Return on Investment Property

Edinburgh on 04/02/2021 - 22:27
Last edited 04/02/2021 - 22:28

Hey Ozbs,

I was just wondering why people buy investment property when it doesn't give such a good return on your investment.

I have around 100k as balance which I am thinking of investing in property. In probably that amount I could barely pay a 10% deposit for 2 bedroom unit + Stamp duty + LMI

When I see cash flow after paying Strata+ Council+Water. I am getting $50/week cash flow. After paying 30K in overheads like stamp duty and LMI, I may not be able to recover these in next 10 years.

Am I missing anything overhere?

I am using this to calculate https://www.homeloanexperts.com.au/investment-loans/property…

Financial

Comments

  • daft009 on 05/02/2021 - 07:27

    More growth potential in independent houses.
    Though buying in this market I dunno.

    I bought a house on 600sqm in Sydney (10-15 min from Parra) right on the t-way in 2013 for 427k. Rented out for 400-440/wk

    Once ppor is close to paid off I'll build a duplex on the IP block and then let's see, maybe sell one or rent both.. no rush

  • mskeggs on 05/02/2021 - 07:49
    +11

    Where is the next doubling of house prices going to come from with wage growth stalled and interest rates effectively at zero?
    Genuine question, I can’t understand it.

    • modsec802 on 05/02/2021 - 08:04
      +2

      China

      • Ghost47 on 05/02/2021 - 11:21

        I spoke to someone once who said “You know what happens now is that Chinese buy the property and rent it out to Australians.” (They were Chinese and I think rented from a Chinese LL.)

    • narbe on 05/02/2021 - 08:10
      +3

      Cheap money and more QE

    • stratbargain on 05/02/2021 - 08:44
      +6

      When I bought my first property 13 years ago people were saying the market was going to crash and I was crazy for spending $320k on a property in that area.

      When I bought my second property 10 years ago people were saying the market was going to crash and I was crazy for spending $640k on a property in that area.

      Both areas are now trending almost double what they were when I bought them. They are by no means flashy or exciting properties

      Now I'm in a position if I wanted I could sell both and have enough capital to buy a house in the 1.4-1.6m range with minimal mortgage repayments. A price that seems absolutely ridiculous to most people (including myself)…

      But for every person that can't pay a $800k loan as they are just getting into the market, there are plenty of people who have done crazier longer term investments in property than me and can easily afford 1/2/3 million dollar properties.

      TLDR there are a lot of people that have been invested in property for many, many years and once you're in the market you can easily afford to purchase more and more expensive properties, which drives prices up.

      • whooah1979 on 05/02/2021 - 09:01

        I bought my first property 13 years ago
        When I bought my second property 10 years ago

        People are always talking about real estate investments they started such and such time ago. Data shows that if they invested in other markets and hodl to today then their unrealized gains would have been higher.

        The 80s and 90s are long gone. The overseas smart money is flowing into more innovative investments where there are less government regulations.

        • Terbo on 05/02/2021 - 17:05

          Leverage and margin calls are the 2 factors that can differentiate actual dollar returns from RE VS Shares. 80% lend on property ok, shares not possible and market volatility can make it hard to avoid margin call on shares if holding long term, whereas bank is happy as long you pay home loan interest regardless of property spot value.

          • scanuck on 07/02/2021 - 08:18

            @Terbo: Same same no?

            You have an LVR with the mortgage - same as with a margin account.

            You pay off the margin loan as you would your mortgage interest.

            I suppose it may be true your shares could enter margin call territory with an obligation you can’t meet and a sell triggered - but you’d hope your investment was wise enough to not!

            All great discussion on here - good reading

            • Terbo on 12/02/2021 - 13:02

              @scanuck: Very broad example…
              You have $100K so you can buy a house for $500K, it goes up 20% / $100K in a few years, you make $100K and the bank doesnt care about the value of the house in the meantime unless you dont pay the loan. Or the value doubles in 10 years, you make $500K.
              You have $100K and you can buy shares for $200K, it goes up 20% / only $40K in a few years, but if the value of the shares falls from $200K to $100K in the meantime you may get a margin call and have to put in more money or sell the shares right when the value is low to meet the call. Value doubles in 10 years, you make $200K.
              Shares are more flexible, diversified and low cost to buy, run and sell, but also more volatile and less friendly for bank borrowing.
              Property is inflexible, concentrated, high cost to buy, run and sell, but can be less volatile and banks love it, supported by govt rules.
              Doing both smartly and consistently is the best way to make easy money over the long term.

