Scenario: Personal investment $350k property – on your taxable income of $85k – 90% Loan with capitalized LMI (cash required $49,200), is cash positive after tax of $36. (interest rate used was 5.2% for first 3 years, then 7% thereafter).
I am a first time investor. The image shows an analysis given to me by an adviser. I have several questions.
1) How can this scenario be positively geared.
2) I am not sure the stuff listed under Non-cash deductions.
3) Does the assumptions and rates make sense.
Thanks
PatHi Pati,
Welcome aboard, and a great suite of questions. I’ll have a go, then see what others can add (or to pick me up if I get it wrong… eeek! :p )1) How can this scenario be positively geared.
Except for the Tax deductions, you would be losing ~$85/week in the first year, then $65 in year 2. They assume a rental increase of ~$25/week each year (is this viable? Could be…. but no guarantee).
After Tax deductions, you are positive by $36 a week in year 1, 40 in year 2, etc. You can get this weekly by filling out a Withholding Variation Form, allowing your employer to take LESS Tax out of your weekly Income. Or have it arrive as a cheque from the ATO at year end.
2) I am not sure the stuff listed under Non-cash deductions.
They have calculated the building cost at $215k, so just $135k remaining to cover land cost – small block? Their Profit will be in there somewhere too. Where is this IP being built? Is it a House, Townhouse, or a Unit?
Fittings are $24k (could be about right, depending on just what you are buying). You also are allowed to write off some of the costs associated with the purchase (borrowing costs) as well as Interest on the Mortgage. I see nothing untoward in most of that.
3) Does the assumptions and rates make sense.
I was pleased to see them allowing 7% Interest after 3 years – this could show an expectation that the low rates of today won’t remain at those levels (good thinking). Note that, in Year 5, you are only just breaking even – this is because your non-cash deductions have all but disappeared, and rental increases haven’t yet gained enough to cover the losses of deductions.
DEPENDING on what is being bought, and where, the numbers look sensible enough to me. Do try to ascertain whether a $25/week rental increase each year is viable, as well as their projected equity growth of 7% pa. These are the real “unknowns” that need a bit more digging.
Let’s see what other points pop up from other members,
Benny
PS Just my opinion – I’m not an adviser of any kind !! ;)It looks like the interest rate is 6.87% which is higher than now by about 2% so this is good to factor in a few rate rises.
capital growth rate is 7% which is pretty high.
rental expenses are about 30% which is about right. Is the rent realistic for the area?
The software used is the PIA – not not pain in the arse, but property investment analysis by somersoft.
What sort of ‘advisor’ gave you this? Are they also selling the property?
There is no licencing needed for this sort of stuff so anyone can do it and it is unregulated.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thank you for responses.
Where is this IP being built?
This is just a scenario, they gave me. They will probably recommend 3 bed 2 bathroom house and land from Brisbane.Are they also selling the property?
No they are buyers. If I give the go ahead they will find IP which closely relate to this calculations I guess.Hi Pati,
This is just a scenario, they gave me. They will probably recommend 3 bed 2 bathroom house and land from Brisbane.
Ah, no wonder everything seems “above board”. It is designed to show the benefits of negative gearing. Actually FINDING a house that would meet those numbers would be the hard part. e.g. in Kingston (Logan City) new 2bdr units in a block of 12 have an asking price around $320k. The land size per uunit is TINY !! And I can’t see a $25 a year increase in rent being viable.
It seems to me this is a sales model – a “pie-in-the-sky” chart (pardon the pun). Watch the numbers change markedly once true figures are known, or watch the “house” become a 2bdr unit or townhouse….. If they CAN find a house that would fit with those numbers, I’d love to know where it is….
Benny
It’s great they have allowed for increased interest rates but I would be wary about the compounding capital gains & rent increase rates of 7% each.
I have used more conservative increases at 4%. Over 10 years this reduced your capital gain by $170,417 & your income by $32,285. Does the analysis look as attractive now?
