All Topics / Help Needed! / Good or Bad return , Number crunching /opinion /help

Viewing 20 posts - 1 through 20 (of 23 total)
• kaus
Member
@kaus
Join Date: 2004
Post Count: 14

Hello folks

I am on gross \$35K after salary sacrifice, partner casual gross 28K, i bought IP in Lidcombe sydney in late 2003 for \$430K + expenses=\$450K total cost with 100% loan.

Currently i get rent \$275p/w , current value of IP is \$400K , it is run down , no improvement can be done except re-build house.

My question is,

What is the return on this investment and how it is calculated? Given the rate of interest ie 9.44%
Is is worth holding it?
Yes, i can service the loan ?
I do not have intentions to live there either?

Kind regards

Sati

duckster
Participant
@duckster
Join Date: 2004
Post Count: 1,674

What you also need to factor in is what the property could achieve in capital growth in the future as at the moment you have lost \$30,000 in capital value over five years. This may be handy if you want to claim a capital loss against another capital gain you may have made in your tax  return if you did sell it.

It is important to factor in the cash flow

Interest on 450,000 loan per year = \$42480 divide by 52 for weekly figure = \$816 (you did not give interest cost so this is guess)
So your tax rate most likely is 30%
So taking \$275 rent minus 816 minus 40 for expenses is -581 a week
Income loss of \$581 *.70 = -\$406 (This is what you would be paying per week after tax refund of \$174 per week
So from a cash flow view point ROI = -\$406*52 / 450,000 *100
ROI = 4.7% (Notice the negative figure) This doesn't take into account the \$30,000 capital loss incurred
Ideally you may want to try and reduce the loan over time so that your ROI can become positive. As it is hard to purchase a property in the current property market that will create a positive cash flow from day one.

When the ROI = + value it is known as positive cash flow.

When a property is negative cash flow most investors are hoping that the capital value increases more than the negative cash flow taking also into account the capital gains tax implications if they sell the property.

As an exercise lets factor in the \$30,000 loss over five years as say a \$6000 a year capital loss

So ROI for last five years is
Interest on 450,000 loan per year = \$42480 divide by 52 for weekly figure = \$816 (you did not give interest cost so this is guess)
So your tax rate most likely is 30%
So taking \$275 rent minus 816 minus 40 for expenses minus 115 for capital loss is -696 a week
Income loss of \$581 *.70 = -\$406 (This is what you would be paying per week after tax refund of \$174 per week
So from a cash flow / capital loss view point ROI = -\$406+115 *52 / 450,000 (you can't claim capital loss against wage income)
ROI = – 521 /450000 * 100

ROI = 6% (Notice the negative figure) This takes into account the \$6,000 capital loss incurred per year
Is it worth holding ?
Depends on if you keep losing \$6000 a year in capital gain (hard to predict , the market could change over long term)
Depends on if you intend to pay off the loan thus changing the cash flow over the long term

I can't give you advise on whether to keep it or sell it as that is giving financial advice which I can't give you as I am not a licensed financial planner.

Chris White
Participant
@chris-white
Join Date: 2006
Post Count: 65

Not sure if you use the PIA software (property investment analysis)  – from somersoft.com.au.

This will provide you with a cash flow analysis and various returns (IRR and NPV) which factors in the cash flow and assumed capital growth of the property.

You may find this useful in creating what-if scenarios and models.

Chris White | Pillar Property
http://www.pillarproperty.com.au/
Email Me | Phone Me

The Property Investment Specialists

kaus
Member
@kaus
Join Date: 2004
Post Count: 14

Hi duckster

Thanks for so quick response, cal you please clarify this bit

"Income loss of \$581 *.70 = -\$406 (This is what you would be paying per week after tax refund of \$174 per week"
i understand \$581 income of weekly loss but unable to get .70 and \$174 one

kind regards

Sati

amsjerm
Participant
@amsjerm
Join Date: 2007
Post Count: 9
kaus wrote:
Hi duckster

"Income loss of \$581 *.70 = -\$406 (This is what you would be paying per week after tax refund of \$174 per week"
i understand \$581 income of weekly loss but unable to get .70 and \$174 one

This assumes your at the 30% income tax bracket.
Since it's a -ve geared property, the government shares the loss with you via taxes. (ie. they tax you less)
The government takes 30% of the loss, and you take 70%. That's where the 0.7 comes from.
What you have out of pocket is really 0.7 * \$581 = \$406.

Hope this helps.

