Hi All,
I have the next case scenario for comments:
IP = $230.000
You put $85000 from your pocket
Loan = $145.000 for 30 years 8% interes(Just a number)
Rent received after commision =
$230p/w x 52weeks= $11960 – $2500 (costs) = $9460
Loan Repayments = $1064p/m x 12months = $12768Let’s assume you are in the 30% tax bracket.
As you receive rent, you have to pay tax for it =
$9460 * 0.3 = $2838And you have a tax deduction for your repayments=
$12768 x 0.3 = $3830.4Totals = $9460 + $3830.4 – $12768 – $2838 = -$2316
So, my point here you can have a 37% equity in your IP and you are still paying money out of your pocket.
This is a very clear Brisbane example, this includes real unit prices and rent.
Now, Brisbane prices are stank or are going up 1% or 2% that means = $235000 x 1.01 = $237350 which means $2350 profit but you are paying -$2316, so you end up getting only $34 a year for your $85000.
I believe is better to invest that money somewhere else for 5% saving account or 10%-20% sharemarket.
Saving account return = $4250
Sharemarket 10%= $8500Any comments, why people is still investing in the property market with this conditions.
WB
WB
Your scenario is simple in ideals but has also forgotten a couple of important issues concerend with property investing:
1) Building Allowance Write Off’s
2) DepreciationBoth these are non cash items but will dramatically effect your Taxation position.
Secondly 10% PA is not that great in the markets when most achieved more than this year. As an ex derivatives trader from way back i can assure you that those returns can be made in a day but also lost in the same time period.
Property is considered by many as something they can see and touch in the way of an investment. Prices were not effected in Brisbane after Sept 11 although World markets were and can be a lot more volatile.
Over time property has certainly proved to be a good long term investment. The entry and exit costs maybe be higher than the markets and the on going service costs i.e land tax, rates etc maybe reduce the net returns but over time the capital growth makes up for this.
Correct loan structure and set up can reduce the interest burden on your IP and put you in a better position to launch into the next investment whatever that maybe.
A mix across the board is surely a wiser option that putting all of your eggs in the one basket.
Cheers Richard
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Hi Richard,
Thanks for your comments. I agree the sharemarket is giving 20%-30% for the last 2 or 3 years. The 10% was the most conservative example.
Now, questions:
How many years do you depreciate a house or unit?
Do you depreciate from the date you buy or the date it was built?WB
I must say I agree with ‘Qlds007’ I do not think that your analysis is complete. Depreciation is a very important component to look at when purchasing IP. There are varieties of loan products that probably better serve your purpose of building equity faster and turning your property into neutrally geared. Now days the banks competing within themselves to get a bigger share of the market and offering 0.7%-0.8% off the current STD rate, reducing your interest repayment can change your position faster.
Need more information or personal analysis, just email me via this forum.Regards,
ES
Hi Clones,
I am far from an expert in all markets, however with a little equity you can purchase a cash positive property with someone elses money, cash on cash return can be huge. Also can use equity and gear on trading markets but probably not more than 50 or 60% – cash on cash return much lower. A company can go bust and dissapear up its proverbial, property may stagnate, even reduce in value a few % but over time is possibly more stable. remember – cash on cash return.
Steve BHi WB,
You’ve picked a shocker of an example of the ‘property market’. Buying a bag of lollies down the corner shop would be a better investment than what you have proferred. Whatever supports your argument hey ??
What about this with your 85K cash;
Purchase a small shop for 283K
Your 85K is the 30% deposit
Borrow the other 198K (70%)Tenant signed up for 5 yrs on 10% nett yield.
Borrow funds at 7.2%
Income is 28K p.a. Only expense is interest at 14K p.a.
Cap growth of 10% p.a. = 28K p.a.
Your 85K p.a. has now earnt 42K p.a. = 49%.
None of these numbers are hard to achieve where I’m scratching around, but if you are trying to achieve them with some average smo house in Qld, well then I would tend to agree with you.
We pulled the plug on our share investments last year. Happy to miss out on the 20% plus that they’ve done this year.
