Feedback on Investment Costs

Hi all,

New to the forum and learning heaps, thanks for sharing so much info everyone!

I'm looking at a property in Brisbane - the plan is to eventually live in it but for the foreseeable future it will be an investment property. I'm hoping to get your feedback as to whether this is a viable strategy, it's my first property and a big decision.

Investment loan on the property will be $285K, property value is $350K. Based on a comparison rate of 3.3% weekly repayments will be $315.

The property is currently not tenanted - it has been owner occupied for years. Rental value estimates are $380-$400 p/w. I am being conservative and going with $350 p/w rental in my calculations. I am on an income of $125K excluding super.

To get together the 20% deposit will wipe out most my savings/vanguard investments/HISA/spec shares, there will be about $5,000 left in those accounts.

Expenses per week associated with the property:

• Repayments $315
• Council rates $30
• Strata/Body corp $55
• Building insurance N/A as it's included with strata
• Landlord insurance $8
• Property Manager $35
• Repairs/maintenance $70
• Land tax $0 (exemption applies)
• Water rates $28 (inc sewerage and other quarterly charges)
• Vacancy @ 6 weeks p/a $40
• Advertising fees $4
• Total outgoings $585 p/w

After the rental income this will leave me $235 p/w out of pocket. I don't feel this is too bad but I'm not sure. I can still afford to make extra repayments of $115 p/w and continue to grow my Vanguard managed fund and a manage a couple of other obligations that I have.

But at the end of the day I don't know what I don't know. Do the expenses seem high to you? Is there anything I'm missing? Does this seem like a balanced/appropriate investment?

Feedback welcome, thanks in advance!

 

Have you allowed for CGT when cashing in your investments?

Check your strata building insurance policy carefully. Some cover everything, many don’t.

Allowing for 6 weeks vacancy a year us high. So long as you are not holding out for excessive rent, 2 weeks a year should adequately cover it.

 

A lot depends on your expectations of cg, and what the alternative is. If the unit doesnt go up for 5 years, if shares boom or crash.....

In and of itself the numbers seem reasonable (that is, comparable to units in the market). Whether its a good investment....

 

Thanks for the feedback on the vacancy rate, I will bring it down! I will definitely cross-check the strata insurance policy carefully, thanks

 

I don't know if it makes a difference but it's a townhouse and I plan to live in it within 5 years, perhaps rent it out again in future. At this stage it's a buy and hold.

 

As a general rule it doesnt make sense to buy an ip with a vague idea it might become ppor in the future. This limits you to areas and properties you are willing to live in. Investment should be made because you think its a good investment.

would you still buy this if you never plan on living in it?

 

I think I still would. This is my first property and I've lots to learn yet but I feel like this is a good investment property that will hold its own. It has grown over the 3 sales it has gone through since build in 1994 but not astronomically that I would be worried that it is overvalued or would suffer terribly in a crash.

 

For starters here is a very quick calculation -> AU$1 in 1994 → 2019 | Australia Inflation Calculator
Type in the original value, type in todays value, if it has barely kept up with inflation then that should raise a flag.

Using the figures you posted above, if you pretend for a second that your mortgage is fully paid off, you still have $270p/w in running costs, that doesn't leave much on the table from $350+ p/w rent once this investment is paid off.

You mentioned the intention is to buy and hold, I don't know all the details but unless the townhouse has some really good capital gains prospects (Gentrification, infrastructure improvements, land locked etc..) then the rental return will get eaten up by all the running costs over the long term.

I agree with the above, judge this as an investment only, even if your intention is to move in, you might find that circumstances change in a few years and all of a sudden you might want to live somewhere else.

 

Wow this is a really insightful response, thank you.

In 1998 the property sold for $112,000, which is $190,665 in 2019 dollars. Given it's on the market for $340K it's grown a decent amount and has kept ahead of inflation.

The feedback on the ongoing running costs even with a repaid mortgage is interesting. These are standard costs for investment properties, how do people avoid the costs being so high? I guess that's the never-ending question of property investing, right?

At best case scenario, ie: rental return is higher (apparently it's valued at $380-$400 p/w but I've gone in conservatively at $350 p/w) and reducing the vacancy rate allowance to 3 weeks instead of 6 weeks, that would still mean my costs would be $250 p/w even with the mortgage paid off.

 

Consider the tax outcomes not just cashflow

1. Repayments arent deductible. Interest is. $180pw
2. Depreciation and capital allowances may help pull the rental profit to neutral ?
4. The combination of accurate rent and a target of nil vacancy excepting initially may improve this position

IMO weekly amounts have too much scope for variance. Annual numbers are often better and smooth all issues eg The agent seems to be 10%...Thats approx 20% too high,

Our property estimator tool uses annual ...and looks at non cash issues, loan splits and marginal tax rates.

 

Wow, thanks for this tool! I ran the numbers after deductions and it's about $2000 out of pocket at that point so that's not too bad.

Currently waiting on strata reports and all that. There's a pool and tennis court in the complex and about $200 in the sinking fund. There's been 2 sales in the townhouse complex in the last 3 months so not sure if that's telling me something I don't know.

If the agent doesn't give them to me is there a way to get them?

 

hope thats a typo.

 

As I understand it, it is not. Can you help me understand a bit more about sinking funds and why they're important? I have an idea of course but newbie looking to learn

 

No dollars in sinking fund can mean several things
1, is they scape thru keeping levies low
2, if doing 1 and something goes wrong a special levy needs to be raised
3, no current funds could mean they have recently had a decent maintenance spend
4, they may have major issue's, hence why people are selling/running

How many in the complex ?

 

Thanks Stoffo. There are 37 units in the complex. Body corp fees are $670 per quarter.

 

Apparently it was, the senior REA has told me the sinking fund has $105K in it so not sure where the junior agent got $200 from!

 

Maybe they thought you were asking how much the sinking fund levy is per quarter.