How to make easy money from property...

It really is that simple......

Over the LONG term.

Take action, buy something and let time and patience give you some $$$.

Rinse.... repeat....boring.....and effective

 

Add a granny flat and the maths gets MUCH better, especially when interest rates move (up) again and it protects your investment. First post on new forum, couldn't help chiming in

So, look for a property that has or can have a second form of income and you increase yield and protect against serviceability risks.

Brazen.

 

What's SANF ?

 

Sleep at night???

 

Hey Michael,
Really interesting. I'm trying to understand your calcs...

In doing my figures, I get:

• - Purchase costs 0.4% (is about a 4% one off, but should be apportioned against length of loan and adjusted for inflation; pretend really simple and 0.4% on a 10 year hold)
• + rent (yield) 3.3%
• - interest 4.2% (note this is 4.5% equivalent interest against the loan; at 80% LVR it would be 4.2% against the property value)
• - general other outgoing/fees/maint 2%
• - depreciation 1%
• All these four come together under NG = 3.3-4.2-2-1 = 3.9% loss, at 40% marginal rate = 1.6% tax saving

So I lose 0.4% purchasing costs, gain 1.6% tax savings, gain 5.3% CG, lose 2.5% to inflation = 4% total gain.
Then I may lose half of that CG to CGT upon sale, depending on circumstances,
so then my position is 4% - (5.3% / 2) = 1.35% total gain.

Of course, that's 1.35% on the property value, not my cash (deposit+costs), and getting this without leveraging bank money through other means may be quite difficult (ie. your ROI calc).

To me, the above is why banking on average CG through poor yield doesn't make much sense - at least it's >0 I suppose! Obviously if you can eliminate CGT then it's a lot better.

Some scenarios:
Low yield 3.3%, avg CG 5.3% = 4% (or 1.35% after half CGT). Avg capital location?
Higher yield 6%, higher CG 8% = 5.6% (or 1.6% after half CGT). Outer good Brisbane/Adel?
High yield 9%, avg CG 5.3% = 1.7% (or -1% after half CGT). Low cost, outer suburb not Syd/Melb?
Low yield 3.3%, high CG 11% = 9.7% (or 4.2% after half CGT). Current Syd/Melb?

Interest rate rises have a negative effect at 40% of the increase - so an increase of a full 1% would effect the total gain by 0.4% (due to marginal rate).

(edited: middle scenario figures were wrong!)

 

Hi Michael,

Good to see you posting on this new forum.

Sydney has been going great past several years. But can you assume it would always be like this? There will be period of pain inbetween which will really test your patience.

To give an example I picked a suburb North Fremantle (Western Australia) which had $1.24million median price in 2007. I understand the limitations of median but they are ok to paint the big picture. Fast forward 2014 (7 years) and the median price of the suburb is $1million. In 2015 it has climbed up to $1.24million. I don't want to calculate the IRR of this particular investment.

Suburb info - North Fremantle

Now for someone looking to aggressively grow their portfolio would be severely slowed down by this investment.

I am fairly confident North Fremantle median will rise much higher in future but planning on 5%pa growth into your next 8 years plan might sometime come undone and cause you a lot of grief.

Cheers,
Oracle.

 

...or simplifying to a formula based on all the assumptions (10yr hold, 80% LVR, 1% depreciation, 40% marginal tax, inflation, size of comet's tail, etc)...

Total gain % = CG - 1.7 - 0.4*(yield - interestrate)

Now I just need to find a way how to span the explanation out for 2 days, make it incomprehensible, and get suckers^H^H^H^H^H^H^Hpeople to pay $10,000ea to come to the "seminar"/"workshop".
Ahhhh - a new formula!

Total gain = $10,000 * number of people with money seeking property nirvana * cities for repeat performances

which can be shortened to​

Total gain = $10,000 * 500 * 10 = $5M, with no CGT

 

Hi McArthur (and everyone else, sorry I was off work sick yesterday and not posting...),

Great to see your response and how you're getting your head around it!

