Discussion in 'Property Finance' started by Nish, 26th Aug, 2016.

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1. NishWell-Known Member

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Hi All, I have been doing some analysis on buying a property over renting a property in Western Sydney considering next 10 years. I would really appreciate if the experts here could provide their feedback on the analysis. The below analysis is considering buying an apartment worth 600k on 10% deposit + 5% purchasing costs.

Rents
======
Current rent is 2380 per month. Considering 10\$ weekly increase, at the end of 10th year total rent I would be paying is \$3,09,320.

Apartment purchase
==================
For 600k unit , paying 10% deposit

Interest only at 6% interest (considering average interest rates at the end of 10 years)
=========================================================================
Initial amount = 90,000
Interest only repayments = 2700 * 120 months = 3,24,000
Quarterly council = 500 total = 500 * 4 * 10 = 20,000
Annual maintenance = 2000 Total = 2000 * 10 = 20,000
Water payment = 100 * 12 * 10 = 12,000
building insurance = 10 * 1000 = 10,000
======================================================
Total = = 3,86,000
======================================================

Total saved = 386000 - 309320 = 76,680 (approx) in 10 years
Amount saved = 76680 / 120 (months) = 639 per month.
When calculated on 11% yearly compound interest, after 10 years \$639 per month invested will get \$1,39,806 or \$3,93,104 including investment of \$90k deposit too

Principal and Loan
===================
Initial amount = 90,000
Interest only repayments = 3479 * 120 months = 417480
Quarterly council = 500 total = 500 * 4 * 10 = 20000
Annual maintenance = 2000 Total = 2000 * 10 = 20000
Water payment = 100 * 12 * 10 = 12000
building insurance = 10 * 1000 = 10000
======================================================
Total = = 479480
======================================================

Total saved = \$1,70,160 (approx) in 10 years
Amount saved = \$1418 per month.
When calculated on 11% yearly compound interest, after 10 years \$1418 per month invested will get \$3,10,244 or \$5,60,799 if invested with \$90k deposit

Please let me know your views on the above, if it is beneficial to buy an apartment or keep renting and invest the money. 11% compound return year on year is feasible with mix of investment in property and foreign shares.

Sorry for the long calculation for your consideration

Cheers
Nish

2. inspiredbypropWell-Known Member

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Nish, your calculation looks impressive. However, just a quick comment on the use of comma!

Interest only repayments = 2700 * 120 months = 3,24,000
Should be 324,000. Otherwise it will look like 3 millions.... Just remember 3 digits before the use of comma, hope it helps.

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3. NishWell-Known Member

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Thanks for pointing out mate!!! Unable to find the edit button here, still point noted

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Nish... I'd go for a house on land for long term appreciation over a unit! Houses will have a scarcity value in years to come whereas a 600k unit in Wentworthville or those general areas will just become an older unit. Just avoid negative factors like a very noisy location or land thats hard to build on.

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5. NishWell-Known Member

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Hi @Gockie, thanks for your reply. I totally understand your point of view and go with it. The only factor is that we want to stay close to Parramatta and house in these areas would be out of reach at the moment. Moreover, it will increase the difference between my current rent and mortgage payment a lot. My main motive is still to remain invested in IPs only. It is just a thought that in terms of renting, if I buy an apartment with above calculation, would it be beneficial and can I expect more growth in 10 years than what I will get by investing those 90k and other expenses in IPs and other venues.

6. inspiredbypropWell-Known Member

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I will suggest for you to keep monitoring the market. You would soon to get to know the "fair" price for a certain property.

If this is your first property and will stay in there as PPOR for at least 5 years, I think it's worth to buy providing you find the suitable one.

As per your calculation, buy is or will be more expensive than rent. However, there are intangible values that could not be calculated using just numbers. e.g. having a PPOR, it might allow you to not think about lease for a while and be able to focus on what's ahead. Also, there are a lot of unknown variables like rent +/-, property price +/-, interest rate +/- etc.
After the first property, you could then leverage it for further investments e.g. IP, shares, etc.

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7. NishWell-Known Member

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Thanks mate! I got one IP in QLD and if I don't buy home then certainly most of the money would go towards IPs only. But you are right, let's wait and watch the mood swings of Sydney market in the coming months....Cheers!!

8. devankLook, lets just get on with this, ok?Premium Member

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Why don't you attach the excel sheet. It'll be easier to check.
Few points.
1. You pay CGT on investment profit. None on your PPOR.
2. You would naturally spend less when you have mortgage.
3. You would pay less interest when your offset grows.
4. If it is an investment purchase then there are negative gearing benefits.

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9. bumskinsWell-Known Member

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I personally don't think it's a great time (more risky) to be purchasing Apartments in that part of Sydney. (only personal opinion)

That being said one of the single biggest advantages to investing in property is the PPOR/6Year concession.

So you do have to think very hard about not utilising it in some way, if you are going to invest in residential property. Even if its means, obtaining a property as a 'PPOR', moving out after the minimum time & renting it out to obtain Investor + PPOR benefits.

It's pretty obvious from a cashflow perspective that the renting option is going to bring you out in front due to rental yields being so poor. You will need to form an opinion on how much you think the house will appreciate however.

I would probably use a range of assumptions in terms of price growth of property & investment returns. I also think 11% compounding returns per annum over a 10 year period, may be a little aggressive.

A major issue with rents going forward I think are Supply/Demand balance, & wages growth. I think these are both contributing to weak rental growth at the moment.
If the economy stays weak going forward I think that will lead to less supply going forward, but if the economy then suddenly ticks up we could see lack of supply + high wages growth again.

Finally I would look at your cost assumptions and think whether they are realistic over 10 years, I'd probably apply atleast 4% base case yearly increase, but you should model higher also.

I'd probably look at houses elsewhere if you can't afford to buy there, and then just end up renting ~Parramatta if that's where you want to live.

I just see untold amounts of apartment supply coming up in that area of Sydney over the next 5-10 years.

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10. NishWell-Known Member

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Thanks @devank
Havent prepared an excel for this calculation. Yup, the points you mentioned have not been integrated yet like CGT etc....

11. NishWell-Known Member

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Thanks @bumskins for bringing up some good points...gotta be thinking about them

12. inspiredbypropWell-Known Member

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13. NishWell-Known Member

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