Help on My Math on Negative Geared Investment Property

focus123 on 27/05/2024 - 18:13
Last edited 05/06/2024 - 05:03

Dear Ozbargainers,
I'm trying to do some math on negative geared investment property and I am not sure if I am getting the numbers correct.

I really appreciate it if you can pinpoint any wrong calculations or assumptions in below scenario.

Investment Property - A Unit worth 500,000.
Mortgage 400000.
Down payment 100000
Transfer and stamp duty - 26000
Conveyance fee - 1000
Total out-of-pocket Initial investment 127000.

Rental income @400 per week x 50 = 20000

Monthly P&I repayment @6.30% = 2475

Outgoings(council, strata, maintenance, water and sewer, agent fees) excluding interest is 7500 per year.
Interest is - 25,000 1st year.

cashflow loss of 12,500 per year (rental income - expenses).

Depreciation 7,500 per year.

The reduction in taxable income is 20,000 (12500 + 7500).

Assuming 120000 per year taxable income, the annual take-home pay is 88,000
After purchasing the investment property,
Assuming 100,000 per year taxable income, the annual take-home pay is 75,000.

Annual loss of after-tax income 13,000

10 years after tax loss 130,000.

After 10 years, the property value is 930,000 (@ 6.5% long-term appreciation).
The sale cost is 2% = 20000.

Remaining mortgage balance after 10 years = 345,000
Total depreciation claimed = 75000
Capital gain = 930000 - (500000 - 75000) - (27000+20000) = 458000

Net proceeds (before CGT) i= 930000 - 345000 -20,000 = 565000

CGT = 20300 @ 37% + 78300 = 98,600.

Total balance in the bank = 565000 - 98600 - 20000 = 446400

Initial investment + ongoing negative cashflow = 127000 + 130000 = 257000.

Total profit from property investment is $189,400 (446400 - 257000) after 10 years of owning.

Is this math correct?

Update 1

Thank you for all your valuable feedback. I updated the math as below.
* Reduced the appreciation rate to 4% as many suggested 6.5% for a unit is very optimistic. This brings down the sale price after 10 years to $740,000 (from 930,000).
* Included the principal payment part as a non-tax deductible cashflow loss, Which reduced the annual after-tax take-home income to 17,700 (previously I used 13,000 for this)
* Because of the above change, the 10-year cumulative after-tax loss becomes 177,000.
* Capital gain reduced to $268,000. Included the wife also in the CGT calculation to get a more accurate picture. Combined CGT reduced to $51,400.
* Updated total balance in the bank to $323,600 (Sale price - Sale cost - Mortgage balance - CGT).
* Updated the total investment to 304,000 (initial investment + ongoing cashflow loss)

Investment Property - A Unit worth 500,000.
Mortgage 400000.
Down payment 100000
Transfer and stamp duty - 26000
Conveyance fee - 1000
Total out-of-pocket Initial investment 127000.

Rental income @400 per week x 50 = 20000

Monthly P&I repayment @6.30% = 2475

Outgoings(council, strata, maintenance, water and sewer, agent fees) excluding interest is 7500 per year.
Interest is - 25,000 1st year (tax-deductible).
Principle - 4700 (non tax-deductible)

cashflow loss of 17,200 per year (rental income - expenses).

Depreciation 7,500 per year.

The reduction in taxable income is 20,000 (12500 + 7500).

Assuming 120000 per year taxable income, the annual take-home pay is 88,000
After purchasing the investment property,
Assuming 100,000 per year taxable income, the annual take-home pay is 75,000.
Reduce the non-tax deductible principle payment of 4700.
Net take-home pay is 70,300

Annual loss of after-tax income 17,700

10 years after tax loss 177,000.

After 10 years, the property value is 740,000 (@ 4% long-term unit appreciation).
The sale cost is 2% = 20000.

Remaining mortgage balance after 10 years = 345,000
Total depreciation claimed = 75000
Capital gain = 740000 - (500000 - 75000) - (27000+20000) = 268000

Net proceeds (before CGT)i= 740000 - 345000 -20,000(sale cost) = 375000

CGT liability (for 2 people) = 134000
CGT liability for 1 person = 67000
CGT 1 person = 20300 @ 37% + 5400 @ 45% = 25,700.
CGT 2 persons = 51,400

Total balance in the bank = 375000 - 51400 = $323,600

Initial investment + ongoing negative cashflow = 127000 + 177000 = $304,000.

Total profit/loss from 10-year property investment is $19,600 (323,600 - 304,000) after 10 years of ownership.

Update 2

Thank you all for comments. The key takeaways for me are;
* Avoid negative gearing if the cash flow loss is noticeably higher.
* Avoid negative gearing on apartments/flats as appreciation and rental returns are low.