For everyone elses benefit: this is a LONG term model approach. I agree completely the relevence of timing and the fact that this won't be the case in every invested year. Some years your investment will not do this well, some years it will do better, but on average, this is a reasonable expectation given history as a guide. Long term, boring buy and hold. That's it.

McArthur, my only comment on the above is you've left yield from your total annual return. It should read:

I lose 0.4% purchasing costs, gain 1.6% tax savings, gain 5.3% CG, lose 2.5% to inflation, gain 3.3% rent (yield) = 7.3% total gain.

That then applies to all your scenarios where you vary your yield and CG assumptions. 7.3% is your inflation adjusted result which is why it compares similarly to my opening non-inflation adjusted model.

Even inflation adjusted, your still making 7.3% on $1M = $73K pa. That's an IRR of 36.5% (inflation adjusted) on your $200K in at 80% LVR. Beats cash in the bank hey, inflation adjusted that's zero if you're lucky...

Cheers,
Michael

PS, and Yes, SANF = Sleep At Night Factor...

 

Thanks very much Michael. It's been a very interesting process to do those stats and really see what the returns could be on different scenarios.
The above you changed is a bit I don't understand still - in my "tax savings" number, I included the yield 3.3% as a positive, but that number has to be offset against the other costs such as interest repayments, other deductibles such as agent fees and maintenance. So the rent (yield) is already included in the 1.6% in the example and shouldn't be added again later.
I'd love another 3.3% gain, but I can't see where my assumptions and reasoning are wrong - help!?

Robert

 

This is a good thread, thanks.

I am not brilliant with maths, and am going to keep it simple, we are really talking about nothing new here, this is the "buy and hold" strategy, and clearly the outcome will be totally dependent on where, what and when you buy. Get all of these wrong and you are screwed and holding -ve geared property, lots of pain as per example of North Freo, plenty of other examples I can give you.

The question is how many people/investors get this right?? That is the only thing that matters IMO as this will enable ongoing investing, strategize with a mix of selling some on the rise reduces risk and the banks will love you because you can service debt. Oh yes, that old chestnut, you need the banks money to keep moving.

MTR

 

Step 1: Buy
Step 2: Wait
Step 3: See step 1.

 

Lol, MTR and Steven. I do agree with you.

What I found interesting in the exercise was looking at the different strategies for Steven's steps 1-3: yield & CG.

For example, it's clear (to me!) that deciding to go high yield, avg CG, means you either have a good plan to minimise CGT or you're doing it only for other obviously great reasons. A great reason may include being able to get servicability on a new IP of low yield, high CG where the 9+% total gain could offset the 1% loss.

But it also whacks me over the head and reminds me that chasing yield as against CG isn't a winning formula (for buy and hold!) - and more importantly, just how much it isn't!
In the revised formula (TM ), every point of CG counts, but only 40% of each point of yield counts. So instead of trying to increase yield by a full 1% by buying in a certain spot or doing renos or something, I'd only need 0.4% increase of CG to get the same effect. So I'm (probably) better off looking for a better CG property than a better yield property.

I'm sure this is well known, but the numbers help me understand.

 

Minimizing CGT sell after 12 months. If trading/developing and you operating as a business pay no more than 30% tax, there are ways to make it work Via structures and timing, this is where you want to use a savvy accountant but then you are not a buy and hold forever investor. If you start playing in this arena and then a different skill set is required but its not rocket science just a different way of playing. I think both are great strategies, mix it and you have a balance of cash flow and growth.

MTR

 

Hi Robert,

No, you need to add it in as the actual rental cash received (yield). That is ON TOP of the tax benefit from Negative Gearing that you also get due to your reported loss position.

