Buying Property MATH Help

Thenarrator on 31/03/2017 - 23:49
Last edited 04/04/2017 - 23:22

Hi guys

First time doing MATH on property purchasing. Need to convince my parents that buying is not worth it. It seems like profits can still be made with some conservative assumptions like 2% growth. Can anyone point out where did I calculate wrong and what did I miss out?

Salary: 66,000
Property: 700,000
80% loan: 560,000
4.5% annual interest: 25,200
$480 rent/w for 48w (say): 23,040

See spreadsheet:
http://imgur.com/aE4WZRQ

I can make $5710 profit!?

UPDATE:

thanks guys for input. I've changed the model completely now to incorporate all of the comments, opportunity costs, capital gain tax, cost base, depreciation division 43, mortgage loan fees, commission fees etc. Its very complicated now.

Conclusion is, capital gain is much more important than rental yield.

Minimum investment period is 5years to make any sort of return.

Combining above 2 points, apartments will age past 5th year and lands appreciate more. It only makes sense to buy houses + land and not apartments.

Poll Options

  • 80
    My Calcs are totally wrong
  • 9
    My Calcs are on the right path
Financial

Comments

        • ThadtheChad on 03/04/2017 - 10:39

          let's say 10k expenditure per year

          Jesus, the standard of living would be worse than living in Afghanistan.

          Or perhaps they had help from savings from other sources (part time work, parents, etc)

          Most likely that this would be the case.

        • Astro551 on 03/04/2017 - 16:53

          @gearhead: That's what it takes to save for a house nowadays in Sydney hey #millenialproblems. In all seriousness though, with the assumption if you're living with your parents then I can't imagine your expenditure needing to be too high (depending if they charge you for board and other things).

        • secondstory on 04/04/2017 - 14:30

          @gearhead:

          Jesus, the standard of living would be worse than living in Afghanistan.

          If it's living at home, 10kpa expenditure seems pretty normal to me even after helping pay groceries etc.

      • pg88 on 03/04/2017 - 21:59

        Not sure why you think that's so difficult? I didn't quite get up to the $175k mark but was in the ballpark, have worked since I was 15 through highschool and uni. Admittedly living at home but did manage to get there even with a few expenses such as car/phone/board without too much difficulty…

        Could be that OP is in same situation and is now looking at a house now that he/she is in a full time role out of uni.

      • canyoudoitcheaper on 04/04/2017 - 22:15
        +1

        Bank of Mum and Dad?

      • Dr Techno on 06/04/2017 - 11:25

        Easy to do if living at home, I saved more than that on almost half that gross wage.

    • natman on 03/04/2017 - 12:29

      Live with parents - board at less than market rate - say $100/week. Other expenses $200/week. After tax income $1000/week = savings of $700/week or $35000/year. Even if not living with parents - can live in boarding house or sharehouse for $200/week. Not hard to save money on that income.

  • NoobTan on 02/04/2017 - 11:29
    +5

    Your income is too low to justify the negative gearing, and also the measly profit. I would not even get neutrally geared property at that salary, because if you lose your job, you're screwed.

    Keep in mind that individuals at that salary are easily replaceable being so many unemployed out there could take your job the next day wanting less money with possible more experience or higher education.

    • johndoe789 on 02/04/2017 - 13:54

      NoobTan is right, negative gearing works the best if only you are hitting the TOP most tax bracket. Otherwise you will be doing a lot of work for every little gains.

      • secondstory on 04/04/2017 - 14:42

        It's not super amount of work that will make it difficult. There is also a chance that instead of the predicted growth, it could skyrocket.

        5 years is a long time OP might even hold onto the property for longer. The "if I sell in 5 years" is a good indication of your current value to know you haven't made a loss for buying a property you want.

        If you lose your job for some reason the interest only repayments might be offset enough by rental income juuuust enough to tide you by until the next job.

        Not saying you're wrong in any way but I feel the situation isn't entirely a bad thing.

        Edit: nevermind, misread op - thought he was trying to convince parents to let him do it lol.

  • Gershom on 02/04/2017 - 11:58
    -1

    Need to convince my parents that buying is not worth it.

