Hi,
I wrote this for the book but it won’t make it in the final cut.
Have a read and then try to answer the multi-choice quiz at the bottom.
When you talk about making money from property it’s reasonable to expect that most investors would immediately think about capital gains. These profits occur from appreciation in the value of real estate values over and above:
I. Your net purchase price (purchase price plus closing costs); PLUS
II. Any net negative cashflow (the difference between cash received and cash paid).For example, imagine you found a property for sale that had much sought after water views which the agent says should secure above market capital appreciation.
The asking price is $400,000 and the rent is $300 per week. Last year’s ownership costs (rates, repairs, insurance etc.) were $2,850. Assuming you borrowed 80% of the purchase price at 7% interest-only finance, your projected annual net cashflow would be as follows:
Purchase Price $400,000
Cash Needed
Deposit [Note 1] $80,000
+ Closing Costs [Note 2] $20,000Total Cash Needed $100,000
Annual Cashflow
Rent Received [Note 3] $15,600
– Interest [Note 4]($22,400)
– Ownership Costs ($2,850)Net Annual Cashflow ($9,650)
Note 1: 20% of purchase price.
Note 2: Assuming 5% of purchase price.
Note 3: $300 × 52 weeks
Note 4: (($400,000 × 80%) × 7%)At the end of the first year you organise a sworn valuation which says that the property has risen by 9.5% and would fetch $438,000 if sold today.
OK… time for a test. Assuming you’d have to pay sales costs and commission of 2.5% of the sales price, what is the amount of your net pre-tax capital gain/(loss) after year one?
FIRST CORRECT ANSWER (WITH FULL WORKINGS) WILL RECEIVE A PERSONALLY DEDICTAED COPY OF MY UPCOMING SECOND BOOK!
a) $38,000
b) $28,350
c) $18,350
d) $17,400
e) ($2,600)What’s your answer and why?
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Answer = E
After paying all expenses, allowing for the negative cashflow and selling costs, the return on the initial 100k is a loss. Obviously tax deductions and depreciation were not used in my calculation as they were not provided in the example.
I should also mention that after reading SIS’s post below that I do not agree with any answer. I just find answer E to be the closest to my answer.
Workings…
$438,000 (Sale Price) less 2.25% (Selling Costs) = $428,145
$428,145 less $9,650 (Negative 1st Year Cashflow) = $418,495
$418,495 less $320,000 (Initial Loan Amount) = $98,495
$98,495 less $100,000 (Initital Cash Put In) = –$1,505
Hi Steve,
my answer is none of the above but, $28,145.00
my reason being is… your question is…
OK… time for a test. Assuming you’d have to pay sales costs and commission of 2¼% of the sales price, what is the amount of your net capital gain after year one?
thats assuming you did sell that property at the sworn valuation, then again this figure would be acutally lower, because we have accounted for a 50% CGT discount.
there is also then a unrealised profit (an IOU) of $14,072.5, yet the other 50% will still be subjected to the income taxable threshold the personnel falls in.
but, if we were to minus owner expenses cost ($9650.00) from the net capital gain of $14,072.50 (which is a true IOU)would equal profit of $4422.50, though again this figure could be greater due to the other $14,072.50, being taxed at the applicable tax threshold.
pls note, my answer has not included an overall position, minusing tax deductions and interest cost incurred.
Cheers,
sisGuys…
Try to work out a solution that gives one of the answers specified. I’m after the pre-tax capital gain.
If you can nut it out then include your workings in the answer.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
Workings below,
$438,000 (Sale Price) less 2.25% (Selling Costs) = $428,145
$428,145 (Sale Price less Selling Costs) less $400,000(Purchase Price) = $28,145
$28,145 minus 50% CGT dis. = $18,495
$18,495 realised profit less $9,650 (owners cost (-ve cashflow)) = $8845.00 Groos Profit (withholding the subjected tax threshold.)
$8845 **then subjected to the taxable threshold**
the other closes answer i can get to your answers steve is,
** Net Annual Cashflow -$9,650 minus $9855 (2.25% Sales Cost) = -$205 with the exemption of capital gains added in.
Cheers,
sisps.. i know, im no where near any of your own multipile choice answers… but is there any extra details that could be added, to allow us, to get a closer or an exact answer of one of your multiple choice answers.. thanks if you can
Cost = $420K
Sale = $438K – $9855 = $428145Yearly cost = $9650, so Sale – Cost – $9650 = $-1505.
Steve, how did you get your figures?
Cheers
MelHi Steve
Very interested to know how you arrived at your figures as I also got the same as Mel -1505. Have tried a number of times in varying ways and always comes out the same.
I am new to all this and very keen to learn the finer points.
Cheers
how about these figures,
$438,000 (sale) – $9855 (Sales Cost) – owners cost ($9650) – $420,000 (Full Cost) = -$1505
Cheers,
sisSteve, is the sale price the $438K? I note the valuation says it would sell for that, but you don’t actually specify sale price….
Cheers
MelI didn’t say it was easy!
All the info you need is there.
Keep trying…
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Ignoring the $20K costs to start with
b) $28350.
You have not said that we have sold it, so it’s $38K – annual costs.
Or
c) $18350.
Again, we haven’t sold it, so it’s $38K – annual costs, minus another $10K cos we paid somebody 50% interest to borrow the other $20K to cover our costs!!
Cheers
MelSteve,
If you mean (sale price) minus (purchase price plus closing costs) less (negative net annual cashflow), the answer is $8,350. Are you certain C should be $18,350 and not $8,350?
Sales costs and commissions cannot apply in the answers provided because no answer allows for the $9,855 or the last number would be a 5.
I get the answer to be E
Initial Purchase Price 400,000.00
Plus : Closing Costs 20,000.00
Plus : Selling Costs @ 2.5% 10,950.00Cost Base of Asset for Tax Purposes 430,950.00
Sales Proceeds 438,000.00
Capital Gain 7,050.00
Note : Not subject to 50% CGT
Discount as held for less than
12 monthsLess : Cost of Property for 12 months 9,650.00
Amount included in Assessable Income -2,600.00
aussiemike, sales costs are 2.25%, but other than that you got closer than the rest of us…
Cheers
MelBINGO!!!
(and D’oh! The sale costs should have been 2.5% rather than 2.25%… sorry [dazed])
Congrats!
Please send brent an email so he can send you out a book when it’s ready.
Stay tuned for the next quiz coming soon…
Bye,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Mike, don’t those selling costs apply to a property that sold for $486,666.67???
2.25% of $438,000 = $9,855, not $10.950.
Have I missed something?
Well????
Can you explain the answer??????????????????????????????
not sure about anyone else, but 2.25% of $438,000 = $10,950?
where did that come from?
It is only your thoughts that create your future – Be careful what you think!
so…. aside from a little bit of afternoon fun, the moral of the story is that capital appreciation must be over:
1. Purchase costs;
2. Holding costs;
3. Any negative cashflow; and
4. Inflationin order to provide a genuine profit.
(Apologies again about the slight mix up with the sales costs, the original question should have read 2.5% rather than 2.25%… [blush])
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
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