IP vs No IP - The Maths

Hi All,

I'm currently considering purchasing an investment property in Brisbane (Logan) with a budget of $500k to lease out while I live at home with my family. I made a post a couple of weeks ago around my strategy and got a great deal of helpful insight from the community. Cheers to everyone who contributed!

Anywho, I've dived deeper into the journey and put together a (possibly incorrect) spreadsheet estimating my cashflow for the next year with and without an IP.
I've found that owning an IP should only cost me an extra ~$191 a week. I've also found that the investment property would have to appreciate in value by over 3% p.a. for me to profit (9,940/500000 + CGT @ 50%.) I think this growth rate should be attainable with an established 4-bedder in Logan?

I'd love some feedback / constructive criticism from the community. I'm also not sure whether all my estimations or calculations are correct, so please flag any errors! I'm also more than happy to share my spreadsheet with anybody for their review/use.

Thanks everyone!

 

I didn't look at the maths/numbers etc only your title.

I'll rephrase your title to my answer.

No IPs = very likey no chance to build significant equity and wealth long term (Unless you invest in something else).

Buy Ips= the strong opportunity that long term you will build up a decent amount of equity to supplement your retirement and live a better lifestyle.

That's essentially what it comes down to. Don't get too hung up on the spreadsheets to determine whether to invest in RE or not.

 

I would work out the specific tax situation for the property and include the tax position in that.

 

Looks about right, looks quite affordable broken down like that.

Cashflow wise; I'd consider the potential after tax outcome of the 9.9k negative cashflow i.e. you might get more back in tax.

CG wise- power of leverage is the main benefit to just continuing to just buying your ETF's you seem to be doing (in addition to diversifying your range of assets).

All the best,

 

Great work with your research and spreadsheet. You’ve got surplus cash flow after buying the ip which is reassuring and means you’re ready to buy.

I’d go for it and as Sackie said, start building your wealth through real estate.

I agree with Sackie too in regard to using spreadsheets as a guide. The variables such as interest rates, rent, capital growth etc change so often that spreadsheets are rarely accurate. Plus if you use them too literally, as I have done at times, they can stop you from moving ahead due to analysis paralysis. (Yep, it’s a thing!)

 

Alpha,

I have been making spreadsheets like yours for ~10 years. Are they accurate, maybe, maybe not. But here is what I can tell you... I didn't buy the properties, and the spreadsheets are all still on my computer. In *every* spreadsheet where I compared IP vs No IP, just as you have, the property is now worth nearly double or more than when I made the spreadsheet.

I focused too much on the weekly cashflow ("I'd be $50 better/worse a week") and missed the point of leverage / capital gains and youth. I suffered analysis paralysis (see Jingo above) and regretted it. The property I bought on a whim (no spreadsheet, very un-me) has made me 20% in 4 years. I regret the properties I didn't buy, and not the one I did.

Take a risk*. You're young.


*absolutely not to be considered financial advice!

 

The big gains are 20 years down the track.

Type these formula in.
=500000*(1.05)^19
=500000*(1.05)^20

the difference is your gain at the back end.
Start early enough? Thats what you see in your 40s.

really do not understand people’s focus on cashflow. Will you panic sell if rates go up because of a few k negative cashflow and give up on the future cg?

 

Spreadsheets are all well & good, but life doesn't work like a spreadsheet. CG does not happen at a certain percentage each year. And I'd like to add that your spreadsheet is a bit confusing. You've added Other Property Expenses twice, as well as Mortgage Payments and Interest Payments. Not sure what's going on there.

Just know that if you start now, you will have a much better chance of building a better life for your future.

 

Say interest rates went up or down by 1%. Will it affect your buying decision? Is that the right way to decide whether to invest in property or not?

 

Interest rates will go up, if increased just 1.2% your interest repayments could have 50% increase, your rates and costs will compound up, Tax deductions will go down with threshold changes. You could soon have 20k costs p/a and falling rent. Property growth is lumpy, you could have 10 years of low or declining prices before having a 70% gain in the 3 next years, which will be eroded by inflation while massive opportunity costs from the losses compound. Optionality is foregone , you might end up with only 2 options, sell at a loss or continue to hold at compounding losses. Any growth cant be accessed your low returns destroy serviceability, a 9k loss means your property could become your master instead of your servant. It is utter BS that you cant have good growth and positive cashflow. it is harder now. Some people's thinking has been skewed by recency bias and confuse luck with astuteness. Good out come doesnt necessarily mean generally superior strategy. Until recent decades property was valued on what it returned, 5% was the bench mark you paid what would give you a 5% return p/a I still use it, it works well makes buying easy and simple when you understand attributes of locations. When yeilds compress sell and swap security to increase cash flow and available funds. Another metric used more so for commercial property was the you paid the gross earning it could make in 5 years.