    Why? How old are you? Are your parents running your life?

  • johndoe789 on 02/04/2017 - 14:02
    +2

    Hi OP,

    use very conservative numbers:

    assume +1% interest rate: so use 5.5% instead
    $480 for 48 weeks is good, always assume there will not be 100% tenancy - remember agent fee is about 10% + 2 weeks rent, so its $432/week for 46 weeks
    assume $3000 per year for repair, that's good
    assume property cap increase 2% - that's okay, but remember when you sell it the agent takes like 3% off selling price
    DO NOT include tax return from negative gearing - because what if you don't have job for that year? means you get nothing back. Treat it as a nice bonus
    Look at your market: how long does it take to sell a house? Lets say it takes an average of 2 months to sell a house in your market, have more than 2 months worth of monthly payment ready. This is in case if you need to sell your house and won't force a capital squeeze from you

    EDIT: I personally would make sure that the Rent Income is same or more than the interest payment (just the interest), otherwise find a different property.

    Good luck

  • Fiximol on 02/04/2017 - 14:08
    +2

    On top of all the comments regarding risk assessment and time dependence issues (e.g. not discounting or considering potential annual rate or wage or rent changes) there is a significant flaw in your estimates as you have not considered the opportunity cost of paying your deposit.

    Assuming your spreadsheet is correct, if you kept the deposit in a term deposit at 2% pa it would knock around $2000 off your annual expected profit, leading to a lower profit of $10,000 over 5 years and a net loss of ~$4000.

    • Krizy on 03/04/2017 - 00:25

      This.

    • ilikeradiohead on 03/04/2017 - 12:11

      You shouldn't subtract the opportunity cost from the calculation though, you should just compare it at the end as an option. So if he makes $5,000 after 5 years buying the house vs $15,000 then he should go for the interest option rather than the property option.

  • polol on 02/04/2017 - 14:36
    +2

    Try this to compare, it basically covers what you want

    https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal…

    • greatlamp on 02/04/2017 - 16:19

      I was just about to post that. Very comprehensive.

      I would be interested to see what it spits out for OP

  • ribze1 on 02/04/2017 - 17:29
    +6

    No bank will lend you enough on a $66k salary to get a $700k property even with a 80% LVR. You'll be lucky to get $400k.

    How do i know this? I was on the same salary as you not too long ago.

    • danyool on 02/04/2017 - 23:16
      +7

      I was on the same salary as you not too long ago

      But now you've followed Mr Hockeys advice and gone and got yourself a "good job that pays good money"?

      • ribze1 on 03/04/2017 - 21:36
        +1

        Of sorts lol

  • DiscoJango on 02/04/2017 - 17:59

    dont forget the upkeep and maintenance of said property, which many people do not factor into the cost and end profit

    • Thenarrator on 02/04/2017 - 20:41

      Yes, I allowed about $700 a year for repairs. Do you suggest allowing an extra line item for upkeep and maintenance? if so, whats the ball park value?

      Is it reasonable to argue there is no need for upkeep because it is a job for tenants to do? If they dont, I will just deduct from their initial down payment?

      • polol on 02/04/2017 - 21:10
        +2

        most upkeep/repairs is paid for by the landlord

      • secondstory on 04/04/2017 - 15:13
        +1

        I think pretty much it's yours to pay unless it's proven to be fault of tenant directly causing it to break/ruin (like plumbing issues caused by tenant unreasonably jamming crud into drains etc)

        If there's a dishwasher/stovetop/rangehood installed that goes, then it could be the full $700 just to replace/fix it. If there's electrical faults at the outlets I don't think the bodycorp will cover that.. same with plumbing issues contained in your property - those are costly.

        Since it sounds like you're furnishing the place, you will need to repair/replace any wear-damages on any of those as well - may be rare/minor but could add up.