Plugged the equity into props and wound up the scale – that’s the key right there if you missed it – and given recent figures, making far more dosh in the prop market. More headaches I agree in the prop side of things, but hey – we don’t mind putting up with headaches to be in control of our assets.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Originally posted by Dazzling:Hi WB,
You’ve picked a shocker of an example of the ‘property market’. Buying a bag of lollies down the corner shop would be a better investment than what you have proferred. Whatever supports your argument hey ??
Hi Dazzling,
As you said, it is a shocker of example but it is the current market in any unit or small house in Brisbane. I can’t imagine why people are still investing with these conditions. I mean I understand people saying that is more secure and all that stuff but being happy with a 1% or 2% return/year is a shocker as that is eaten by inflation.
I am no familiar with commercial property and no really interested in, but looks it is the only kind of property investment today.
Regards,
WB
Originally posted by esaar:I must say I agree with ‘Qlds007’ I do not think that your analysis is complete. Depreciation is a very important component to look at when purchasing IP. There are varieties of loan products that probably better serve your purpose of building equity faster and turning your property into neutrally geared. Now days the banks competing within themselves to get a bigger share of the market and offering 0.7%-0.8% off the current STD rate, reducing your interest repayment can change your position faster.
Need more information or personal analysis, just email me via this forum.Regards,
ES
Hi Essar,
I changed the example for your interest rate level, let’s assume a 5% interest (very hard to find but possible)
IP = $230.000
You put $85000 from your pocket
Loan = $145.000 for 30 years 5% interestRent received after commision =
$230p/w x 52weeks= $11960 – $2500 (costs) = $9460
Loan Repayments = $779p/m x 12months = $9348Let’s assume you are in the 30% tax bracket.
As you receive rent, you have to pay tax for it =
$9460 * 0.3 = $2838And you have a tax deduction for your repayments=
$9348 x 0.3 = $2804.4 (This has changed as less interest paid)Totals = $9460 + $2804.4 – $9348 – $2838 = $78.4
So, my point here you can have a 37% equity in your IP and you are still paying money out of your pocket.
This is a very clear Brisbane example, this includes real unit prices and rent.
Now, Brisbane prices are stank or are going up 1% or 2% that means = $235000 x 1.01 = $237350 which means $2350 profit but you are paying -$2316, so you end up getting only $2428.4 a year for your $85000. (2.85% return)
WBII
Originally posted by Qlds007:WB
Your scenario is simple in ideals but has also forgotten a couple of important issues concerend with property investing:
1) Building Allowance Write Off’s
2) DepreciationBoth these are non cash items but will dramatically effect your Taxation position.
Just a reply from a previous comment, I do not think you should invest in IP thinking about depreciation:
Truth #2: The dangers of depreciation
Buying a property based on depreciation benefits is dangerous and deceptive.
Depreciation is an accounting term used to describe the wear and tear of an asset that occurs over time. In practical terms, depreciation on a property refers to the carpet wearing down, the walls becoming chipped or stained and the furniture dating.
In most new properties you are allowed to claim a tax deduction for the depreciation of the fixtures and fittings and in certain circumstances you may also claim a building write-off of either 2.5 per cent or 4 per cent of the property (not land) value too.
Slick marketing companies sell the notion of the taxman paying off your property using depreciation and building write-off deductions, but this sales pitch is quite deceptive because you don’t avoid paying tax with depreciation, you just defer it.
Commonsense suggests that depreciating an appreciating asset like property will give you a tax deduction today, but you’ll have to repay it in the form of capital gains tax at a later date when you sell.
‘Bracket-creep’ issues can catch out many taxpayers too. If you earn $50,000 when you buy the property you will only be able to claim a deduction for depreciation at 43.5 cents in the dollar, but if your income rises to $60,000 when you sell then you’ll need to repay the depreciation at 48.5 cents in the dollar.
If you don’t ever plan to sell the property then at a minimum you should recognise that your depreciation tax deduction represents the wear and tear on your asset that will need to be eventually refurbished in order to continue attracting quality tenants.
Finally, beware any financial model that allows for depreciation benefits but does not include a maintenance budget. You cannot have depreciation without an expectation of repair costs – even new properties still need tap washers replaced.
WB
Couldn’t agree more clones.
The residential market operates in a spectrum but your example is by no means an extreme. In fact not uncommon.