Financial

Comments

MS Paint on 27/05/2024 - 18:17

+7

I didn't read it all but I spotted an early mistake.

Why are you putting such a huge down payment upfront on an IP?
- focus123 on 27/05/2024 - 18:25
  
  Got the PPOR covered by offset and extra money now sitting in a savings account that earns 5.3% interest. 100k will remove the need of having a lender mortgage insurance.(This is my assumption. Please correct me if I am wrong).
  - MS Paint on 27/05/2024 - 18:40
    
    +4
    
    LMI is tax deductible.
    - focus123 on 28/05/2024 - 06:10
      
      Thanks for this hint.
- Kongzi on 27/05/2024 - 18:30
  
  +4
  
  Probably to avoid LMI
- kaleidoscope on 28/05/2024 - 07:51
  
  Exactly… you don't spend every buck in the account for a downpayment for IP…
onetwothreefour on 27/05/2024 - 18:28

+13

I know nothing about this but aren't there 52 weeks in a year?
- 87percent on 27/05/2024 - 18:36
  
  +20
  
  Maybe on your planet
  - Antikythera on 30/05/2024 - 21:44
    
    there are approximately 0.926 Venus days in a Venus year.
    
    so assuming 7 Venus days to a Venus week, there are 7.56 Venus years in a Venus week.
    - Alice McGregor on 03/06/2024 - 16:07
      
      Uh mondays. Am I right?
- focus123 on 27/05/2024 - 19:31
  
  +14
  
  I left 2 weeks without rent to compensate for the periods in between tenants. Hence the 50 weeks rent instead of 52
SBOB on 27/05/2024 - 18:38

+1

Rental income @400 per week x 50 = 20000
Monthly P&I repayment @6.30% = 2475 (12=29700)
Outgoings excluding interest is 7500 per year.
Interest is - 25,000 1st year.

cashflow loss of 12,500 per year (rental income - expenses).

Incoming $20000
Outgoing $29700(monthly p&I) + $7500(outgoings) = $37200

Cashflow loss =?

Unless I'm not following some of your numbers and/or descriptions
- focus123 on 27/05/2024 - 19:33
  
  Thanks for pointing that. I think I got lost between the actual cashflow loss and the deductible amount that can be claimed in tax
mskeggs on 27/05/2024 - 18:43

+13

Good example of how many variables there are.
Will long term appreciation be 6.8%? Will rates rise or fall? Will CGT discounts remain on property? Will there be any extra maintenance costs? Will the unit be vacant at any time, or have bad tenants needing to be evicted.
Jaduqimon on 27/05/2024 - 18:51

+17

100k on nvidia set and forget. Easy math
- Jimothy Wongingtons on 27/05/2024 - 18:56
  
  +6
  
  On nvdia options*
JimmyF on 27/05/2024 - 19:03

+10

Outgoings(council, strata, maintenance, water and sewer, agent fees) excluding interest is 7500 per year.

How much have you put aside for maintenance? Don't be a scumlord and not do maintenance.

After 10 years, the property value is 930,000 (@ 6.5% long-term appreciation).

Maybe….. Property can't keep going up forever unless wages/inflation follow it ;)

For your $500k unit today to double in 10 years, a LOT of crazy things have to happen.

Total profit from property investment is $189,400 (446400 - 257000) after 10 years of owning.

Now do the figures of putting the deposit and the 'losses' into a managed fund or ETF and see what you have after 10 years.
- Kongzi on 27/05/2024 - 19:23
  
  -4
  
  10 years ago, people who didn't buy wished they did. And the benefit of real estate is leverage.
  - JimmyF on 27/05/2024 - 19:30
    
    +5
    
    10 years ago, people who didn't buy wished they did. And the benefit of real estate is leverage.
    
    Past performance is not an indicator of future performance.
    
    There have been a lot of reasons property has gone up, mostly cheap money, but that has run out now.
    
    Its funny how as prices have gone up, interest rates have come down🤔
    - Kongzi on 27/05/2024 - 19:57
      
      +1
      
      House prices are rising despite interest rate going up. Interest rate is not a direct correlation of property prices
      - JimmyF on 27/05/2024 - 19:58
        
        +2
        
        @Kongzi:
        
        House prices are rising despite interest rate going up
        
        Will they double in 10 years with interest rates @ 7%! without wage growth and inflation? No they won't…..
        
        Kongzi on 27/05/2024 - 19:59
        
        +2
        
        @JimmyF: I guess you must be right
        
        JimmyF on 27/05/2024 - 20:05
        
        +1
        
        @Kongzi:
        
        I guess you must be right
        
        I'm not disagreeing houses have doubled in the last 10 years, but as it sits today, we are playing a different game to that period.
        