        Not sure of the pricing because that might depend on locale and apartment size, fixtures, etc. Take an inventory of everything intended and possible things going wrong and put a value against that you would feel comfortable with - the idea for these is have a value you would be "okay" with in your calculations to see if it's worth it but have a sum left aside as a safety net for anything going wrong (I think its always good keep aside 3 months worth of payments safety net that aren't taken into account for any calculations - push this into offset to reduce interest payments (since the negative gearing wont really do much at 66k anyways)

        Also, don't forget the condition of the property, if it's new you wont have to worry about immediate upkeep but if you wish to sell in 5+ years you might want to consider some touch ups before selling (repainting/carpets) you don't have to but it can affect the market you draw in and should balance in the sell price anyways. Might be considerable if you don't intend to sell after 5 years.

        edit: I got this far into the thread before I realised I misread the original post and that you were actually trying to convince you're parents not to buy.

        From here assume everything bad will happen.
        Looking after your tenants yourself is too hard while working fulltime - add in agent fees at 8% of rental income (unless they are volunteering)
        Look up tenant horror stories and share them with your parents.
        If land value goes up so do the rates (particularly higher for investment properties, some councils nearly double)
        Interest rates gets increases for IPs that PPRs do not.
        Sounds like you're in a bracket to pay land tax too.

        • Thenarrator on 04/04/2017 - 23:16

          how do u determine land tax payable for apartments? or is this exercise most left to professional accountants?

        • secondstory on 05/04/2017 - 16:43
          +1

          @Thenarrator:

          I don't think it requires an accountant, I'm not from nsw so you may wish to double check this:

          You can check (if not already) the land value through the Search feature here:
          http://www.valuergeneral.nsw.gov.au/land_values/land_value_s…

          Then see if you are in the threshold (and if so calculate the amount payable) here:
          http://www.osr.nsw.gov.au/taxes/land/factsheet/booklet-2017

          Some quotes from the link above:

          "Land tax is calculated on the combined value of all the taxable land you own. The land tax threshold for 2017 is $549,000. This means your land tax assessment is calculated on the combined value of all the taxable land you own above this threshold." ..(see page for calcs)

          "For strata units, the land value for each individual strata lot is calculated on a proportional basis using the unit entitlement for each lot and the aggregate for the strata scheme."

          From here it says the search I linked above can determine individual value:
          http://www.valuergeneral.nsw.gov.au/__data/assets/pdf_file/0…

          Some other things to note and costs involved in the initial acquisition could also include:
          - Build and pest inspection (possibly around up to $500 - since its newish might want to check for telltale signs of structural issues)
          - not sure on NSW but inorder to divert water use charges to the tenant you may need to have certified watersaving faucets/showerheads (I think $200ish)
          - might need yearly smoke alarms installation/replacement/approvals to meet insurance (probably $100)
          - Depreciation report (possibly $400-$800ish I strongly recommend finding an example copy and studying it if you haven't already)
          (I think I read earlier you accounted for capital depreciation but not sure if you looked at plant which can add up and reduce tax a little - Not 100% sure on the list but I think this includes things like fixtures, dishwasher, ac, fans, carpet, furnishings(above certain value?), etc.)
          - There's been mention of rates a number of times but not sure where you're getting the figure (I don't trust the selling agent). Same as above, you can look up the local council rates and check (they have a different rate for investments so make sure you check the right one).. Not sure since its strata so might just be body corp (that you can get from the agent) but these can increase every year.. I think its something like 6% tops per 3 years or something, not to familiar with apartments..
          - I mentioned this kinda already but interest rates are still being nudged upwards for IPs by some banks (It's older news but the APRA IP loan rate increases are still trickling for non-fixed loans I hear)

          I wrote a bit much but hope this helps.

        • Thenarrator on 05/04/2017 - 19:39

          @Myrtacaea: Thanks I had added pest control as a variable. Although it will most likely be 0 for new apartments, it is there as a variable in case the spreadsheet turns to analyse a 2nd hand house.

          What is the depreciation report? if it is for depreciation purposes, shouldnt my accountant have those details?

          Depreciation: I accounted for division 43 and plant and equipment depreciation. cheers

          Yea interest probably rise however unsure how I could model this uncertainty in the model.

          The growth rates I just pulled it out of my ass.

          Appreciate you writing this much.

