Real costs of owning a negatively geared rental property?

Discussion in 'Property Market Economics' started by Alex123711, 29th May, 2019.

Join Australia's most dynamic and respected property investment community
Tags:
Page 1 of 3
  1. Alex123711

    Alex123711 Well-Known Member

    Joined:
    28th Dec, 2017
    Posts:
    403
    Location:
    Sydney
    I have been looking into this and even with negative gearing, costs seem to be quite high to hold onto property hoping for a cap gain, for example a 500k house renting for 500/week (which is a better yield than most), still seems to be over 10-15k out of pocket with neg gearing when you consider all costs, real estate fees, rates, water, maintenance, repairs etc. Depending on interest and and interest only or P&I.
     
    Alex123711, 29th May, 2019
    #1
  2. Simon Hampel

    Simon Hampel Founder Staff Member

    Joined:
    3rd Jun, 2015
    Posts:
    12,412
    Location:
    Sydney
    Sure.

    $500K purchase price, let's say 90% lend, so $450K loan, interest payments @ 5% = $22.5 Kpa

    Repairs / maintenance, allow say, 2%pa (could be much higher depending on age of property) = $10 Kpa

    Income at 5%pa = $25 Kpa, allow for 2% vacancy = $500 ... management fees @ 8% (all inclusive) = $2K, net = $22.5 Kpa

    Holding costs = $22.5K - ($22.5K + $10K) = -$10Kpa

    After tax = something like $6K, depending on your tax bracket.

    Actual negative cashflow could be much higher with a P&I loan - but your equity is growing faster if you do pay P&I.

    NAB loan calculator on $450K loan with 25 years remaining (eg after initial 5 year IO period) at 5% interest rates, monthly repayment will be $2,631 ... so around $31.5K pa ... of which we've already established around $22.5K is interest - so P&I adds approximately $9K pa in cashflow requirements.

    Which puts you at around $15K negative cashflow per annum after tax.

    So, yes - holding costs can be quite high.

    Capital growth at 7% pa (long term average) = $35K pa ... compounding!

    This is also where adding value really starts to have an impact - perhaps increasing yield and rentability from cosmetic renovations. You could also look at dual-income properties or other ways to increase income from the property to offset some of the holding costs.

    There are a heap of ways to make property less cashflow intensive to hold.
     
    Simon Hampel, 29th May, 2019
    #2
    Beano, ALT, Stoffo and 2 others like this.
  3. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,323
    Location:
    Australia
    Guess some people hope harder than others.

    Cap gains is uncertain. Risk is where the return is.

    Sure there are falling markets (syd and mel), flat markets (bris and per) and crashes (mining towns). Thats the risk.
     
    Last edited: 29th May, 2019
    Trainee, 29th May, 2019
    #3
  4. Alex123711

    Alex123711 Well-Known Member

    Joined:
    28th Dec, 2017
    Posts:
    403
    Location:
    Sydney
    Also a lot of people do their calculation on Interest only, which isn't really realistic?
     
    Alex123711, 29th May, 2019
    #4
  5. fols

    fols Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    737
    Location:
    Sydney
    Pretty much. If it was easy everyone would be doing it.
     
    fols, 29th May, 2019
    #5
  6. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,323
    Location:
    Australia
    For share investors, every share pays enough dividends to cover interest costs.

    Wait.....
     
    Trainee, 29th May, 2019
    #6
  7. Alex123711

    Alex123711 Well-Known Member

    Joined:
    28th Dec, 2017
    Posts:
    403
    Location:
    Sydney
    Would you buy shares on margin? 7% compounded seems pretty high considering wages aren't growing at that rate, do you see wages doubling in 10 years?
     
    Alex123711, 29th May, 2019
    #7
  8. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,323
    Location:
    Australia
    Dont agree with your drivers of property prices.

    Dont feel a need to convince you either.
     
    Trainee, 29th May, 2019
    #8
  9. PandS

    PandS Well-Known Member

    Joined:
    14th Feb, 2017
    Posts:
    1,165
    Location:
    NSW
    Nah take money out of mortgage and buy share I am paying 4% interest, I get yield around 5% fully franked so gross up around 7%-8% and then capital gain on top.
    I expect good yield shares going to drive a mini rally if RBA cut rate next week.
     
    PandS, 29th May, 2019
    #9
    Greedo, ChrisP73 and The Y-man like this.
  10. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,406
    Location:
    Qld
    Interest payments only should be used for calculating true holding costs.