From any property investment, the elements of your total annual return are:

1. Rental Yield (the rent you receive from tenanting the property) +ve
2. Capital Gain (the passive internal growth on the asset) +ve
3. Negative Gearing (the tax on your personal income that you don't have to pay because of your reported loss) +ve or zero
4. Interest (the cost of borrowing in servicing the loan) -ve
5. Other costs (annual costs associated with owning the property e.g. land tax, council rates, civils, maintenance, gardening, property management etc) -ve

All of these can be converted to a percentage, which is what I did in the opening post to demonstrate what a typical NET annual return from passive buy and hold property should look like. It is tax effective because the capital gain isn't taxed under buy and hold, and depreciation can mean that even a cash flow profit becomes a reported loss.

In the above 5 elements, your model looks like this:

1. Yield 3.3% +ve
2. Capital Gain 5.3% +ve
3. Negative Gearing 1.6% +ve
4. Interest 3.4% -ve (4.2% on only 80% of the value)
5. Other Costs 2.4% -ve (acquisition 0.4%, other general 2%) Note: depreciation of 1% is for NG purposes only and is absorbed in the overall Capital Gain of the asset.

TOTAL = 3.3% + 5.3% + 1.6% - 3.4% - 2.4% = 4.4% Net return after all costs and tax
As an Internal Rate of Return on your $200K that's $44K pa after tax or an IRR of 22%. In real terms, after inflation that's 19.5% assuming 2.5% inflation.

As an aside, is 4% the typical acquisition cost? I thought on about $1M it would be closer to 2% equating to 0.2% pa over 10 years buy and hold...
I also think the yield of 3.3% is lower than what most would achieve. I know my Sydney properties were yielding 4.9% at purchase which then only improves from there as the loans are locked at purchase. They were renting for an average of $800pw at an average purchase price (built) of $850K. Loans are only $588K each. Today they value over $1M each but the loans are still only $588K each and the rents have all gone up several times to an average of $830pw (5.1% yield on original purchase).

Sorry, I should have paid more attention to your calcs in my initial response. The above is a more accurate representation of what you were trying to calculate.

Cheers,
Michael

 

Michael
Would love an update on Mona Vale, if you don't mind sharing

MTR

 

That's right . It's often the most boring stuff that deliver the best long term .

 

People forget this. Also there is no such thing as a "typical" year.

 

Yes, but long term buy and hold is a pretty stable compounding curve. People forget this...

And when you don't care whether next year is a "typical" year or not, then buying the mean not the point on the curve is a valid investment approach.

Too many people try and "time" their investment then "flick" it for short term gain. That's not investment, that's speculation. Admittedly, if you're buying now into the Eastern seaboard markets then you're likley buying at a point towards the top of the curve which will mean a protracted period of under-performance relative to the mean. I'm certainly not buying Sydney now, but I AM holding.

My numbers in this thread weren't supposed to project that you would achieve those returns every year, just that you should expect those AVERAGE returns over a protracted timeframe.

Its not complicated, just boring long term buy and hold. You can, of course, improve those returns by timing your entry. A lot of people, myself included, pay attention to the property clock and time our boring long term buy and hold entries at as close to 6 o'clock as we can... Its nigh on midnight on the East Coast now!

Cheers,
Michael

 

How many of us here are actually cash rich from properties, compared to paper wealth?
Interesting concept how many perceives themselves of being rich simply by looking at their asset value. You gotta use the cash for it to be worthwhile.

 

depends on what phase you are up to.

I am in the acquisition phase so cash poor but asset rich.

My father (was on SS in 2001) he hasn't logged onto SS for 8 years (maybe more) but hasn't joined PC. He is asset and cash rich. Hasn't worked since he retired (early 50s) cant collect his super but is right now in England/Ireland going to the ashes test matches (all 5 days of the matches) + Wimbledon semi final.

He did look at the mens final but it was going to cost over $10,000 and he doesn't think that is value and ended up with the women's semi which was $3,000.

So I think people on PC yes there would be some cash rich and asset rich but to me once (if) I make my money you wont be seeing me online!