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

  • whooah1979 on 01/04/2017 - 00:10

    4.5% annual interest: 25,200
    $480 rent/w for 48w (say): 23,040
    I can make $5710 profit!?

    $5710 profit from where?

    • ihbh on 01/04/2017 - 07:56
      +2

      on the assumed 2% capital gain.

      • John Kimble on 01/04/2017 - 08:05
        +3

        You actually read the spreadsheet!? What a novel approach!

        • Thenarrator on 01/04/2017 - 09:34
          +2

          Just asking for some help guys.

        • BalanceSheet on 02/04/2017 - 16:22
          +1

          @Thenarrator:

          G'day,

          Did you include the value of the property as part of your profit? It seems you only considered the cash flow but did not include the value of equity amount that you own in the property. So that will be 1/30 x Property value in Year 1 and 5/10 x property value in Year 5, is that correct??

          I'm not certain.

        • Thenarrator on 02/04/2017 - 20:36

          @BalanceSheet: Hi there, value of property meaning the capital gain? The spreadsheet calculates the profit when the property gets sold

        • CashFlowStatement on 02/04/2017 - 21:49

          @Thenarrator:

          No, not capital gain. But the equity value of the property

        • BalanceSheet on 03/04/2017 - 16:18
          +2

          @Thenarrator:

          Are you planning to take out an interest only loan or interest + principle loan?

        • Thenarrator on 03/04/2017 - 23:44

          @BalanceSheet: In the spreadsheet, it is intereset only. Why do you ask?

    • Thenarrator on 01/04/2017 - 09:43

      On the spreadsheet, it calculates $5710 after selling apartment in 5 years. Rent income + (conservative) 2% growth.

      • whooah1979 on 01/04/2017 - 10:25
        +5

        On the spreadsheet, it calculates $5710 after selling apartment in 5 years. Rent income + (conservative) 2% growth.

        I see. I didn't open the link.

        Sinking $140k for a $1142 p/a or 0.009% return is madness.

  • [Deactivated] on 01/04/2017 - 00:12
    +33

    Maths

  • whooah1979 on 01/04/2017 - 00:16
    +9

    Salary: 66,000
    Property: 700,000
    80% loan: 560,000

    a mortgage that's ten times the net won't end well.

    • taoz on 02/04/2017 - 11:08

      Agree
      Agents commission?
      Gap in rental when tenant changes…
      Interest rise…
      It's not proft when your in the hole 560k…

  • CacheHunter on 01/04/2017 - 00:38
    +19

    You're on the right path, but need to get more sophisticated and allow for risk. Eg Risk that the tenant doesn't pay on time and it takes a couple of months to evict them, risk of major repairs being needed, risk that you lose your job or get sick and can't work, risk that rents fall or that the property did vacant between tenants, …
    Also, factor in a few interest rate rises. Rates are starting to increase internationally.

    Then decide if the return is enough to justify the risk. Everyone's tolerance for risk differs, but no matter what the investment or scheme, risk and return are closely correlated.

    • Thenarrator on 01/04/2017 - 09:41
      +4

      Thanks for the feedback. Good to see a serious response.

      I've allowed for tenant not paying risk : allowed 48week rent instead of 52week. I can bump that up.

      I've allowed for major repairs: $3000 a year, every year. Reasonable in your opinion?

      Losing job: hm. somewhat hard to quantify that plus i'm comparing cash between situation (A) buy property with situation (B) not buying. Losing job affects (A) and (B) equally so it is reasonable I excluded that in analysis?

      Interest rate rise risk: To limit that, I only looked at a short 5 year span.

      Let me know what you think and what else to alter in calculations.

        • geoffs87 on 02/04/2017 - 13:30
          +4

          Umm, based off what?

          RBA is responsible for maintaining inflation between 2 and 3%… currently it's at about 1.75%. Raising interest rates would lower inflation (well theoretically).

          What banks do independently, who knows… but I wouldn't imagine rates will "rise steeply in the next couple of months"

        • Baysew on 02/04/2017 - 13:34

          Interest rates will start rising steeply

          How much is "steeply" 0.25% , 2%. What exactly, and more importantly why do you think this will happen?