Cheers

kaus
Member
@kaus
Join Date: 2004
Post Count: 14

Thanks a lot amsjerm and duskster

Sati

Event Horizon
Member
@event-horizon
Join Date: 2008
Post Count: 90

Doesnt sound like a good investment choice im afraid….. yes sydney markets rocky since the end of the boom in 2003/04 but you should have made at least 15-20%  gain since late 2003 if you bought well…. I would need to be convinced otherwise if you think there are good fundementals for growth on your property in the future….There are definitely far better investment opportunites out there interms of future growth and rent return……..

If you hold you should consider improvements, you said its run down so why cant to do a cheap tart up, and increase your rent with vacany rates so low… are you near the station, surely you can ask more… even just painting inside and out may make a difference whether you sell or hold. think about it…

suggest investigate getting a better loan product you should be able to get around 8.6% if you shop around, that will make a big difference to your finances.

Scamp
Member
@scamp
Join Date: 2008
Post Count: 297

Kaus : Well , at least you can smile and think : "I made someone else rich at my expense"
The longer you keep your 'investment' property ( excuse the pun ) the more money you will lose.
I'm afraid you were suckered into something you didn't understand, and you will need to pay the price for the lesson learned.

At least the spruiker you bought the house from at the huge (overpriced) houseprice got rich from your mistake, so it's not all gone bad : Smile and think you made someone happy ! Don't put your hopes on selling the house because in this market noone really can buy any houses. I'm not sure you heard about credit crisis, 10% interest rates or high oil prices ? Well anyway, there's the high food prices which you must have heard of, or the inflation which nibbles away at people's money.

Don't worry, you're not the only one : There's 900.000 people like you today, and that number is increasing by 30.000 every week, maybe you should start a club and raise money ( I really mean, raise even MORE tax payers money than you greedy 'investors' are already getting ) to pay for your foolishness and greedyness ?

god_of_money
Participant
@god_of_money
Join Date: 2008
Post Count: 970

I would be thinking about selling..
Bleeding A\$ 6000/year with mortgage rate climbing to almost 10%… you could bleed more.
The property market in Lidcombe is not looking good either…

You also need to factor in that your combined income is A\$ 63k (i.e. rising petrol, rent, food etc)… so basically it probably has reached  saturated point… and you may need to cover some ongoing running cost to keep your property alive as well.

Consider selling… but seek independant advice

Cheers

devo76
Member
@devo76
Join Date: 2007
Post Count: 542
Scamp wrote:
Kaus : Well , at least you can smile and think : "I made someone else rich at my expense"
The longer you keep your 'investment' property ( excuse the pun ) the more money you will lose.
I'm afraid you were suckered into something you didn't understand, and you will need to pay the price for the lesson learned.

At least the spruiker you bought the house from at the huge (overpriced) houseprice got rich from your mistake, so it's not all gone bad : Smile and think you made someone happy ! Don't put your hopes on selling the house because in this market noone really can buy any houses. I'm not sure you heard about credit crisis, 10% interest rates or high oil prices ? Well anyway, there's the high food prices which you must have heard of, or the inflation which nibbles away at people's money.

Don't worry, you're not the only one : There's 900.000 people like you today, and that number is increasing by 30.000 every week, maybe you should start a club and raise money ( I really mean, raise even MORE tax payers money than you greedy 'investors' are already getting ) to pay for your foolishness and greedyness ?

Wow thats harsh. A couple decide that they dont want to spend there retirement  dependent on a government pension and decide to maybe buy a Property as a retirement nest egg. And they are branded foolish and greedy. I better ring my pop who done exactly that and tell him how greedy he is. It would have been much more noble of him to just live of a pension.

That said yes you do sound like you are in a bit of a bind.Dont make any rash decisions. Just take on the info available here and then maybe seek some proffesional advice as the wrong choice in your position may cost you dearly.

Scamp
Member
@scamp
Join Date: 2008
Post Count: 297

Devo : It sounds harsh but it seems like some people have a thick skull. Their wrong choice was ALREADY made. They are in deep shit already, they have no clue how deep they are in. They should be panicking and SELLING their mistake before they get foreclosed on and go bankrupt. If they lose their car, their mobility and their ability to work, they will get in even deeper.

Advice like : "Seek advice" only costs them more money than they already own. It's CLEAR they need to sell.
There's no other option. Well yes there is another option : Both of you get a high life insurance and roll a dice, if you understand what I mean.

newbi2
Member
@newbi2
Join Date: 2008
Post Count: 227

Kaus,

Dont fret about Scamps comments. He likes to be the big orge and scare monger everyone. Occasionally there is apoint hidden in the BS somewhere but …………….

Well done on putting the question to the forum and I wish you well with the outcome.

