I would like to be a first timer investor. I spot appartments in small town in NSW (population about 8,000). with the price range of 65,000 – 70,000 and rental income 110 – 120 per week.
is it a potential good investment?
Quick calculation for you;
Assume purchase price of $70k
Add 6% for purchase costs. – $76k
Assume interest rate of 7.5% interest only (current market rate) – $107 p/w (not including bank fees)rent – $120 p/w
Allow 20% of rent to be eaten up by holding costs, 1 month vacancy – $96 p/w NETT RENT.Initial cashflow = -$11 per week.
These figures don't factor in bank fees and interest rate changes.
6% purchase costs are approximate but generally over estimate the actual cost by a little bit.
20% of rent is also an over-estimation, but it is a good guide to use to eliminate nasty surprises.
Tax return has not been considered.The nett result is theses properties are not pos geared, but probably would be pos cashflowed AFTER TAX. If they are built after 1987 there will be on-paper deductions to improve your return.
The other thing to consider is there may not be much cap gain in a small rural town of this size. Also, there is very little land content in apartments. You may do better to buy a house, townhouse or villa unit with some land.
You would want a better rent return if there is not a lot of cap growth. Maybe there is an increase in population forecast for the town, or improved infrastructure etc? What is the future for the town?
Here is an extract from our info brochure regarding positive and negatively geared properties: If you ignore our marketing terms, the arguement on both sides may be useful!
The concept of generating positive cash flow income through property has been an area of contention amongst industry experts for many years. The argument is one of risk and exposure on both sides of the equation. Buying Positive Cash Flow PropertiesDue to the recent property boom in Australia, properties producing a positive cash flow at purchase tend to be older-style houses located in low growth, low demand (usually rural) areas. This exposes the investor to risks of higher vacancy rates, higher repair and maintenance issues and a high exposure to debt that can only be offset against minimal equity generated in the property over time. This could be particularly risky in a market of rising interest rates. For example, a unit purchased in rural Alice Springs for $90,000 may achieve $200 per week in rent but in five years time if there has been no significant growth in Alice Springs, the investor still has a $90,000 exposure to debt. If a similar investment property is purchased in a higher growth area however, the same $90,000 property may be worth $160,000 in five years time therefore minimising the investor’s risk.
Negative GearingBecause market rents have not increased as much as property prices in the recent up-market, properties that are poised for good capital growth generally have low rental incomes in relation to their value, or are negatively geared. That means that the investor must find a means to fund the shortfall between income and expenses related to the property. Although negative profits relative to investment properties can be used to gain a tax advantage on other income, the property still achieves an overall loss which does not make financial sense. The rationale behind the negative gearing strategy is that the investor purchases a negatively geared property with a speculation that in a certain number of years, capital appreciation in the property will outweigh all losses incurred during that those years, resulting in an overall profit for that property. Most properties in high growth areas will appreciate in value given enough time; however, it is difficult to speculate exactly how long is required. In the meantime, money paid into funding negatively geared properties not only reduces the investor’s lifestyle, but also their serviceability when it comes to financing. That means that most investors (even those on high incomes) can only service at most, four or five properties in a negative cash flow situation. Balance is the KeyA successful wealth-creating property portfolio has a balance of positive and negative geared properties. Positive cash flow generated using our Let-Sale™ system can be used to service high-growth negatively geared properties meaning that your portfolio can grow faster and property acquisition can be achieved irrespective of your income.
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