      • Krizy on 02/04/2017 - 17:50
        -2

        You're on the right path, you just need 3 years doing a Finance degree.

        • Thenarrator on 02/04/2017 - 20:38
          +8

          I already got a finance degree. Havent practiced it in industry however. Please tell me what is lacking in the model that made you say this

        • NoobTan on 04/04/2017 - 09:13

          You need to model a cash flow chart as well that runs weekly to monitor your cash flow timing (all your direct debits timing, daily spending pattern etc). Cash is king in any management of financial position. You lack cash that one day to service an interest, banks will scrutinize your account and find a way to get you onto higher interest rate which is approximately 7.35% or for some banks 8% interest.

          It will be good if you have family to fallback if you urgently need a few hundred to top up the service amount. Always bring up this point with family.

  • [Deactivated] on 01/04/2017 - 00:41
    +9

    $5710 after 5 years is a small and risky margin for a lotta work. I would think insurance would eat a fair bit of that, or all.

    • John Kimble on 01/04/2017 - 01:21
      +3

      I would think insurance would eat a fair bit of that, or all.

      Insurance is missing from the spreadsheet.

      • Thenarrator on 01/04/2017 - 09:44

        THANKS! I will add insurance to it. Are you referring to home and contents insurance? any other insurance types?

        • airzone on 01/04/2017 - 11:14
          +6

          Home / landlords. Tenants can insure their own stuff

        • aboogee on 04/04/2017 - 11:05

          hey there

          assuming your scenario is true, you'd have 140k to pay downpayment
          you could have invested the 140k at deposit rates of 2.2%
          and should make more than $5710 after 5 years

          then again, investing in deposits does not give you exposure to the property market, which could make more than 2.2%
          yeah?

        • secondstory on 04/04/2017 - 14:13

          Landlords insurance, I would include cover for accidental damage by tenants as well.

    • Thenarrator on 02/04/2017 - 20:46

      Just did a bit of sensitivity analysis, with 3% growth, i am 30k better off if I had chosen to buy property compared to only investing money in savings.

  • John Kimble on 01/04/2017 - 00:50
    +6

    Capital gains tax?

      • John Kimble on 01/04/2017 - 01:08
        +13

        Hence the question mark…

        • John Kimble on 01/04/2017 - 01:10
          +19

          @thorton82: Can't sleep and no other threads interest me

      • John Kimble on 01/04/2017 - 01:16
        +7

        I just thought one gets taxed on any profit one makes from anything in this country. I get taxed on the tiny interest in my savings accounts… Why wouldn't the government get a slice of profit made from selling an investment property?

        Not trying to be smart (obviously); genuinely asking.

        • John Kimble on 01/04/2017 - 07:14
          +14

          @thorton82: in the spreadsheet OP linked.

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

        • Thenarrator on 01/04/2017 - 09:50
          +3

          THANKS! I will add that in.. So assume 15% tax (normally 30% tax, but 5yr has 50% CGT discount). Profit will be 0.85*5710 = 4854

        • whooah1979 on 01/04/2017 - 10:33
          +1

          @Thenarrator:

          Profit will be 0.85*5710 = 4854

          $971 p/a is even worse than before.

        • airzone on 01/04/2017 - 11:31
          +2

          @whooah1979: I used to earn more than that selling newspapers on the corner once a week 20 years ago. A lot less risk.

  • Gunther on 01/04/2017 - 00:58
    -3

    You are missing about 10 other variables.

    • Thenarrator on 01/04/2017 - 09:51
      +1

      Please tell me what the 10 other variables are?

      I know insurance and capital gains tax are 2 of them.