        • secondstory on 06/04/2017 - 17:14

          @Thenarrator:

          I had added pest control as a variable. Although it will most likely be 0 for new apartments, it is there as a variable in case the spreadsheet turns to analyse a 2nd hand house

          From what I've seen the cost for these is generally dependant on property size rather than age. You can google something for the local area and find one that gives quotes on their website.

          I still recommend the building inspection for new properties I just lumped this together as build and pest (not to say it will have something termites/rats after only a year though if it's never been lived in - in which case would be your first home and new so you could be looking at a government grant and waving stamp duty if you want to live in it for a bit).
          I'm not sure about inspections for apartments though, but you yourself should at least scope out the rest of the building since a crack in someone else's wall or leaking out in the back foyer might well become your problem later on in sinkingfund/bodycorp/valuedrop.

          In terms of the depreciation report you need to give all the information from this to your accountant anyways if you want your accountant to do be able to do this (also accounting fees, but I think these are tax deductable the following year).
          I haven't really looked at this one specifically but seems there's an example here:
          https://www.washingtonbrown.com.au/blog/tax-depreciation-sch…

          Pretty much someone goes through your house once-off, values all your assets, decides what they are, does all the calculations and sets up a schedule for you to depreciate against each year for the next 40 years. You can also do the leg work for this yourself (accountant to do the calcs) if you want. It's also a bit troublesome if something gets replaced because you'll need to depreciate that separately since its not in the report - though if you have an accountant they will handle that.

          Just remember if the costs of upkeep/maintenance is beyond a threshold (I think something like $300) for certain items you need to depreciate it for tax reductions rather than claiming the full amounts too.

          I think you can look at realestate agent websites and get suburb profiling reviews or use Onthehouse.com.au for nearby similar properties and then take another random guess at growth rates lol. I though 2% sounded quite low to be honest but areas differ. Also note the local council may maliciously (or maybe not) increase your land value by ridiculous amounts just to get more rates out of you and that will also bring up land tax..

          No worries :) I find this kind of thing quite fun. This is just from what I know and I'm not an expert in the field by any means so you may want to research these further if you really do start to consider making the purchase.

  • darkchoc on 02/04/2017 - 21:16
    +3
    1. Landlord insurance
    2. Estate agent commission on sale
    3. Estate agent rental advertising charge
    4. Estate agent rental management charge
    5. Land tax for investment property
    6. Furniture will be worth close to zero after 5 years.
    • Thenarrator on 04/04/2017 - 20:41

      how much typically is landtax for an apartment/?

  • Hearthstone on 02/04/2017 - 21:45
    +2

    Now calculate with properties going backwards 10% and for a long period of time say 5-10 years
    and during that time are without a tenant for a few months or rate at 7%

    your calculation only calculate properties always goes up, yes it did for the last 20 but it may or may not
    continue, if history is a guide all boom will follow by a period of correction or crash.

    • universe on 02/04/2017 - 21:53
      +1

      Now let's calculate a meteor hitting the planet and destroying civilisation. Just as likely

  • [Deactivated] on 03/04/2017 - 08:22

    You're assuming profit but you also assume you're gonna move in a cardboard house? There is no profit there.

  • wlz2000 on 03/04/2017 - 08:28
    +3

    I will not think 2% appreciation per annum is conservative enough, especially for new/near new apartment. For house with land, 2% is more realistic.

    700k for 1 bedder is probably for fairly new apartment in a nice suburb, i am guessing? the strata may increase significantly in the first couple of years for the new apartment.

    A lot of people already mentioned that there will be many risk factors involved including interest rate, government policy changes to investment property, etc. It's just not enough gain to outweigh the risk, I am afraid.

    suggestion:
    1. lower your budget and set your eyes on old unit, say 400k
    2. try other investment,
    3. invest in yourself by buying investment books, property, share, bond, etc.

  • DingoBilly on 03/04/2017 - 08:44

    Why do you NEED to show your parents that it's not worth it?

    Shouldn't you just help them out either way? Give them the best information possible and let them decide themselves in the end?

    • Thenarrator on 03/04/2017 - 13:13
      +2

      because theyre wanting to buy without doing any maths. i wana get some maths in and get to the facts

  • barleyshake on 03/04/2017 - 09:28

    Interest for the loan (because it's for a rental investment) can be claimed as a tax deduction.