    The principal part of a P&I loan pays down the loan, so is increasing your equity by reducing your debt.
    Marg
     
    Marg4000, 29th May, 2019
    #10
    The Y-man likes this.
  11. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,406
    Location:
    Qld
    No, and no.

    Not only is the interest rate high, you are also subject to sudden margin calls when/if the share value falls sufficiently.
    Marg
     
    Marg4000, 29th May, 2019
    #11
  12. Simon Hampel

    Simon Hampel Founder Staff Member

    Joined:
    3rd Jun, 2015
    Posts:
    12,412
    Location:
    Sydney
    Sure - if I had high confidence that my returns would more than cover the costs. Like any investment - it comes down to a risk vs reward measure.

    I have had margin loans in the past and still have a margin facility - although it is currently unused.

    Note that I do not margin in my own name (only via trust), so I'm not negatively gearing things.

    You have to pick your markets.

    I've had properties in Adelaide triple in value in the space of about 14 years ... worked out to be around 9%pa compound growth.

    My other Adelaide properties I estimate have had around 8%pa compound growth in 18 years (despite the last 6-7 years being fairly flat growth), plus they were 10%+ yield at purchase price (this is a block of units, so multiple income).

    Again, all my properties are held via trust - so I don't get any negative gearing benefits there either.
     
    Simon Hampel, 29th May, 2019
    #12
  13. Alex123711

    Alex123711 Well-Known Member

    Joined:
    28th Dec, 2017
    Posts:
    403
    Location:
    Sydney
    7% compounded growth doubles your money, so this prices the average property in Sydney at $2 million, and $4million in 20 years, assume the average wage goes to 100k in 10 years time, that puts prices at 20x earnings, is that realistic?
     
    Alex123711, 29th May, 2019
    #13
  14. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,323
    Location:
    Australia
    Dont buy if you dont think it will happen.
     
    Trainee, 29th May, 2019
    #14
  15. PandS

    PandS Well-Known Member

    Joined:
    14th Feb, 2017
    Posts:
    1,165
    Location:
    NSW
    building wealth doesn't works with projection

    building wealth is about stacked away a bit of your pay packet each pay day and invest wisely
    through out your life, where the market end up in boom or bust in 20 years time no one knows but one thing for sure you will have more money than you have now if you stacked it away in that period.

    The thing is to action at some stage and don't wait for too long, if you think properties is unworkable find another asset to invest your saving, shares, business, capital equipment rental etc... if shares is expensive and properties is cheap buy properties.

    don't let your money sleep and dont concentrate all your money in one place where bad things may happened and it wiped you out, keep putting the money to work.
     
    PandS, 29th May, 2019
    #15
    lettert, ALT, Gockie and 7 others like this.
  16. Human

    Human Active Member

    Joined:
    4th Nov, 2017
    Posts:
    29
    Location:
    Sydney
    So true. Words of the week.
     
    Human, 29th May, 2019
    #16
  17. The Y-man

    The Y-man Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,500
    Location:
    Melbourne

    I tend to look at the reverse ~ i.e. the break even.

    So if the $500k prop will be $15k negative pa, I effectively need it to grow at a minimum 3% pa.

    Then I ask myself whether this is unlikely, likely, or highly likely

    The Y-man
     
    The Y-man, 29th May, 2019
    #17
    lettert and Angel like this.
  18. Andrew Allen

    Andrew Allen Well-Known Member Business Member

    Joined:
    20th Jun, 2015
    Posts:
    369
    Location:
    Brisbane
    Excellent thread and nice analysis Simon :)

    Negative gearing is mainly a bet that growth will compensate, if there isn't any growth then it's not attractive at all. Opportunity cost is a significant cost to consider also.
     
    Andrew Allen, 29th May, 2019
    #18
    Simon Hampel and Peter_Tersteeg like this.
  19. Alex123711

    Alex123711 Well-Known Member

    Joined:
    28th Dec, 2017
    Posts:
    403
    Location:
    Sydney
    Good points, I always include opportunity costs too, so if the 100k deposit was put into index funds for example the long term return is around 7% compounded so double in 10 years or another 10k per year, so 25k total costs per year, the property needs to be worth 750k in 10 years to break even
     
    Alex123711, 29th May, 2019
    #19
  20. MWI

    MWI Well-Known Member

    Joined:
    17th Jul, 2017
    Posts:
    2,287
    Location:
    Lower North Sydney NSW
    Property is a long term game and never constant or consistent in price rises or falls just see the graph in article below for the last 40 years or so to understand:
    What we can learn from Australia's median house prices from 1970-2016 - Homely
     
    MWI, 29th May, 2019
    #20
Page 1 of 3