        We have inflation driving up prices of everything, which is driving up wages or at least demand for increased wages. We also have the highest interest rates seen in the last 10 years.
        
        You can't expect the average punter to pay double what they are today @ 7%, without massive wage growth to back it up, which is basically a devaluing of your money.
        
        Sal in SA on 27/05/2024 - 20:07
        
        @JimmyF: Just need enough wage growth > available properties in very very small limited areas people want to live in.
        Wages are going up in the right industries / professions - and that % is more than enough to keep prices going up.
        Does not need everyone to keep having large wage increases, just more than supply or physical available land where everyone wants to live.
        Saying that 6%+ for a unit may be a tad optimistic.
        
        JimmyF on 27/05/2024 - 20:13
        
        +2
        
        @Sal in SA:
        
        Just need enough wage growth
        
        Things I said above, which was "Property can't keep going up forever unless wages/inflation follow it"
        
        Does not need everyone to keep having large wage increases, just more than supply or physical available land where everyone wants to live.
        
        It does need everyone's wages to raise more equally than you claim as part of keeping all people in the country at a more even standard of living. Otherwise you turn into the cesspool that is America of extreme poor and rich.
        
        The problem with endless property growth and wage growth is it devalues the value of the money. It is all about your 'buying' power.
        
        Who has it better? A person in a $4m house, earning $500k a year, who pays a $50 coffee on the way to work or a person in a $1m house, earning $125k a year, who pays a $8 coffee on the way to work?
        
        Sal in SA on 27/05/2024 - 20:24
        
        @JimmyF: Expectations will be the main part that changes, detached or semi detached housing 30-40mins from CBD will be more exclusive to 2x above avg to high incomes and denser apartment - units will become the norm for most. Again all related to distance form CBD.
        As for even standard - when or where has that ever happened ?
        
        JimmyF on 27/05/2024 - 20:29
        
        +1
        
        @Sal in SA:
        
        As for even standard - when or where has that ever happened ?
        
        Australia has a massive middle class band compared to lots of countries, cough cough America for example.
        
        You didn't answer the question on Who has it better? A person in a $4m house, earning $500k a year, who pays $50 for coffee on the way to work or a person in a $1m house, earning $125k a year, who pays $8 for coffee on the way to work?
        
        Its not about how much you earn, its all about 'buying power' and sending house prices to the moon like every investor wants from this point in time, isn't going to great things for that.
        
        Sal in SA on 27/05/2024 - 20:47
        
        @JimmyF: well, for starters - own coffee machine and grinder at home - mix/blend own beans and then self brew on way to home office to WFH !.
        It's less investors sending prices to the moon, but more buyers in general - more than enough buying PPOR even right now, so obviously they are also just as responsible for increasing prices and demand.
        
        This maybe the last decade or so to get actual detached or semidetached houses within 30-40min of any CBD on avg 2x full time wage, going forward it will be more and more limited to townhouses and cramped units/apartments - regardless of buying power etc - as we push to 100mil+ population things will continue to change and land will only ever increase in value - as wil cost to build $ /m2 - again we have high wages - new builds /renos are also reflective of that
        
        JimmyF on 27/05/2024 - 20:50
        
        +2
        
        @Sal in SA:
        
        well, for starters - own coffee machine and grinder at home - mix/blend own beans and then self brew on way to home office to WFH !.
        
        Whoosh as the entire point of the question flies over your head.
        
        regardless of buying power etc - as we push to 100mil+ population things will continue to change and land will only ever increase in value
        
        No point in continuing if you don't understand what buying power is all about.
        
        Have a great night!
        
        Kongzi on 27/05/2024 - 22:05
        
        @JimmyF: You don't have a crystal ball m8. Real estate is a secured long term investment in general.
        
        JimmyF on 28/05/2024 - 09:06
        
        +2
        
        @Kongzi:
        
        You don't have a crystal ball m8. Real estate is a secured long term investment in general
        
        Oh you have a crystal ball? As I said many times, Property can't keep going up forever unless wages/inflation follow it. But I can see you're another one who doesn't understand 'buying power'. So who is doing it better?
        
        A person in a $4m house, earning $500k a year, who pays $50 for coffee on the way to work or a person in a $1m house, earning $125k a year, who pays $8 for coffee on the way to work?
        
        CommuterPolluter on 28/05/2024 - 00:20
        
        @JimmyF: I think you underestimate just how quickly the Federal Government can mint new Aussies when the rubber hits the road.
        