Mick

clubhonda
Participant
@clubhonda
Join Date: 2008
Post Count: 29

[/quote]

Wow thats harsh. A couple decide that they dont want to spend there retirement dependent on a government pension and decide to maybe buy a Property as a retirement nest egg. And they are branded foolish and greedy. I better ring my pop who done exactly that and tell him how greedy he is. It would have been much more noble of him to just live of a pension.

That said yes you do sound like you are in a bit of a bind.Dont make any rash decisions. Just take on the info available here and then maybe seek some proffesional advice as the wrong choice in your position may cost you dearly.[/quote]

This is personal, but I don't believe there is any real value in such a thing as "professional advice". In general the more people know about a particular technique, the less useful it becomes (think -ve gearing). If they are so good, they would have done whatever they did quietly and made a ton of money themselves. I still think that the best way to invest is to always do as much homework as you can and form your own analysis. When you reach your own conclusion, to act on that. If someone says that they're not smart enough to understand a particular investment vehicle, then they shouldn't be touching that in the first place.

Tony B
Member
@tony-b
Join Date: 2008
Post Count: 130

Kaus / Sati

Im not meaning to be too critical here, but you have borrowed \$450,000 in late 2003 its now 2008 dont  you think its a bit late to ask the question bellow.

What is the return on this investment and how it is calculated? Given the rate of interest ie 9.44%

May I ask why you brought it if you are not able to do the simple ROI calculation?  Im sorry  to say but I feel for you, this to me is not a good investment

Gross Rent @ 275 p/w = \$14,300 p.a. less your running costs, rates, agent fees, maintainance, vacancy etc. say \$40.00 p/w. = 12,220 this is a 2.71% return on the \$450,000 before the cost of your finance 9.44%. On an intrest only loan its \$42,480 p.a. or \$816 p.w. as pointed out by duckster. I wont labour the obvious any more.

My concern is this: Why are people buying real estate with out doing any financial calculations?  Im seeing it more and more property sold for less or the same as it was brought for 2 or 3 years ago.  Is it because they are told by agents you will double your money, you can never loose on real estate, its safe as houses.  My favouret is  " its called negative gearing".
You will never make money on an investment that is sold for less than you paid for it, simple. You will not make money from rent if the rent is less than the intrest + your costs, simple. These cases are a indicator that the market will slow even go back.  Most smart investers have their money in the bank at 8.45% fixed not great but better than the above.

Sati my friend if you keep this place you may loose more money if you sell it now you will loose money not a nice place to be. Its called risk verses return. I hope you find a solution you are comfortable with. All the best.
Regards
Tony……

clubhonda
Participant
@clubhonda
Join Date: 2008
Post Count: 29

Sati,

You might have overextended yourself.

To summarize what the others have said here, the decision to hold on not is really quite simple. Do you think your property will increase in value by more than what you are losing every month and whether you can continue to service the load?

If the answer is yes, by all means hold on to it. If the answer is no, then sell it. This is really all it boils down to in a nutshell.

mpertile
Member
@mpertile
Join Date: 2005
Post Count: 55

Scamp, your kind of input doesn't help anybody, maybe except for yourself.

Do you feel better about yourself now that you've put someone else down?

Scamp
Member
@scamp
Join Date: 2008
Post Count: 297

mpertile : It does help him, I just told him what noone else will tell him : Reality.
Whether he accepts it is another thing.

Wealth Accumulator
Member
@wealth-accumulator
Join Date: 2008
Post Count: 67
kaus wrote:

I am on gross \$35K after salary sacrifice, partner casual gross 28K, i bought IP in Lidcombe sydney in late 2003 for \$430K + expenses=\$450K total cost with 100% loan.

Currently i get rent \$275p/w , current value of IP is \$400K , it is run down , no improvement can be done except re-build house.

You better hope someone wants to pay you big bucks for the land value to redevelop.  Whoever lent you the money should be shot!  Your current gross rental return is 3% take of costs lucky to be 1%, take off interest – about -8% so yes at best your getting negative 6% per annum!!

You better hope you don't get sick or the tenant doesn't leave!

I am a financial adviser -I would get sued if I had given you the advice to do what you did on your income – I would call it severely over committed – surely you would have known that they house was a write off at the start?

devo76
Member
@devo76
Join Date: 2007
Post Count: 542

My point is it would be very stupid to make a decision involving that kind of money based on a forum response from people they dont know. I say listen to the options here. Then take them to a reputable financial adviser or someone similar and see what they have to say. I believe thats the best thing to do.

god_of_money
Participant
@god_of_money
Join Date: 2008
Post Count: 970

Hei devo,

Sometimes, the forum's comments here are much better than spruiker out there…

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