There numbers may not factor in repairs & maintenance & a multitude of other property expenses.
Dave
thanks for the response. I agree with u.
I believe this is a most likely case, most of the advisers put in front of new investors. So, are you guys saying this is not a good enough investment?
Pat
The agent can help you not only with the home loan, but with negotiating the offer, researching comparable sales in the area, getting the home inspected, handling title issues, and dozens of other things that can give you leverage, help you avoid making an expensive mistake, and save you money.
In order to find a good agent, interview at least three. You want one with experience, is full time, has a proven track record, and can provide references. An agent who is a good negotiator is worth their weight in gold.
Cooper | Property Management Portland, Oregon
http://www.porterbrauen.com/
Email Me | Phone MeHi Pati,
So, are you guys saying this is not a good enough investment?
I’m saying the example is looking OK – but is there an actual property on offer that meets those numbers? I reckon it would be hard to find one in this day and age.
The figures look quite OK, and yes, positive geared by a little bit – but when an ACTUAL property comes along, have them run the actual numbers to see if it really does measure up. I’m thinking there might be words like “Well, the numbers aren’t QUITE the same…” and then a whole bunch of positive features rattled off that have you thinking “That sounds good”, then a contract put under your nose….. etc. And the ACTUAL numbers might see you -$50 each week rather than +$36. Who knows !!!
Just be careful – those numbers are fine, but it seems they are an EXAMPLE,designed to pique your interest.
Benny
Thanks guys, highly appreciate your input.
Heya,
Just be aware they are assumptions and forecasts being used – any investment carries risk.
Some of the calculation assumptions are nice to see, particularly the conservatism applied with the interest rate.
The capital growth rate is quite high – perhaps using previous 20-30 year price cycle dynamics to calculate todays price. Realistically though, if the average buyer had bought a newish place in Brissy 5-6 years ago, those cap growth numbers would be all wrong (7% p.a. is a 50% rise in asset prices over 6 years) – whereas the median growth rate according to RpData|ABS is somewhere floating around -1% to 1% over the time period.
Cheers,
RedomRedom Syed | Confidence Finance
http://www.confidencefinance.com.au/
Email Me | Phone MeHome Loan Specialists based in Sydney, serving clients Oz wide.
Hi…
To many people are getting caught up in numbers and analysing data.
eg: No one knows what the tax system is going to look like in 10 years time, CGT rules might change and what you can or cant claim might change to.
Also they show that all the positive stuff like capital, rent eg all goes up… to me this looks like a way to lure you in.Cheers
jpfinancialgroup | JP Financial Group PTY LTD
http:www.jpfinancialgroup.com.au
Email Me | Phone Me(Known as JPCASHFLOW)
The numbers don’t account for reality. In what you have posted they have given a nice wonderful world where you are renting your property 51 weeks of the year. I would say this its more around the 48 week mark, and would be basing your figures off of 48 weeks to make it more realistic and conservative. Also rental prices, dont assume they will go up. My 2 yr property down south has just taken a $10 a week rental drop thanks to over market supply. So it has basically gone backwards.
They have also made it a bit more misleading, for the gross/rent to get the figures by using gross rental yield 5.1% multiple esitmated property value, which again I would say is over estimating the property value.
You can make figures and stats say what you want. Do your own math, look at how much the area has gone up in value in the past 10 yrs + how much rents have gone up. etc etc.
Thank you,
very good points.I feel like if everything goes according to the plan, I would end up around 200K return after 10 years for my 50K investment. Where ever I look advisers and property gurus put forward similar scenarios. I dont think this is a good enough outcome given that the risk for 10 years.
Hi Cooper
Sorry that may be the case in the good old US of A but certainly not in Australia.
The agent can help you not only with the home loan, but with negotiating the offer.
In Oz you need to hold a Credit License or be a Credit Representative of a License holder and as the agent acts for the seller and not the Buyer. Only a Buyers Agent can help you with the wording of your offer.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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