        JimmyF on 28/05/2024 - 09:08
        
        @CommuterPolluter:
        
        I think you underestimate just how quickly the Federal Government can mint new Aussies when the rubber hits the road.
        
        And how well did that work out for everyone when govs printed money during COVID? As I said many times, Property can't keep going up forever unless wages/inflation follow it.
        
        Feel free to answer the who has it better question above….
        
        Drpepper666 on 28/05/2024 - 12:15
        
        @JimmyF: Houses literally will keep going up forever
        
        JimmyF on 28/05/2024 - 13:28
        
        @Drpepper666:
        
        Houses literally will keep going up forever
        
        Yes they will, as along with wages and inflation…. There isn't a pathway that wages and inflation will stay at todays levels while houses double.
        
        So answer me this then, who has it better?
        
        A person in a $4m house, earning $500k a year, who pays $50 for coffee on the way to work or a person in a $1m house, earning $125k a year, who pays $8 for coffee on the way to work?
        
        Succulent on 28/05/2024 - 19:15
        
        @JimmyF: For goodness sake. Let the man has his question answered.
        
        To put you at ease, Im going to take a stab in the dark.. ummm.. is it the one with $4m house as $4m house will have better design and materials than $1m house, and maybe $50 coffee would generally taste better than its cheaper comparison?
        
        JimmyF on 28/05/2024 - 20:09
        
        @Succulent:
        
        To put you at ease, Im going to take a stab in the dark.. ummm.. is it the one with $4m house as $4m house will have better design and materials than $1m house, and maybe $50 coffee would generally taste better than its cheaper comparison?
        
        So you assumed the question was for the same point in time. Its not. Another one who lacks the understanding of buying power and what property prices going up really means when wages/inflation follows.
        
        Succulent on 29/05/2024 - 00:38
        
        @JimmyF: Everyone was ignoring your question, even though you have taunted them multiple times. So, I am just giving you what you want. Hope you feel better letting that one out.
        
        JimmyF on 29/05/2024 - 09:11
        
        @Succulent:
        
        Everyone was ignoring your question, even though you have taunted them multiple times
        
        You see it as a taunt, it wasn't, it was a use your brain question in hope that a light bulb would go on.
        
        So, I am just giving you what you want. Hope you feel better letting that one out.
        
        Thanks, you proved what I already knew. Most commentators here fail to understand buying power.
        
        Higher property prices does not mean more 'wealth' when everything else has gone up with it.
        
        fourofjacks on 29/05/2024 - 14:41
        
        @JimmyF: You proved what most knew, your question was loaded and not worth answering.
        
        JimmyF on 29/05/2024 - 16:57
        
        @fourofjacks:
        
        You proved what most knew, your question was loaded and not worth answering.
        
        Far from it. Most fail to understand what even purchasing power is.
        
        So if you do, then who has it better?
        
        fourofjacks on 29/05/2024 - 17:10
        
        @JimmyF: All other things being equal person earning $500k.
        
        Do you understand what purchasing power is? One person has $10, the other has $20. At the same point in time. Who has more purchasing power?
        
        JimmyF on 29/05/2024 - 17:28
        
        @fourofjacks:
        
        All other things being equal person earning $500k.
        
        Want to try again?
        
        Do you understand what purchasing power is?
        
        I do, its about what you can 'purchase' with your money at a given point in time.
        
        One person has $10, the other has $20. At the same point in time. Who has more purchasing power?
        
        My example wasn't at the same point in time though…..
        
        We are currently in a purchasing power reduction, as inflation is up, and wage growth is down. Most fail to understand what that means moving forward.
        
        fourofjacks on 29/05/2024 - 17:37
        
        @JimmyF: So if you do, then who has it better?
        
        One person has $10, the other has $20. At the same point in time. Who has more purchasing power?
        
        I have helped you since I have stated it is at the same point in time.
        
        JimmyF on 29/05/2024 - 17:41
        
        @fourofjacks:
        
        One person has $10, the other has $20. At the same point in time. Who has more purchasing power?
        
        If looking at the same point in time, the one with more money…. But as I said, my example wasn't the same point in time, so not sure what your point is of your question.
        
        Now in your example if that one person with $10 was living in 1980 and the other person with $20 was living in 2024, then the $10 person has far better purchasing power!
        
        fourofjacks on 29/05/2024 - 17:45
        
        @JimmyF: Want to to again? If it isn't clear my question is loaded.
        
        JimmyF on 29/05/2024 - 17:52
        
        @fourofjacks:
        
        Want to to again? If it isn't clear my question is loaded.
        
        LOL was it really loaded? Your question was
        
        One person has $10, the other has $20. At the same point in time. Who has more purchasing power?
        
        and it was answered in full, If looking at the same point in time, the one with more money. Question answered.
        