The marketing of properties involving depreciation and “tax benefits” from negative gearing is of concern. The aim of investing is to make money, not to lose it, even if up to half of those losses are returned by way of tax deductions. Depreciation is a furfy because it diminishes the cost base resulting in a higher capital gain at the time of sale.
I understand the arguments about capital gain in the long term, but that is unpredictable and there are a lot of people who purchased units off the plans with that idea in mind, who are now in dire straits.
Good educational posting clones.
pr
Most people I know who buy and hold property plan to hold for 5-10 years maybe more.
It is easy to compare shares to property in any single year and note that they are 20% in 2005. Shares are historically more volatile and could go down 20% next year easily.
But the strategy from many seasoned property investors for buy and hold properties is to buy WHEN you can, as the long term will prevail.
What were house prices 20 years ago? What do you think property prices might be in 20 years.
Listen, shares can be a great investment, but you aren’t really giving investment property a fair go comparing over 1 year!
You don’t have to expertly pick the top and/or bottom of the market to make good money from property.
There is bargains in every market! Like OTP apartments where a vendor overpaid a couple of years ago, looking short term and now has to sell in a hurry……[devil]
Live, Learn and GrowLifexperience
Originally posted by lifeX:Most people I know who buy and hold property plan to hold for 5-10 years maybe more.
It is easy to compare shares to property in any single year and note that they are 20% in 2005. Shares are historically more volatile and could go down 20% next year easily.
But the strategy from many seasoned property investors for buy and hold properties is to buy WHEN you can, as the long term will prevail.
What were house prices 20 years ago? What do you think property prices might be in 20 years.
Listen, shares can be a great investment, but you aren’t really giving investment property a fair go comparing over 1 year!
Live, Learn and GrowLifexperience
Lifexperience,
As you said, one year comparison is no fair. So check the next article about investment options and how they compare Listed Property, Shares and investment property.
http://www.asx.com.au/investor/shares/news/russell_-_asx_investment_report_2004.htm
Key highlights – Investment returns for 10 years to December 2005:
For the top marginal tax
Australian Shares – 9.2% pa
Listed Property – 10.0% pa
Residential Investment property – 8.4% pa
Fixed interest 4.4% paFor the lowest marginal tax rate:
Australian Shares – 11.6% pa
Listed Property – 12.3% pa
Residential Investment property – 10.6% pa
Fixed interest 6.7% pa20 years to December 2005:
Depending on marginal tax brackets:
Australian shares produced the best returns ranging between 13.5% and 11.6% per annum
Residential investment property with returns between 11.7% and 10.2% per annum
Listed property 11.5% and 9.5% per annum.
Clones
They would all appear to be good investments.
Both have their pros and cons.
For me, I am still putting a large percentage of my investments towards property as personally the ability to easily borrow 95% of property from the bank and also the ability to increase the value of the property with a little elbow grease and extra yards from my self. Even in a flat mark
Although I understand Margin loans for shares are now becoming more widespread, Out of interest What percentage LVR can you get at the moment clones?
The article was good and gave a fairly balanced view of the different events, considering it came from the ASX.
I like the first line of the article
Russell Investment Group – ASX Investment Performance Report
The ASX Investment Performance Report by Russell Investment Group found that, for the 10 years ended 31 December 2004, listed property has outperformed all other investment sectors.
Interesting you must admit, that they still gave listed property shares such a good rap. Maybe property aint that bad, eh?
cheers.[
]
Live, Learn and GrowLifexperience
Hi Clones,
Where to begin? For those of us who have a passion for property there are so many ways to make money out of it it is hard to understand why others don’t see it. So I suppose it is all about perception.
Sure you have the tax advantages and the higher gearing ratios but what about the ability to add capital value to your investment by way of improvements or increasing the yield.
What about making money when you buy through negotiating a discount off the purchase price (cant really do that with shares).
Cheers
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Originally posted by lifeX:Interesting you must admit, that they still gave listed property shares such a good rap. Maybe property aint that bad, eh?
cheers.[
]Lifexperience
That is correct, but also property is not the only investment option out there that can give you a good return in the long run.
I also believe that shares will performe better than investment property in the next 5 years. Eg. most of the banks are yielding 7% to 8% only in dividends. However, the same time we need to give thanks to those property investors that are paying large repayments every month.
It is a balance between different options.
Clones
]
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