $4,420 to cover; rates, insurance, repairs, (strata if relevant) ...

Also, call me a purist, but the tax situation considers all of your income and all of your deductible expenses. If it were up to me I'd be doing the calculation holistically, such as;

Non IP income + forecast IP income (as others have said use 50 weeks) - forecast deductible cash expenses - forecast deductible non-cash expenses (depreciation) = taxable income. Talk to your tax accountant.

So, my advice is to model with a set of assumptions - perhaps a pessimistic, average and optimistic set of assumptions and then get a tax accountant to look at your specific circumstances.

By the way, it is good that you are doing the modelling and testing your thinking. Ultimately you will make a good decision I'm sure.

Trev

Trev
 
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