        But I went on to expand on your question that if that person with $10 was living in 1980 and the other person with $20 was living in 2024, then the $10 person has far better purchasing power for sure.
        
        fourofjacks on 29/05/2024 - 18:18
        
        @JimmyF: It was Hong Kong dollar $20 vs $10 USD. I even even told you the question was loaded.
        
        In economics, when explaining and comparing the default is to consider 'all other things being equal' this includes being at the same point in time.
        
        Your question was loaded as you were using an assumption that most people would not use. If you wanted to ask a question with that assumption, include it in the question.
        
        So yes my answer $500k is correct if you are talking economics. Just like your answer is correct.
        
        You are not wrong in your thoughts, but the delivery needs work.
        
        JimmyF on 29/05/2024 - 18:49
        
        -1
        
        @fourofjacks:
        
        It was Hong Kong dollar $20 vs $10 USD. I even even told you the question was loaded.
        
        In economics, when explaining and comparing the default is to consider 'all other things being equal' this includes being at the same point in time.
        
        Oh look at you smartie pants…. You won!
        
        This is ozbargain, we had been keeping it simple. Like your example leaving off the currency.
        
        fourofjacks on 29/05/2024 - 19:13
        
        @JimmyF: You mean simple by trying to be a smart arse leaving off different point in time?
        
        Just doing the same thing to you as you did to succulent.
        
        My question (in your words) -'it was a use your brain question in hope that a light bulb would go on'
        
        JimmyF on 29/05/2024 - 20:38
        
        @fourofjacks:
        
        Just doing the same thing to you as you did to succulent.
        
        Well not really, the entire thread has been talking about house prices increasing in Australia….. and peoples buying power in Australia……. No Hong Kong vs USA. My example was a now and a what people will think will happen. Yours not so much.
        
        My question (in your words) -'it was a use your brain question in hope that a light bulb would go on'
        
        Yeah, on why house prices increasing in Australia isn't as great as people think it is. Which my example was factored around.
        
        So enjoy, you won. Congrats!
        
        fourofjacks on 29/05/2024 - 21:29
        
        @JimmyF: I'll make it more relevant for you. The person with $10 has more purchasing power as his parents bought him a house. The person with $20 is struggling with rent.
        
        If you weren't trying to be a smart arse, you would have included your assumption in your question.
        
        Don't think anyone in this thread has said increasing house prices is great in this thread.
        If they have is certainly not as many times as you have repeated your loaded question.
        
        JimmyF on 29/05/2024 - 21:51
        
        @fourofjacks:
        
        I'll make it more relevant for you
        
        You won, no need to be a jerk about it.
        
        fourofjacks on 29/05/2024 - 23:28
        
        @JimmyF: You see it as a ~~taunt~~ being a jerk, it wasn't, it was a use your brain ~~question~~ reply in hope that a light bulb would go on.
        
        you calling me out being a jerk just the same as you calling me out for my terrible assumptions. It's ok for you to be a jerk and make terrible assumptions?
        
        I knew full well my assumption was as bad as yours, hence why I fronted up saying it's loaded. Know I'll be seen as being smart arse to call you out on it. But so be it.
        
        You have made errors in many of your posts in this whole topic, not just this thread. Errors are fine, but the smart arse attitude is not.
        
        But yes let's move on. I won't bother replying anymore. Even if you admit being wrong again but can't help yourself try take another dig at me.
        
        JimmyF on 30/05/2024 - 09:04
        
        @fourofjacks:
        
        I knew full well my assumption was as bad as yours, hence why I fronted up saying it's loaded. Know I'll be seen as being smart arse to call you out on it. But so be it.
        
        Yes you had been a smart arse aka jerk. My 'assumptions' had been fair and was related to time, keeping all else equal, time is what we are talking about. Buying a house and holding it for 10-20 years. While yours are just silly so you win. So you won. Congrats.
        
        Errors are fine, but the smart arse attitude is not.
        
        Kettle is that you?
        
        but can't help yourself try take another dig at me.
        
        Says the person having a dig while announcing their departure. This isn't a airport, no need to announce you're departure from the thread. 🙄
        
        Succulent on 30/05/2024 - 07:11
        
        @JimmyF: So are you saying it is not a ~~taunt~~ trick questions even though you have insisted someone, who disagree with you, to answer it again and again?
        
        Is this that kind of question where you were given A or B, and the actual answernis C. Either way you answer, it will be wrong because the person who answer it will need to guess the context and the assumption that are in scope in someone brain that was not stated, and any other assumption made by someone else will be wrong?
        
        I wonder what will you say if someone has answered with the one with $1m house?
        