    • ilikeradiohead on 03/04/2017 - 12:12

      I think he has that included in his calculation.

      • Skramit on 03/04/2017 - 12:52

        I cant see where in the spreadsheet though….

        • ilikeradiohead on 03/04/2017 - 13:09
          +1

          In the second column near the bottom he lowers his income by the amount in interest he pays and adds on the amount he receives in rent.

        • Skramit on 03/04/2017 - 13:54
          +1

          @ilikeradiohead:

          Hmmm I guess so. I think the spreadsheet could use a little more detail :D

  • Powershopz on 03/04/2017 - 11:28
    +2

    This is a terrible idea and your calculations are flawed. For starters your annual interest calculation is just a flat % of the overall and doesn't take into the effect of compounding interest each month. Inflation is also another thing to consider and what else you could do with that money invested elsewhere which you don't have in your calculations.

    You're severely underestimating a lot of the values in there and haven't put enough buffer in their to offset interest rate increases and emergencies.

    Please for your own sake do not purchase anything remotely close to what your thinking. F

    or your salary I'd be capping a purchase at $450K and looking at a townhouse/unit out in the suburbs.

    • Oz80085 on 03/04/2017 - 18:11
      +1

      His interest calculation is correct. Interest does not compound unless it capitalized which I assume he would not be doing (because its a terrible idea). Agree with you on the other points though.

      • Thenarrator on 04/04/2017 - 20:44

        what does it mean for interest to capitalise?

  • Skramit on 03/04/2017 - 12:52

    In your spreadsheet I can't see where you've listed the tax deduction on the loan interest since this is an investment property. This is critical and will reduce tax payable by decent chunk.

    You also haven't got a depreciation line item in there either that I can see. Another way to reduce tax payable on your income.

    • Thenarrator on 04/04/2017 - 20:45

      thanks for this. too many giving me points to make buying property unappealing. I need some positives to balance it out.

  • T1OOO on 03/04/2017 - 14:01

    dont forget agent fees, listing, fees, council rates that you pay, in the end your making what $2k on that initial deposit you invested? wouldnt you be able to just get more in interest?

    why put your self through all that for like $2 grand on a million dollar investment? thats poor business imo,……. your doing so much leg work for nothing, and lord forbid prices go down!

    • Thenarrator on 04/04/2017 - 20:47

      I allowed 2% for agent commission when I sell.. does that include listing and adverting? if not how much is listing and advertising?

      • T1OOO on 04/04/2017 - 21:18

        I mean the weekly fee when u rent it out.

        • Thenarrator on 04/04/2017 - 23:17

          oh yah, i've included that in. note that is tax deductible.

  • Oz80085 on 03/04/2017 - 18:08

    I would not make that investment. Gross rental yield is 3.2% which is not enough to make it viable. As a general rule of thumb, I look for yields of 5.2% or higher. This means that if the purchase price is $700k then it should rent for at least $700 p.w.

    Read everything on this forum before you make any property investment decisions: https://www.propertychat.com.au/community/

    Huge wealth of knowledge about property on here.

  • Oz80085 on 03/04/2017 - 18:09

    Also, where is this apartment? I'm surprised no one has asked this already..

  • Trying2SaveABuck on 03/04/2017 - 20:32

    $5710 profit? wow where do i sign you would be lucky to break even in the 1st 3-5 years

    onces you get a bit of off set and a bit of capital gains you might make a few $$$ but until then dont expect to much

  • cheesydude on 03/04/2017 - 21:44

    left out stamp duty and legal fees but say thats included

    ~$5000 return on only $120,000 is a great return. power of leveraged investment….you only need to save $120,000…

    you also get all the negative gearing benefits and deductions

  • [Deactivated] on 04/04/2017 - 10:16

    Water service, waste, land tax, insurance

    • Thenarrator on 04/04/2017 - 23:12

      thanks for input. Note those are tax deductible

  • zealmax on 04/04/2017 - 14:40

    How do you get 560K loan on 66K salary?