              • scanuck on 12/02/2021 - 17:07

                @Terbo: Correct and agree - except for the missing scenario in which the house value drops (unlikely but possible)

                You’re still on the hook for an asset that is now worth less than you owe!

      • ihbh on 05/02/2021 - 09:06
        +1

        Excellent example of uninformed investors. What was the level of interest rates when you bought? What are they now? What are they likely to be in 5-10 years?

        • Donaldhump on 05/02/2021 - 09:11

          Prob -10 percent knowing the rba

        • stratbargain on 05/02/2021 - 09:40

          5.2% from memory and now 2%.

          I'm not suggesting it was a better investment than the stock market. All I'm saying is there are plenty of people investing in different ways that will continue to drive property prices up. I don't see them dropping anytime soon (if ever). For every person who is new into the market trying to buy, there are many who have years of investing and capital behind them.

          • ihbh on 05/02/2021 - 09:49

            @stratbargain:

            I don't see them dropping anytime soon (if ever)

            What if interest rates rise back to 5.2% or even higher? (Not in next 2-3 years, but after)

      • slow on 05/02/2021 - 09:35
        +4

        Agree 100%

        Like my friend who has been ready to buy a house since 15-20 years ago, but always waiting for prices to crash. Told me I was crazy to buy property. He is still waiting.
        The houses he nearly bought then have more than doubled in value

        Now it turns out I was just "lucky" to have got into the property market

      • Ghost47 on 05/02/2021 - 10:18
        +2

        Now I'm in a position if I wanted I could sell both and have enough capital to buy a house in the 1.4-1.6m range

        Is that a post CGT or pre CGT figure?

        People often say “I can sell for x capital gains” and that’s all well and good but costs of ownership really need to be factored in as well (if they haven’t been which I would think most people don’t consider when they say that kind of thing).

        • stratbargain on 05/02/2021 - 10:31
          +2

          Post CGT. Post agent commission etc etc.

          But you're right it can be a bit of a shock to people when they realise the true cost of selling an investment property

      • netjock on 05/02/2021 - 12:23

        Number don't make sense.

        $0.96m for both properties with average hold of 11.5 years.

        $800k mortgage assume at 6% average interest rate. Your mortgage balance would be $0.65m.

        Even if they are double the price you have $1.9m less $0.65m mortgage.

        Capital gains on $0.9m with 50% discount would be $450k at say 30% = $135k

        $1.9m - $0.65m - $0.135m = $1.1m

        You are still talking about $300k - $500k loan which isn't that far from some $800k to enter the market loans.

        Simple truth I have been trying to tell is. With property rising prices spread across the market and bidding up capital values with little regard for income is just bad news.

        If the only house you can afford you have two options:

        Pay $500k for it $100k deposit and $400k loan 3% $1,700 per month of after tax money.

        OR $1m house with $100k deposit (impossible almost) $900k loan 3% $3800 per month.

        $2,100 per month at 5% growth over 30 years is $1.7m

        Pay the difference into super or shares. I'd have a pot of money at retirement compare to just sitting on a big expensive house that banks won't refinance unless I take a vulture loan (reverse mortgage)

    • netjock on 05/02/2021 - 12:02

      Genuine question, I can’t understand it.

      Initially negative interest rates. Literally you borrow $800k and buy the end of 30 years you have paid back $500k because the other $300k the bank paid you.

      Will get a big initial bump. Sydney should average $2m house prices but by the end of 30 years everyone would have paid back $1m because the bank paid the other $1m.

      Then everyone rejoice believe they have made $1m. Cash out and fight with all the other millionaires for scraps of $100k RAV4 hybrids.

    • greatlamp on 06/02/2021 - 22:46

      the price can double in ways that aren't shown on a simple graph.