        Is it "wrong, this proved to me commentator here failed to understand the buying power"?
        
        If it is, sounds like a taunt just to ~~prove~~ say others are wrong and you are right. :)
        
        JimmyF on 30/05/2024 - 09:03
        
        @Succulent:
        
        I wonder what will you say if someone has answered with the one with $1m house?
        
        Give you a hint, the coffee price was the key to the persons buying power.
        
        If it is, sounds like a taunt just to prove say others are wrong and you are right. :)
        
        Far from it, no one picked the right answer as most think more is better.
        
        The $1m house owner has more 'buying power' for their money.
        
        SBOB on 28/05/2024 - 14:03
        
        @Drpepper666:
        
        Houses literally will keep going up forever
        
        below, above, or in-line with inflation.
        A houses "price rise" is only relevant as an "investment" when compared against everything else that has changed price over the same period.
        
        If above, you're deduction is house prices effectively increase against inflation forever and approach infinity $?
        
        JimmyF on 28/05/2024 - 20:13
        
        @SBOB:
        
        If above, you're deduction is house prices effectively increase against inflation forever and approach infinity $?
        
        House prices are driving wage growth, that is driving inflation, that is driving wage growth, that is driving inflation.
        
        So yeah, you earn $125k today with a $1m house, WOW it becomes a $2m house in 10 years time, too bad you now need $250k income to afford the house. So did your house really go up? As your buying power hasn't changed.
- focus123 on 27/05/2024 - 19:37
  
  Thanks,
  The maintenance part is about 1000 to 1500 in my assumption.
  
  I used the historical property value data from 1998 to 2020 in Adelaide to come up with 6.5 % long term appreciation.
  - SBOB on 27/05/2024 - 19:53
    
    up with 6.5 % long term appreciation.
    
    of all properties or just units?
    Free standing properties likely appreciate at a much higher rate than units
  - JimmyF on 27/05/2024 - 20:01
    
    +2
    
    The maintenance part is about 1000 to 1500 in my assumption.
    
    Could be a little low unless you put this away each year. Be prepared if they need a $3k AC unit replaced in the first year or a dish washer or oven. You be ok with that?
    
    I used the historical property value data from 1998 to 2020 in Adelaide to come up with 6.5 % long term appreciation.
    
    For units? Maybe remove 2020 data and do it to 2019 instead and see what it shows.
    
    Just remember, past performance is not an indicator of future performance.
    - focus123 on 28/05/2024 - 06:35
      
      Thanks for bringing this up. Seems like I used the house price history (which is not the correct one for units)
      https://www.valuergeneral.sa.gov.au/__data/assets/image/0015…
      - JimmyF on 28/05/2024 - 09:14
        
        +1
        
        @focus123: If you look at your graph, removing the crazy property spike from 2020 onwards, would show that the long term growth in Adelaide hasn't been as good as it first appears.
        
        It went from $125k in 1998 to $475k in 2019.
        
        Compare that to the crazy growth in 2020 from $475 to $750k in 2024.
  - Benoffie on 27/05/2024 - 20:52
    
    Also remember Adelaide was staring from a low base. Actual movement in units in Adelaide isnt likely to continue to maintain that type of growth long term.
  - knk on 28/05/2024 - 16:53
    
    Maintenance is 1000-1500 till something actually breaks and costs you 10k.
    
    Always need a decent buffer for just in case repairs if you have a rental. Heater / oven shit themselves at mine in the space of a month and it was a nice hit to the bank balance all at once.
CyberMurning on 27/05/2024 - 19:22

+2

Hmm i thought when investor is claiming depreciation, when the property get sold, they need to pay back all those depreciation amount? ( get added to the profit)
- nissa on 27/05/2024 - 19:32
  
  -1
  
  Not depreciation. Only Capital Works Deductions Division 43 are added to the cost base.
- focus123 on 27/05/2024 - 19:40
  
  +1
  
  Yes, the total depreciation amount increases the capital gain. I added 7500 depreciation per year over 10 years to get 75000. That 75000 is considered a capital gain at the time of sale.
DingoBilly on 27/05/2024 - 19:45

+3

6.5% appreciation is very generous to the point of being unrealistic. I prefer conservative estimates so would do it at 4% myself. Also noting some properties just see no rise at all so there is even further risk there. Average over last 10 years across Australia for units has been 70% total, so here you'd be at $850,000. Regardless, I think this assumption of 6.5% is your main issue.

If you went conservative with 4%, that would take $200,000 from your profit which would mean you barely break even. At the national average, you'd make about $100,000, but would have made similar or more from other sources on average.

From a risk perspective you'd be far better off with something like an ETF. You may make more (or much less) on property, but your main issue is that it's negatively geared to the point of making it likely you won't make money if you just hold for 10 years IMO.

