Managed Fund vs Investment Property

Ok. you are focusing on the interest but neglect to look at the money coming in.

 Just say you leave your $60K in the managed funds for 10 years. 8% (minus tax = 5.6%pa- assuming 30% tax rate).
So compounded you will have (after 10 years) $70,665.

Take that $60K and buy a house value $300K.  10% deposit + stamp duty etc.

OK you have a loan of $300K at say 7% interest. =$21K a year BUT rent will give you $18K   minus costs = $15k. So you lose $6K the first year (- tax and depreciation) should cost you $3K max in the first year BUT the rent goes up each year so after 3 years you should be cash flow neutral. So for the next 7 years the rent will more than pay your interest. The last 5 years you'll actually have money in your pocket AFTER you pay the interest.
 In the meantime your $300K property is now worth $600K (based on the assumption that property doubles every 10 years).

So instead of have $70,665 you now have $300K equity. Sure you lose some if you sell CGT but that';s still a hell of a lot more than $70K. Also you now have $20% of a property but in 10 years time you've only got just over 10% of a property making it impossible to get in to the market.

The above is very simplistic (I hope) but I think you'll get the idea.
 

Yeah sorry about that. I thought it sounded too low. I have worked the figures on 10 years.
So there would be $104K in the account. I haven't included adding extra because it's not easy to calculate the extra payments going into the mortgage or the fact that you could have used that extra money to buy a second investment property in that time with that money.

Yes I have assumed property doubles in 10 years as it's easier. Some don't, some more.
You are also forgetting that rents go up so the property becomes positive and pays itself off. Even though you have a debt it erodes over time even if you don't pay it off. I bought my first house for $60,000. Now imagine I never paid it off. Would I be happy having a $60K debt on a house that's now worth $300K. You bettya.

I have a property that I have owned for 2 years (in Sydney so not booming by any means), It has risen 48% in 2 years.
I also have not taken into account that you don't (well I don't) pay full price for property. The idea is to buy under market so you have instant equity. I have also just done a quick reno which increased my equity by $30K. So I can now draw out the money I put in and it owes me nothing. That property, by the way is now cash flow positive so it gives me money each week too. Even if it never goes up (which it will) as rents rise it will pay itself off. Then I can sit back and live off thje rent. No bank acvcount will do that.

Over time property rises more than inflation.
So on my (very basic) figures you would be ahead (if you sold).

Sell $600K minus CGT and selling costs $250K. That's $146K more than your account.

By just saving you will never keep up with property.

OK my opinion. Take it for what it's worth. The numbers are simplistic (as I said). You need to read more and educate yourself.

Another factor to consider is the returns each asset class would give you, the psychology of investing in a manged fund (or even trading), and whether or not you are comfortable with the more 'stable' growth of property against the volatile movement of the share market (although returns can be amazing in short periods) and managed funds and the more consistent income from property (historically low vacancy rates) against those of the share market. The loans and costs would be a consideration but almost secondary IMO.

I don't think the average property is a good investment in this climate. You need something special to get any gains.

Assuming you could find a good property, why not do both?

take out your cash and buy a house to live in, get the FHOG and stamp duty exemptions. Stay for 6 months, do it up to maximise valuations and rent. Then move out again but to your parents and rent the place out. Hopefully the rent will almost cover the loan.

Since you have lived in it you could keep it as your main residence and thereby CGT free for up to 6 years.

You then reborrow against it and invest in managed funds. You will now have a property growing in value and a deductible loan for the same amount of managed funds you started with – if not more.

Generally you will need 5 to 20% deposit. Maybe try for 5% and pay the LMI as that will leave more money for MF investing.

Always IO loan with an offset account.  Always pay the interest as required, and funnel extra money into the offset, which holds off the interest.  Then you either leave the money in the offset to pay the property off one day, or pull it back out to use it as a deposit on another property.

JacM – usually, but not always.

Imagine he had a loan of $300,000 and $100,000 in the offset. He wanted to buy $100,000 worth of managed funds. He could:
 A. use the money in the offset, or
 B. he could pay down the loan and reborrow it to invest.

At the moment this would not make any difference. But what would happen if he decided to move into the property and live there – say a year down the track.

If he used method A, he would be paying more tax – maybe $3,000 pa more.

Its a hard decision to make. And it is probably best to love the money in the offset as long as possible until investing.