      A house used to sit on 600-800 sqm of land, now a house sits on 350-400sqm.

      There is also the logic that owners set the price of rent. If there is no capital price growth, rent will be increased instead. This isn't as clear as the opposite isn't true - increasing prices do not command higher rents, and it is certainly possible for renting to be cheaper than owning - on a short term basis

      • mskeggs on 07/02/2021 - 08:40

        If you own an investment property, can I suggest you set the price of rent higher by $100 a week and let me know how the owner setting the price of rent to make up for slower capital growth gets on.

        • greatlamp on 07/02/2021 - 08:42

          It won't happen in the short term, I already covered that. No need to be obtuse.

          How do rents rise? Or do they never rise in your world?

          • mskeggs on 09/02/2021 - 16:26

            @greatlamp: Rents rise with wages, given stable supply and demand. They fall when there is unemployment and lack of demand (no international students).
            They can't exceed wage growth because they already comprise a large proportion of income for the average renter, on below average incomes.
            Renters can't put off paying market costs till the future like an investor might choose to do.

      • netjock on 08/02/2021 - 14:07

        A house used to sit on 600-800 sqm of land, now a house sits on 350-400sqm.

        Also look at new builds on those new 400sqm blocks vs 1970s - 1980s brick veneer houses, at least twice as big.

        There is also the logic that owners set the price of rent. If there is no capital price growth, rent will be increased instead.

        Yes, those are the people who also overlook price increases are actually a function of low interest rates not increase in rental yields and prices will keep on going up at the same pace while interest rates won't be going down at the same pace.

        I wouldn't been too worried about interest rates going up. Reason is because people are basically loaded up with debt and tapped out their disposable income.

  • pharkurnell on 05/02/2021 - 09:31
    +1

    I have around 100k as balance
    I could barely pay a 10% deposit for 2 bedroom unit

    You must be talking about Sydney… ?

    • mskeggs on 05/02/2021 - 12:53
      +2

      Everywhere else is just camping out.

      • pharkurnell on 05/02/2021 - 14:02
        +5

        If Australia needed an enema - Sydney is where you'd insert it.

  • nedski on 05/02/2021 - 10:06

    I might be the exception here but I have bought a couple of 1 Bedroom apartments and the rent I get covers the costs (mortgage etc) and they are pretty much evenly geared (well one is let out to social housing and I deliberately take a tax loss on that one), but my end game is to have them paid off by the renters and when I retire, I have additional revenue streams to my super from the rent I get from them.

    I just think the constant gambling on capital gain appreciation is not sustainable.

    • ihbh on 05/02/2021 - 10:10

      Downside is the building depreciates through wear and tear and in, say, 30-40 years might have to be pulled down. There is some value in the land, but not that much, and you have to stump up a lot of capital for your share of the rebuilding.

      • netjock on 05/02/2021 - 12:09

        You have to look at what they do in Asia with old flats. DYOR.

      • nedski on 05/02/2021 - 16:12

        Well we do have a depreciation schedule which allows us to write off an extra $5k a year.

        I think those risks are mitigated however with a well funded sinking fund which refreshes the building every decade.

        • ihbh on 05/02/2021 - 18:11
          +1

          a well funded sinking fund which refreshes the building every decade

          That is, money from your pocket

          Houses have a lot of land that doesn't need a sinking fund to refresh it.

          • netjock on 05/02/2021 - 22:08

            @ihbh:

            Houses have a lot of land that doesn't need a sinking fund to refresh it

            Well apartments don't have land that needs refreshing. I think you need to compare the structure people live in.

            • ihbh on 05/02/2021 - 22:10
              +2

              @netjock: He said apartments get a higher yield without having to speculate on capital gains or not. I'm saying the higher yield is because at the end of many years, there might be no structure and not much land value, whereas houses have more land value (to offset the lower yield).

              • netjock on 05/02/2021 - 22:14

                @ihbh: You got it all wrong.

                Why you bringing a knife to a gun fight?

                Two different products serving two segments of people.

                There is advantages to both but you are just on the houses side and never see the other.

                Positive cash flow of apartments is a peace of mind that you don't have to be tipping money in each month to make repayments. For some people that can let them sleep at night. Just like share market vs property people.