      • daleyboy79 on 03/04/2017 - 15:56
        +2

        Have you factored in the tax savings from your expenses … as well as the depreciation amount you will be able to claim on the property

  • [Deactivated] on 01/04/2017 - 01:04
    +6

    9+10=21

  • John Kimble on 01/04/2017 - 01:22
    +1

    Strata looks low to me, but maybe may because I'm paying heaps more personally…

    • Thenarrator on 01/04/2017 - 09:51

      This is for a 1 bedroom apartment. How much are you paying if you dont mind me asking

      • John Kimble on 01/04/2017 - 11:21

        I pay $1600 pq, but living in a pre war art Deco unit that is falling apart. :(

      • zqipz on 03/04/2017 - 13:07
        +1

        $700k for a 1 bedder? Shouldn't you be renting it at $700/wk?!

        • Thenarrator on 03/04/2017 - 13:16

          i made it lower as a buffer. being conservative in my approach and even then, theres profit

      • humdingaling on 04/04/2017 - 14:05

        image says 2 bedder

  • [Deactivated] on 01/04/2017 - 01:26

    interest rates rise 1%, profit gone. your missing a lot of small costs, 5-7% of rent for real estate agent, stamp duty, rates, strata, this is just a couple things but all tax deductible.

    • Thenarrator on 01/04/2017 - 09:53

      The spreadsheet includes 4% stamp duty, strata, lawyer fees as once off fee.

      I'm assuming to lease it out personally without real estate agent involved. Hence my assumptions excluded 5-7% rent going to agent.

      But please, what other variables am I missing?

      • magikz on 02/04/2017 - 09:17
        +9

        It's like no one bloody opens the link…

        • Thenarrator on 02/04/2017 - 20:47
          +6

          Maybe people dont like seeing spreadsheets on the weekend.

        • secondstory on 04/04/2017 - 14:15

          @Thenarrator:

          I think more people would have opened a link to a shared spreadsheet.

  • [Deactivated] on 01/04/2017 - 03:31
    +10

    "Salary: 66,000
    Property: 700,000"

    No bubble here. Proceed with such high leverage with extreme caution. Even taking into account the 20% deposit, you can easily wind up in negative equity when it's all said and done. I'm sure blathering fools will be on the scene to claim Australia's "One True Asset Class" will only ever go up (ie. past performance guarantees future performance).

    Interest rates are going to have to rise very soon, even if RBA and APRA continue to not do their respective jobs (RBA = rates, APRA = lending "speed limits"), the banks will continue out of cycle rate rises due to their escalating funding costs.

    • wlz2000 on 03/04/2017 - 08:19
      +4

      Will bank even approve the lending? Given the tightening in the serviceability calculation used by the banks.

      That's a reality check that needs to be ticked off before even venturing into this investment.

  • ihbh on 01/04/2017 - 08:02
    +9

    What if the 2% capital gain turns into -2% capital loss? What if interest rates rise to 6%?

    You're missing the depreciation etc. which are tax benefits.

    Also biggest expenses missing is agent's commissions, and selling costs. Possibly insurance.

    Also, are you leasing it out furnished? You limit your rental options unless you're buying in a holiday area, where you have to factor in much bigger vacancies.

    • Thenarrator on 01/04/2017 - 09:57

      thanks. hm yes Im missing depreciation, agent commission, insurance. Would you know a ball park estimate for agent selling cost?

      • tomleonhart on 01/04/2017 - 10:06

        selling costs varied. Ball park around 2 - 2.5% of selling price.

      • Thenarrator on 01/04/2017 - 10:28

        Wow, after depreciation of 10,000 in first year (https://homesales.com.au/research/depreciation-calculator.as…) (2016 apartment, 40units, 10levels, NSW, 80m2), minus insurance, I get even more profit after 1yr!

      • [Deactivated] on 01/04/2017 - 10:34

        selling cost is about 2-2.5% of sold price + extras for professional photos about $300 etc. All negotiated before hand.

        • Thenarrator on 01/04/2017 - 10:50

          "Wow, after depreciation of 10,000 in first year (https://homesales.com.au/research/depreciation-calculator.as…) (2016 apartment, 40units, 10levels, NSW, 80m2), minus insurance, I get even more profit after 1yr!"

