Property Investment Strategy - set and forget, is it worth it?

Hey guys,

I have just received the results from my first completed tax return with an IP under my belt.

The numbers stack up as follows:
purchase price $265,000
Total acquisition $277,000
Rental income $15,600
Expenses: $19,900

Total net loss of $4,300 for the year.

Purchased in Ingle Farm, SA with an approximate annual growth of 2.3%.

If I were to have another 4 of these properties with similar numbers, it equates to the following:

Total rental income: $78,000 per year
Total Expenses: $99,500
= Total net loss of $21,500 per year.

2.3% growth on (5 x $265,000)
= $30,475 annual growth.

Therefore after owning 5 investment properties, based on the above numbers and taking in to account all rental income and all expenses incurred, I would have an annual positive cashflow of $8,975.

Obviously this is not taking in to consideration any tax benefits or opportunities to add value through renovation or development, but to me these numbers don't seem worth the hassle of the initial outlay costs and associated risks. I understand that rental income eventually increases, but the expenses stay the same when considering interest payments, council tax, insurances, property management fees etc.

For example if I have saved up $30 000 every 2 years for 10 years to have been able to pay for the deposit & all associated buying costs for all 5 of these properties, I only come out $9k in front every year.

I'm about 6 months away from purchasing my 2nd IP, but I'm seeking clarity from you guys in how sound my strategy actually is. To define, my strategy is to purchase within 12kms of Adelaide CBD with blocks of land at least 500sq with the potential to renovate and / or develop.

I could also be wrong with how I have crunched the numbers or any other accountancy issues which I am more than happy to be corrected with.

Any feedback will be much appreciated.

 

Don't know if this is obvious but you wouldn't actually be 8975 positive each year and would actually be 21500 negative each year as you won't be able to realise the growth until you sell a property and then have to minus all the associated cost and taxes so would probably be less. Maybe look at diversifing the types of property so you have some with growth potential and some with positive cashflow so you can start paying down the debt to minimise expenses and gradually become cashflow positive

 

What exactly is your strategy with these purchases? For me, when I purchase I'm either looking for a net yield that pays down the principal (so regardless of growth I'm building equity using other peoples' money) or I see a rising market and try to catch ripple effect of growth or other (maybe counter cyclical buy bmv to with potential to make equity) or a mix of above. If you have net yield and predicted growth that doesn't cover hold costs, is there an upside you didn't mention or are you speculating on a future boom?

 

Also, presumably you had these figures before you purchased? You need to be comfortable with them before you sign up and know in what way you expect the ip will work for you. I don't know that area so hopefully someone local will chip in.

 

I wouldn't be buying any more with low cap growth forecasts- I don't see the point.

 

For the purpose of this exercise put aside the issue of whether this is a good investment and calculate your returns on a compounding basis.

One property we bought 23 years ago owes us $200,000(buying+costs+renow+refurb),
had $170,000 capital gains plus $35,000 net rental returns over the last 12 months.


Compounding is the 8th wonder of the world, then throw in leverage and the long term returns can be amazing(can also blow up).

 

Property and any investment shouldn't be set and forget but with 1 year you really aren't set and you haven't forgotten. Added it is difficult to make a profit after the first year due to the high costs in purchasing etc.

If you take our your purchasing costs (12k) as this would only be there for the first year, then there would of been a gain of 7.7k. However in 5/10/20 years time your costs remaining fairly fixed as loan size generally doesn't increase, the interest rate will likely increase however generally speaking rents will change with this due to supply and demand. However the house value will typically increase along with rents due to inflation, demand etc etc.

Go back 20 years ago and the house you purchase was probably 50k and even if you made a 50k loss on the first couple of years it would likely be;

1. Positive geared
2. Rent have increased even though interest rate has gone down
3. Loan cost would be the same (unless you drew out more)
4. Capital has increased.

B&H is a slow and steady way but the better quality the asset the better result your B&H will usually yield.

To make money in less than a year you have to buy well under MV, have a boom and reno/develop.

 

Personally with these yields and SA lacklustre performance over the last 5 years I would be buying Telstra shares at $4.00 with a fully franked yield of 7.8%.
Also interest rates are on the rise, expect the property yields to drop further.

Property is all about timing and buying in the right markets with the right fundamentals ie jobs, immigration/population growth, strong economy.

I would sit back start doing some homework and viewing many posts and strategies on PC, there are plenty of forum members who have made considerable gains by buying in the right market. Education first and take your time, there is absolutely no rush to buy in Adelaide, because this market is not doing anything.

Not to say it wont in the future, however investing in property has nothing to do with living in hope and anyone can buy property

MTR

 

Need to consider vacancy rates or other unanticipated costs (HWS blows up, property damaged) etc. Do you have a buffer for unanticipated costs and IR increases?