                People in the share market have balls to hold on when it goes down and put more money in, while a lot of property people are literally so scared they can't sleep at night when a major crash comes once every 10 years.

                • ihbh on 05/02/2021 - 22:18

                  @netjock: He was pointing out the pros of one and the con of another, I added a con to balance it out

                  • netjock on 05/02/2021 - 22:21

                    @ihbh: You just need to read the stuff that you write and check it for common sense. I'll leave it there. Common sense is in short supply in this country as show by the people we vote into government.

  • TheMindsetTraveller on 05/02/2021 - 10:24
    +1

    I love and encourage residential property investment. Over a million Australians utilise the benefits of negative gearing, and whether that makes it right for your situation ..YMMV. Of course there are other pros and cons with residential property investment, just like any type of investment.

    That said, buying a property is much more tangible than buying shares as some have already mentioned in this thread. If you gave me or most people here $500K right this second we have a good idea what apartment/house we might get with this money and if it is worthwhile (to our lay man eyes). Most of us would not know where to start with the shares, plus, if most of us went to the bank right now to borrow $500k so with the purpose of buyings shares (without any surety) I am sure the bank will tell us all to go away, politely of course. With a apartment/house purchase, they would give you $500k and more without even trying.

    • railspider on 05/02/2021 - 11:05
      +4

      If I had 500k I'd buy some Vanguard ETFs.
      Picking a property with good potential for yield and capital growth is much harder.

      • Ghost47 on 05/02/2021 - 11:28
        +1

        I don’t think most people who don’t know much about stocks or the sharemarket realize that investment vehicles such as ETFs exist.

      • TheMindsetTraveller on 05/02/2021 - 11:56

        Assuming I earn $100k (assuming no expenses, have zero debts also zero assets), can I walk into a bank right now and will they lend me $400k so I can buy ETFs?

        • whooah1979 on 05/02/2021 - 12:22

          Why do you need a legacy bank to borrow money to invest?

          People can open an online trading account, find an asset they like and go long (or short) at 2x to 125x leverage without leaving their home. Their $100k cash is now in a $200k to $12.5m trade.

          • TheMindsetTraveller on 05/02/2021 - 12:25

            @whooah1979: Ok so I go open a trading account, deposit the $100k, and start ETF investing? No investment is guaranteed to grow so what are the likely risks here?

            • whooah1979 on 05/02/2021 - 12:33
              +2

              @TheMindsetTraveller:

              No investment is guaranteed to grow so what are the likely risks here?

              You're right, No investment is guaranteed to grow. The only guarantee is that data over the last 100 years shows that asymmetrical investments outperform real estate. They'll keep outperforming real estate if that trend continues.

              • TheMindsetTraveller on 05/02/2021 - 13:36

                @whooah1979: Thanks, will definitely look into this.

                I've been taught and have practiced over the last 15 years that buy residential property; utilise negative gearing, and the moment a property is positive geared, to go buy the next property and build a portfolio from there. Resi property has been fine so far, but this ETF looks really positive.

                I might speak to my accountant and see if I can use my SMSF to buy some ETFs.

            • Ghost47 on 05/02/2021 - 12:59

              @TheMindsetTraveller: Short term risk is drop in value. Maybe some currency risk depending on the ETFs.

              The world would really have to go to a dark place (e.g. nuclear war) for ETFs to lose value over the long term — they are essentially tied to economic growth.

        • nhylated on 08/02/2021 - 21:52

          Yes - see NAB Equity Builder.

          I don't know if you'll get 80% LVR - but the point is that certain banks do provide leverage for equity investments (from a pre-approved equity list that also has ETFs).

    • netjock on 05/02/2021 - 12:11
      +4

      Over a million Australians utilise the benefits of negative gearing

      Okay if you call paying the bank $1 to save $0.40 and maybe cash in 10 year if not 30 years time.

      People can't even salary sacrifice to super without kicking up a stink about how it will be locked up until retirement age. Tax discount up front and discount on returns.

      • Ghost47 on 05/02/2021 - 12:56

        Not only that but you don’t have to deal with everything property investing entails. I know that my pre and post tax super contributions will pay off handsomely by the time I retire and I will hardly have had to lift a finger for it. That is the main benefit of not investing in property, the time and effort it takes.