          10,000 depreciation gives a boost, unfortunately the 2.11% selling cost (https://www.localagentfinder.com.au/blog/real-estate-agent-c…) in NSW bumps it back down to ~$5000 profit/5yr ball park

        • SeVeN11 on 03/04/2017 - 01:01
          +2

          @Thenarrator:

          when you calculate your capital gain you need to reduce your cost base by the depreciation you have claimed in prior years.

          i.e. all depreciate does is defer your tax to the end and you get the benefit of the 50% off for the capital gain tax

        • Thenarrator on 03/04/2017 - 13:08
          +1

          @SeVeN11: thanks, will adjust that.. is capital gain tax just the individual tax with the capital gain added to ur annual income?

        • SeVeN11 on 03/04/2017 - 15:45
          +1

          @Thenarrator:
          Yes. Just add the capital gain component to your income. It will be taxed at your marginal tax amount.

          Note: Medicare levy will apply, along with other taxes if you cross the threshold. everything. eg. Floor repair levy, budget repair levy etc.

          I don't think you need to worry unless the capital gain starts getting over 150k plus

        • secondstory on 04/04/2017 - 14:10

          @SeVeN11:

          I don't think you need to worry unless the capital gain starts getting over 150k plus

          Anything's possible in Sydney.

  • John Kimble on 01/04/2017 - 08:31

    Is there a difference between MATH and math?

    • Thenarrator on 01/04/2017 - 09:57
      -1

      Not really, I should have used math.

      • mbck on 01/04/2017 - 10:28
        +5

        I used meth….wait

        • Thenarrator on 01/04/2017 - 10:30

          lol

        • kywst on 01/04/2017 - 11:04
          +14

          @Thenarrator: maths (normal people) > math (mericah) > meth (cuzbro)

      • [Deactivated] on 01/04/2017 - 11:08
        +7

        No, you should have used maths.

  • John Kimble on 02/04/2017 - 02:46
    +12

    Meanwhile $175k in a 3% savings account for 5 years would earn you $28,288 interest.

    $18,392 at 2%.

    • bargainhuntaa on 02/04/2017 - 13:51
      +4

      minus Tax.

    • aussie28 on 02/04/2017 - 16:57
      -4

      Much better to just put the $175k in rate setter for 9+% return pa for 5 years. At 9% he would make $94,259.

  • Boba on 02/04/2017 - 06:19
    +3

    This might be a stupid question, but will banks be willing to lend 560k on a 66k/year income?

    At some point the loan will convert to Principal + Interest, and they will be thinking whether your income is enough to cover that Principal + Interest

    Of course you'll probably be earning more income by then but the bank probably conservatively assumes no real change in income.

    • drprox on 02/04/2017 - 07:22
      +1

      By my quick calcs…No. No they won't.

    • geoffs87 on 02/04/2017 - 13:38

      Yeah, I don't think they will. But if it's an investment property, expecting 23k in income, op total income becomes $89k

      • JIMB0 on 02/04/2017 - 20:20
        +1

        Minus expenses (rates, strata, repairs, agent fees)

        • geoffs87 on 03/04/2017 - 08:39

          income and expenses are two different things.

          You are correct that those things need to be taken into account to adjust for profit, but those things should be subtracted from the total income, not his employee salary.

    • drose1 on 02/04/2017 - 13:42
      +2

      No they won't.
      At 66k, he'll probably be able to loan ~380k - 400k.

    • ThadtheChad on 03/04/2017 - 10:36

      Speaking from anecdotal evidence, a bank may lend but with the caveat that it is not owner occupied; i.e. rental cashflow is absolutely mandated.

      • secondstory on 04/04/2017 - 13:58

        You can provide proof of rental income if there is an existing lease (you get a copy of the current contract) and they will count it towards what determines the total loan amount. The loan needs to be taken out as an investment type loan (and interest is higher just because).

        It might be possible to get it appraised for rental value for the same but I'm not sure.

  • [Deactivated] on 02/04/2017 - 07:46
    +3

    Is this a new apartment? Or newish?

    Just a few risks that I think it might be worth pointing out. None of these may apply to the building you are looking at - but it's worth at least turning your mind to them and going into it acknowledging the risks.

