pls check my figures, tell me if i'm right

[aul]

Hi, hoping someone here can check these figures are ok and my line of thinking is correct.

IP: est value 490k. using 475k as base price (15k costs if sell)
Loan: 300k
Rate used: 6.96%

300000 @ 0.0696 = $20880 int paid p.a
$430 rent (conservative) - 7% agents commission x 52 weeks = $20794.80 rent rec'd

Let's call the above EVEN.

$3k expenses - rates, water, insurance
ie. $3k loss p.a
@ 30% tax bracket, refund of about $1k.
Total cost p.a = $2k p.a

BUT:
If I sell for $475k and pay back $300k loan, I will have $175k cash in hand.
My loan outstanding on PPOR is $180k so pretty much I will have my PPOR paid off.

By not having the $175k in my PPOR, I am paying $12180 interest p.a on my PPOR.

Total cost of keeping the IP = $2k + $12180 = approx $15k.

So in view of all the above, my IP would have to grow (capital growth) by $15k p.a (3%) for me to "break even"?

Is this the way I should be thinking to see what growth I would need in my IP to break even?

 

[jrc]

THat's pretty much how I'd look at it. Your analysis doesn't take into account CGT. So for example I'd probably want a higher capital growth eg $20,000 per annum ($10,000 free of tax, $5,000 balance after $5,000 CGT).

An appropriate formula could be:

Total Return = [(End-of-the-Year Investment Value - Beginning-of-the-Year Investment Value) + Net Income] / Beginning-of-the-Year Investment Value

In this case you're saying your investment only makes sense if the return is greater than the interst rate on your mortgage. If your PPOR mortgage rate is 7% and you're paying tax at 30c in the dollar, to get an after txa rate of return of 7%, you need a pretax return of 10%

 

[craigb]

well 175k in the hand is greatly reduced as the tax on this amount needs to be considered , when you sell the ip you have kissed all depreciation predictions and the stamp you paid good bye, if you up the rent by $5 bucks only you get very close to a neutral investment.

 

[joanmc]

Don't forget to figure in your capital gains tax on your IP profit. On 175k, depending on what your wage is it could push you into a higher bracket. How long have you owned it? is it only in your name? Are you self employed? All these can make a difference to the actual amount you get to keep.

 

[aul]

hi all, thanks for your replies, as to CGT, I bought it 8 yrs ago for 435k so capital gain is not much.
Using online calculators, after costs, my so called "gain" is 15k, however, I think it will be more like $0 gain to be honest.
Take $15k as MAX gain - divide by 2 @ 30% tax = $2250.

But like I said, I would take the gain/loss to be between -$10k to +$5k.

So to me CGT is not really a factor at present. It has been a poor performing asset

 

[Marty McDonald]

Hi,

Interesting quandary. It must be tempting to get mortgage free, on the other hand no one ever got wealthy by not owning any assets.

I guess you need to look at the purpose of the IP long term and your age and weigh up whether you have enough time to make holding worth it.

Good luck...

 

[chran]

Total Return = [(End-of-the-Year Investment Value - Beginning-of-the-Year Investment Value) + Net Income] / Beginning-of-the-Year Investment Value

jrc, what is "net income" in the formula - rental income, profit if selling, or household income (wages)?

 

[jrc]

Net income is your income from the investment after expenses

So if your rent is $30,000 and your other expenses are $25,000 your net income is $5,000. If your other expenses are $35,000 and you get a $2000 tax credit you will have a net loss of $3,000. So that also needs to be taken into account.

 

[turk]

Hi aul

Your figures apply to the current year don`t forget to allow for the effects of compounding.

Cheers

Pete

 

[chran]

Net income is your income from the investment after expenses

Ah got it. Thanks for the clarification

 

[CHam]

If it were me, and based on the data you have provided, I would sell and clear the personal debt, and then use the equity on you PPOR to buy more IP's.

As long as you find positive or neutral cashflow properties to buy you will then have no requirement to pay out of your own pocket.

 

[digitald]

Let's call the above EVEN.

Have you had a property surveyor in to create a depreciation schedule for the IP? This would help to create a more positive cashflow situation for you