        • netjock on 05/02/2021 - 14:56
          +1

          I too also see property as only a necessary evil. At least I can stop my salary sacrifice into super when things get bad, if the bank doesn't give a mortgage holiday then you are well stuffed. The money is also there when the ATO come looking, not tax surprises at the end of the year.

          Look at stamp duty and now potential imposition of annual universal land tax for stamp duty. Stamp duty for share purchases went away decades ago. The government will always look after the share market, they only look after the property market so they look after the banks who are listed on the share market.

          People just think the government is looking after their investment properties. No the government doesn't care about the little person. Land tax regime in Victoria hasn't increased the threshold for a long time so basically everyone with an investment property in Metro Melbourne is caught into paying land tax.

  • ImpulseMan on 05/02/2021 - 12:06

    Maybe look outside Sydney. I have heard of great land and build deals in QLD where you can benefit from the home builder grant. I assume you are not a first home buyer, but if you are possibly added incentives. The prices in Sydney generally keep you out of most grants/concessions.

    Property should not be the only thing in your portfolio imo. I personally also like a good dividend producing stock with upside.

  • Edinburgh on 05/02/2021 - 21:51

    Thanks Everyone for your comments and suggestions.

  • MustacheFire on 06/02/2021 - 19:57

    Many properties are cashflow neutral, or positively geared if you have 80% LVR. Over time, inflation will increase house prices and hence generate capital gain (historically growth has been much stronger). Likewise rental returns will grow in dollar terms.

    This will mean growing equity and positive cashflow over time. And more so if you are paying down the principal amount of debt.

    Relative to shares, the key advantage is the ability to borrow to get larger asset which can generate gains (without margin calls). A (strong) 10% gain on say $200k of shares is $20k. But that same $200k could fund a deposit on $1m property, which only needs a 2% return to generate $20k gain. (Leverage can work both ways though….)

  • Bid Sniper on 06/02/2021 - 20:28

    $50/week cash flow. Seriously you can buy Lego at discounts, sell on Ebay for more cash than that.

    Forget capital gain in Sydney on flats, you will probably lose money, its played out.

    • greatlamp on 06/02/2021 - 22:53

      Unfortunately its been 'played out' for well over a decade. It keeps growing, and those who try and outsmart the market end up poorer

  • funnysht on 06/02/2021 - 23:08

    The point with property is that you can borrow against it and hence wait for the capital to grow. No way a bank would give you 500k to invest in shares etc.

    However if you have 100k best would be to invest in shares- or ETFs.. More liquidity and some ETFs have like 6-8% gains compound that and is quite a lot

    disclaimer: seek your own financial advice first

  • MrTruffle on 06/02/2021 - 23:22

    Interesting discussion. I'm much more into property as you get the rental return and the capital growth but lots of good arguments here.

    I didnt know the bank would lend you money to buy shares. Especially at a low < 2% rate?! Please direct me to these loans!

    All the loans Ive seen that low normally have been owner/occupier. So you can get a loan, pay it down, and then redraw from that to invest in shares but you need the property as collateral. (I searched the Interactive Brokers have margin loans for < 2% but Comsec is ~5%!?!)

    If you have 100k only and then want a loan from the bank what will they use to secure the loan?

  • nephilim on 07/02/2021 - 09:22

    "When I see cash flow after paying Strata+ Council+Water. I am getting $50/week cash flow. After paying 30K in overheads like stamp duty and LMI, I may not be able to recover these in next 10 years."

    Then buy a House in SA for 200k and make 250 a week (after paying agent and insurance)?
    never get why people go after hugely expensive houses for first time.

    • Some Guy on 10/02/2021 - 12:56

      "Then buy a House in SA for 200k"

      Sounds like you'd be buying a social problem.

    • vince088 on 10/02/2021 - 17:37

      deleted comment, nvm :)

  • negger on 14/02/2021 - 10:35

    investing in A-REIT is a good option if you like property. Leverage is good with properties but I am not a fan taking on huge liabilities especially at the current property prices.

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