Minor other things - your CGT estimate is in the ballpark of being right but a bit off/unclear. I got a slightly different number. For selling costs, you don't include marketing/displaying/renovations Etc. Which would drive price up but cost maybe $10-20k.

Lastly, my expenses are closer to $10k each for properties I own per year. I think your costs for property are a bit low.
- clandestino on 28/05/2024 - 18:29
  
  Any comments on how to borrow for ETF, dingobilly? cheers
Dollar General on 27/05/2024 - 19:52

+1

How many other units are there?
CyberMurning on 27/05/2024 - 20:02

How about not selling it but just keep it as passive income?
- mrtin on 27/05/2024 - 20:54
  
  +4
  
  4% gross rental income isn't much is it? Probably 2 net.
Cheapskate Paul on 27/05/2024 - 20:09

+5

Monthly P&I repayment @6.30% = 2475

Principal repayments are not tax deductable. The interest payment for the first month will be approximately $2071 (assuming a 30 day month). The first month's repayment includes a principle repayment of $404 ($2475-$2071). The second month's interest payment will then be approximately $2069 ($400,000 - $404 = $399,596 * 0.063) and will reduce each month that you make principle repayments. So you have significantly overestimated your interest paid tax deductions.
Dollar General on 27/05/2024 - 20:21

I’m not a tax expert but you sure your $20K per annum loss comes straight off your taxable income? I thought it reduces your tax payable at your tax rate
- star-ggg on 27/05/2024 - 21:06
  
  +2
  
  It reduces your taxable income directly (Etax does the accounting for you). So yeah, instead of paying more tax on PAYG, those tax dollars are directly helping to pay for my IP.
JIMB0 on 27/05/2024 - 20:43

+14

You haven't factored in the annoyance of owning rental property. The maintenance, tenants requesting to keep cats/dogs/roommates, neighbours wanting new fences etc. It's not exactly a passive investment.

I much prefer shares. About the only communication I get from my ETF holdings are too notify me of distribution payments.
- star-ggg on 27/05/2024 - 21:08
  
  +1
  
  Even better nowadays, etax prefills all the ETF info for you.
- MS Paint on 27/05/2024 - 21:40
  
  +3
  
  I agree. Had a rental for 10 years with mostly good tenants. Was glad to see the back of it when it sold. Just extra bulltish you just don't need. Sure, we made money from it but hardly worth it in hindsight.
  
  I reckon you need a good $5-10k in liquid cash on hand in preparation for maintenance and tenant requests/entitlements.
- AustriaBargain on 28/05/2024 - 01:19
  
  +1
  
  Warren Buffet bought his large home for like 28k or something in the 70s and it's worth a few million now. But he says he would have made even more money if he rented and invested in shares instead.
  - payless69 on 28/05/2024 - 04:30
    
    +1
    
    Omaha is not Adelaide. I would be happy to rent a room from him for some of his advice.
- knk on 28/05/2024 - 16:55
  
  Honestly this is too true.
  
  Even if you've got good tenants, it's still stressful knowing that if they're out of work and can't pay it's going to be hell to get them out / manage the mortgage during that period.
  
  Mine went on the market last week and I honestly can't wait till it sells.
  - liongalahad on 29/05/2024 - 22:22
    
    Landlord insurance? Not that expensive
    - knk on 31/05/2024 - 11:11
      
      Covers next to nothing for tenants not paying generally. No where near the amount of time to get them out.
      - liongalahad on 31/05/2024 - 14:13
        
        @knk: 12 weeks for financial hardship and 20 weeks for general default
        Is that not enough? honest quesiton, I have no idea
TVC889 on 27/05/2024 - 22:09

+1

Found an Excel investment property calculator online. Entered your numbers into it and found your calculations are not 100% right but close.

Summary (Based on 52 weeks)
Weekly Outgoings $595.19
Less Weekly Tax Savings $122.41
Less Weekly Rental Income $384.62
= Total Weekly Investment $88.17
Total Annual Investment $4,584.75 (After tax cashflow)

After 10 years, your return will be:

Gross Gain $383,000.00
Less Annual Tax Increase $95,530.00
Less Total Investment $45,847.50
= After Tax Profit $241,622.50
- Happyd on 28/05/2024 - 00:15
  
  +3
  
  Can you share the link to the calculator please?
  - TVC889 on 28/05/2024 - 13:41
    
    +1
    
    Here is the link:
    
    https://www.investmentpropertycalculator.com.au/free-investm…
    
    Click the Download link on the right and you should be able to get a copy. It is free.
orangecarpet-22 on 27/05/2024 - 22:33

+3

Appreciation on an apartment at 6.5% pa average over 10 years is quite optimistic. You’ll probably hit some decent strata maintenance costs in that time.