  • Thenarrator on 04/04/2017 - 23:23
    +3

    UPDATE:

    thanks guys for input. I've changed the model completely now to incorporate all of the comments, opportunity costs, capital gain tax, cost base, depreciation division 43, mortgage loan fees, commission fees etc. Its very complicated now.

    Conclusion is, capital gain is much more important than rental yield.

    Minimum investment period is 5years to make any sort of return.

    Combining above 2 points, apartments will age past 5th year and lands appreciate more. It only makes sense to buy houses + land and not apartments.

    • greatlamp on 06/04/2017 - 04:50

      Is there any chance you would be willing to share the original spreadsheet?

  • peterpeterpumpkin on 05/04/2017 - 09:15

    The most stressful part is staying in a job you hate because of the mortgage. Or keeping one.

    • Thenarrator on 05/04/2017 - 19:40

      hmmmmmmmmm.. whats your story?

      • peterpeterpumpkin on 05/04/2017 - 21:17

        Haha. Too bitter to discuss but it turned out OK.

        When you're young and haven't settled down yet (wife, kids, dog) it can especially be burdensome to have a large responsibility suddenly placed upon your shoulders, especially if you're still "finding yourself", consumed by wanderlust or undecided on a career (if any).

        Although largely a first-world problem, there's something liberating about knowing you can jump off that hamster wheel at any time (largely discussed in https://www.ozbargain.com.au/node/279276). Most people never leave the wheel, let alone the cage, so it's best I don't spread anarchic thoughts :)

        The only other risk I can think of that hasn't been mentioned is that the kids born today might one day riot against the system of land ownership, making all the work in vain. And you would probably have a property portfolio by then.

        My non-political British friends in their twenties post very different articles on Facebook to what the Australian ones do (e.g. http://www.businessinsider.com/inequality-class-britain-prop…).

  • zealmax on 05/04/2017 - 10:15
    +1

    Remember depreciation isn't free money. You have to pay CGT on every dollar you depreciate.

  • zacata on 05/04/2017 - 10:51
    +2

    speaking as tax accountant, here some my input:

    just a simple math, if you take $140k and deposit for 5 years at interest rate of 2.1% (compound interest), you will make $15,331 and it's stress free.

    2% capital gain is quite low. capital gain worths more than rental yield.

    just my 2c. If i have that spare $140k, i reckon i will jump into the market. since I can fix most of everything in the house myself, just personal reference

    • Thenarrator on 05/04/2017 - 19:40

      yes for 5 years, it may not be much but according to my model, the capital growth compounds hugely in the 6-10 year mark.

    • frostman on 06/04/2017 - 08:27
      -1

      just my 2c. If i have that spare $140k, i reckon i will jump into the market. since I can fix most of everything in the house myself, just personal reference

      If I was a tenant in your apartment, i'd throw the keys in your face and exit the contract.
      Last thing I need is for the owner to become a "Mr-Fix-It" and try and repair everything from water leaks, plumbing, paint and electrical faults.
      I had a mate renting and each time he called the real estate for a problem, the owner would actually come out disguised as a handyman, my mate later realized that's the owner because on each job, he would spend double the time and not resolve anything because the next day it's broken.

      If you can't afford to rent out your house along with all the responsibility, then don't buy one

  • frostman on 06/04/2017 - 08:21

    Why are you trying to purchase a $700K property on a 66K salary?
    Even as "an example" it's wrong

    • Thenarrator on 06/04/2017 - 16:17

      why is it wrong? my calcs show some profit althought not much. 7is there a general rule of thumb u follow?

      • frostman on 06/04/2017 - 20:16

        What profit?
        You've hardly factored in stamp duty, legal fees, conveyance, pest control, council fees, water rates, gas & energy, repairs, all of which come down on you like a tonne of bricks.

        Marginal income and a large deposit mean nothing. Getting a loan isn't that hard, maintaining it beyond 2-3 years is the challenge.

        66K gives you appx ~$890.00/week, not enough to pay off a $560,000 loan.
        If you cop a fine one week of $500 dollars, you're doomed

        • Thenarrator on 07/04/2017 - 20:08

          I've factored all those in. gas to be paid by tenant.

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