    • Market Risk

    Bear in mind that many new and affordable apartments tend to be built near many, many other new and affordable apartments. Which can make them hard to distinguish from other apartments.

    Even if it's in a good location, it can be hard to achieve a really good rent if there are many other apartments for a tenant to choose from. So make sure you have a good look at what is on offer to rent in the same area to see if you're rental expectations are accurate.

    If it's in an area where there are plenty of similar apartments (not sure where you are located) then it can be hard to sell to anyone other than another investor.

    If it's a new apartment the buyers are paying a premium for new-ness. 10 years down the track the next crop of new developments rent and sell for more, meanwhile you're apartment is now one of the older apartments and no longer rents for a premium (if it ever did).

    Well constructed, well located, well designed apartments can hold their value - but they can be expensive.

    • Suprises

    Also, have a good look at any strata meeting minutes - is their any rectification work to the building that needs to be done. This can be expensive and may not be covered by the original builder's insurance. The recent boom (in melbourne at least) seems to have revealed a lot of shoddy builders out there.

    Anyway, go to the library, read as much about property investment as you can. Don't be a negative gearing / off the plan / investment sucker. Based on your summary of the maths it sounds like a really poor return in the short term, based on how much risk you will be taking on. Maybe it will turn out well in the long term - no one can really know. But if you model your possible performance, and establish a framework of risk, at least you go into it with your eyes wide open.

  • [Deactivated] on 02/04/2017 - 08:49
    -1

    made gross $1m profit here in 8.5 years. primary home. exempt fr capital gain tax.

    thanks to Sydney crazy market :)

    but that profit is now reinvested to an even bigger house closer to cbd… :(

    • love2buy on 03/04/2017 - 11:32
      +1

      isn't that enough to retire on if you used that money and bought in qld.

    • raj koothrappali on 04/04/2017 - 21:49
      +5

      So you made no profit at all or very insignificant.
      That bigger house closer to cbd would have been similar in price to what you bought 8.5 years ago.
      And you don't usually 'invest' if it's your primary home.

      • stumo on 06/04/2017 - 08:51
        +1

        Exactly. That bigger house closer to the CBD wouldve made way more profit than you did. So really you made a loss. You only make profit if you cash out.

  • Plug on 02/04/2017 - 10:27
    +1

    OP - where will you be living while all this is going on and what will your expenses be for that?

    • xuqi on 02/04/2017 - 16:35
      +1

      Moving back in with the parents! or Never moving out.

  • CleverCounter on 02/04/2017 - 10:27

    2% capital growth is low end assumption. You should also consider results for other scenarios at 4% and 6%. Have you got other investment options you can compare? Term deposits? What if you move out after 1 year and turn it into an investment property? What are you tax benefits? Costs of carrying the property. Is your longer term strategy to borrow against the equity? There is a lot to consider.
    I think your salary is too low for a 700k house even with a 20% deposit. Although it might mean you need to look elsewhere, a range of 400-500k would be more affordable under your current circumstances. It would also make the decision easier， as the stress of money is lower. All the best.

  • Shame on 02/04/2017 - 10:31
    +1

    You forgot political risk- if Labor win the next election (which according to the polls they will) then they will most likely abolish negative gearing.

  • sillyguy on 02/04/2017 - 11:03
    +2

    Seriously, your down payment is $175,000, and you only expect $5710 profit after 5 years. That's 0.66% gain per year!!! Any basic savings account could blow this investment out of the water.

    Your math is right but your calculation is wrong. Just don't do it.

    If you have $175,000 then man you have lots of option to invest.

    • whooah1979 on 02/04/2017 - 11:43

      Seriously, your down payment is $175,000,

      it's hard to imagine that someone that has a $66k gross income can save $175k. they would've to explanation to the lender on how they got this deposit.

      • Astro551 on 02/04/2017 - 12:33
        +3

        66k pa is about 50k after tax. If OP lives with their parents, let's say 10k expenditure per year then that's about 5 years worth of savings. Or perhaps they had help from savings from other sources (part time work, parents, etc)

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