Hi all
Property purchase…200000
costs…………….10000
total……………210000year one…………210000
year two…………220500
year three……….231525
year four………..243100
year five………..255255So capital growth is 55255 over five years.
Now the holding costs are
Mortgage interest only 210000 @ 7% 14700
rates management etc…………….3000
total…………………………17700
17700*5=88500So in five years it has cost 88500
capital growth@5%…………55255
Loss is…..-33245Now does one take into account the
rent
depreciation
tax deductability
etc to calculate the how ell the property is performing.eg.
rent…200*52=10400*5=52000What i am trying to get too is this property worth holding and what calculations should i be doing.
cheers
alfGood figures Alf, there is no right or wrong answer for this one regarding holding, I think it depends on your investing goals and desired outcome. If you have other properties that are similar and you’re in a position to hold this property, why the hell not? Good Luck G7[biggrin]
Hi
Thanks G7 for the reply. This is a hypothetical.
At times i have seen investors say they have sold because the property hasnt performed. I guess the question is on what calculations would this be assessed.
eg capital growth little growth v outgoings
as i have indicated are all the benefits of the investment thrown into the pot do assess the actual cost and see how this weighs up against the assumed growth.
regards
alfI would atleast use the rent in the calculation, it seems a bit onesided to use the outgoings like management fees and not include the rent on the incoming.
As an example of an underperforming asset, we’ve just sold one property that to our way of thinking hasn’t performed.
It has averaged 16% CG per annum over the last four years & positively geared the entire way (we did put 20% down). It is dual zoned for commercial use as well as residential, 20 seconds from the local shops & playground and only four years old (bought new).
Why sell it?
It’s the worst performer in our portfolio.
It has a high tenant turnover (average 8 months) – telling us the location isn’t great (partially because the shop bins are only a few metres away & the’re a lot of traffic with cars visiting the shops).
The CG while positive is unlikely to continue through the slow times over the next five years (I expect it will go backwards). It also has the lowest CG of any properties in our portfolio over a four year timeframe.
It’s a medium density townhouse with strata (strata can become an issue – nice to avoid) & in an area where there’s the potential for increasing medium density housing to be built – in fact many newer places are already coming onto the market.
Finally (and most importantly) we can make a higher return with the cash elsewhere.
Cheers,
Aceyducey
In theory, there is no difference between theory and practice. But, in practice, there is.– Jan L.A. van de Snepscheut
If you belive the property will grow over the next 5 yrs – then keep it. Growth is the key.
This is how I would justify it over a 5 yr period.
Growth is $55255
Rent is $52000
Costs are $88500
Nett Costs $36,500
Tax benefits (assume highest tax rate) approx $18250 ($36500 * 50%) ie. a fat tax refund every yr of $3650.
Depr – lets assume $1k per yr. Could be more or less. So that $5k.
Total holding costs = $52000 – $88500 + $18250 + $5,000 = $13250.
Growth as projected = $55255
Increase in equity = $55255 – $13250 = $42005.
So roughtly in 5 yrs time
Property is worth = $255255
You owe = $210000Rent may be $230 per week and you owe $210,000 and dont forget your income in 5 yrs hopefully had increased too. eg today its $45k and in 5 yrs its $55k.
So in my view if the property is placed for capital growth – then hold it.
My only other proviso is – if you cannot afford the short term hardship of $7k a year then maybe you need to sell. But in fact its only about $4k after your tax refund.
I hope this helps a little.
I read somewhere recently that if a property does not double it’s value in 7 to 10 years then it is not performing.
Does this sound correct or did i maybe misunderstand something?
Gloryboy
gloryboy,
Yep- the 7-10 year figure is usually the one use used (by Somers etc).
Alf, I can’t comment on your figures, but the question is an important one. The premise of CG is what I’m wondering about. Ya know, in 2004, if you buy a property, there might not be growth at all- for some years. I bought a property and for 4 years after I bought it, there was no growth and negative growth in the area.
I never presume growth. I may hope for it, but I won’t assume it for purchasing reasons- not in 2004, at least. So when I discuss growth properties (oh, and I do do that [blush2] ) then I guess I am talking about the kind of locations that *have* traditionally achieved growth. However, past performance is not a complete indicator for future growth. [baaa]
I think property is an *investment* meaning I put money into it. I just don’t wanna put in too much. Point of this post is… some propertiesd that are negatively geared now… may be much more negatively geared in the future if oversupply (-> static or reducing rents), and/or rising interest rates, and/or negative or no growth, occur. There was no growth in pre-boom times, in many areas, and that may occur again post-boom.
kay henry
Hi Alf,
Call me optimistic (or maybe just “old school”) but IMO property will ALWAYS grow, perhaps not in the short term, and true, it may have NIL growth for a while, but in the long term, it is bound to see an upward climb.
The real issue for most people is “time”; how long will it take to recoupe their money, and even more to the point, when it actually gives something back???
For me (as with many others) property is a LONG TERM investment, but if it is costing you too much, and by this, I mean not just in $$$ terms (but stress/anxiety) then YOU have to decide for yourself whether it is worth it.
Cheers,
Jo
Agree Monoply..
Assets + Time = Wealth
Aceyduycey, i’d be happy with the 16% per annum[biggrin]Actually over the last few years we all would’ve (have)done well
REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorHi Alf
math isn’t everything
Location?
Potential future growth?
Vacancy issues?
Maintenance issues?
Future zoning issues?If there are positives in the above, hard to see why you’d ask the question.
Cheers brahms
From the looks of it, I think if you factor in the rent, you’ll find you are well ahead.
Hi all
Thanks for your input. Intersting to see the differing opinions and ways of looking at things.
I also think property will always go up over time. Just cast your mind back 20 years ago wouldn’t you like to have owned a few more in the boom period.
cheers
alf
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