Take your $100k, dump it in SP500. Add your $13k per annum. Put 10% pa average on that. Blow this property rube Goldberg machine out of the water.

Use the PPOR to get leverage on the SP500 and watch it blow out.

But propadee mate. Been there, done that. Unless you get some rezoning windfall it underperforms the big indexes. It also takes a lot of time and energy, is illiquid and hard and expensive to enter and exit, and isn’t divisible.

It's also unethical on a couple of levels - you can only live in one house at once, so collecting multiple is morally wrong. They're also on stolen land (sovereignty was never ceded).
- surg3on on 30/05/2024 - 09:34
  
  You think the SP500 isnt operating on stolen land?
freefall101 on 27/05/2024 - 23:56

+3

CGT = 20300 @ 37% + 78300 = 98,600.

I'm totally lost on where that came from. How are you paying less than $100k CGT on a $458k gain?

You're also double dipping on capital repayments on the loan as a tax deduction and entirely relying on the property almost doubling in value in 10 years.

Depreciation 7,500 per year.

Are you absolutely sure on that? Gut feel is the tax office won't let you write off $75k over 10 years while also letting your write off all the capital improvements then only paying CGT on it. I'm not a tax specialist in this area though, but seems worth running it by an accountant before you commit your life savings to it.
- DingoBilly on 28/05/2024 - 07:10
  
  +2
  
  The cgt part is justifiable.
  
  458k x 0.5 (cgt discount) = 230k.
  
  Then let's say 0.375 tax rate on average (half at 30%, half at 45%) = 86.25k. So his estimate is pretty good if not a bit high.
  - freefall101 on 28/05/2024 - 09:53
    
    Cheers, that makes sense. I think my brain just got very confused on the calculation.
  - focus123 on 28/05/2024 - 10:49
    
    Thanks mate. Actually the investment will be shared with wife. So it reduces the CGT paid to the government. Added it under the update 1.
AustriaBargain on 28/05/2024 - 01:17

The PM and leader of the Greens are calling for moar properties, it's drummed into our heads in the news so often that it may actually become a political necessity one day. Building properties isn't rocket science and the country as a whole has the means to get it done, given enough time. In a world where there are enough properties for everyone would that unit still stack up as being as valuable or desirable as it is today? Each and every year we let more and more young people vote…
- donga100 on 28/05/2024 - 10:00
  
  +3
  
  The Greens get a lot of hate from the property investor class but I think it is undeserved. Most of their policies I have seen are to outright block new developments or to impose numerous restrictions and extra expense to property developments. These policies strengthen the value of existing properties and rent prices whilst reducing the profit margins on new developments.
  - Tleyx on 29/05/2024 - 16:46
    
    +1
    
    Greens ahould get love from propery investors due to their immi policies
payless69 on 28/05/2024 - 04:26

+1

Negative gearing might blind you. Nice to pay legally less tax. Savings upfront with a bit of CGT to come out of possible profit.
But your largest risk is the quality of your tenant or even tenants in the complex.
Interest rates are unlikely to go up much. But the quality of the bodycorp is likely to be another unknown.
If you believe the lies between the teeth of the agent there are endless traps ahead:
Tenant puts in payslip and a declaration of being smoke and pet free.
Tenant loses job, gets pet, starts to drink fights with partner spends 24hrs wearing down your property.
Landlord pays, pays, pays and courts charge money upfront to not even listen to landlords. So agent kicks out tenant, charges you a fee to go to court and you do get a ruling in your favour. Not worth the paper it is written on. You end up paying for cleaning, repair, advertising for another random unknown tenant.
Your bank has zero tolerance, actually they are happy to lend you some extra ant a fancy rate. In QLD your bond has absolutely ZERO value. Tenant stops rent, you pay for an urgent small claims hearing and just before the police turns up your tenant is gone and you usually inherit a huge mess to dispose of. Your entitled Karen will ring the RTA and clain that you failed to maintain your property and caused the DV and nobody will care about a rental contract that has zero face value. Even if the most caring judge awards you say 10 grands, your chance of collection is practically ZERO. Don't listen to me, ask an accountant that has at least 100 clients with investment properties. Expect net 2% average, risk higher than HVN shares. (Gerry used to pay 6.8%)
Your evicted tenant might leave some white powder behind. Your risk: 100 to 200k for decontamination! I would rather donate to Gerry's dog than pay for such a cleanup.
- liongalahad on 29/05/2024 - 22:24
  
  +1
  
  bikies?

Help on My Math on Negative Geared Investment Property

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