Simple Question

Discussion in 'Investment Strategy' started by Property Baron, 5th May, 2019.

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  1. Property Baron

    Property Baron Member

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    If one buys an IP for lets say 500k.
    50k deposit
    450k loan at 4%
    Over 20years

    All going well the loan gets paid off after 20 years through positive geared renting.
    Each month after all expenses were paid one is $10.00 a month in front.

    If after the 20 years everything is paid off and the value of the house remains at 500k would this be considered an ok investment?

    Cheers
     
  2. Famil Man

    Famil Man Well-Known Member

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    I think it depends on what return on investment (ROI) you are aiming for.
    The higher % ROI generally the higher risk is involved.

    While some will see it as owning the house outright with $0 cost to yourself. i.e someone paying your loan off for you.
    Others will be able to turn that $500k into $1mil in a shorter time frame.
     
  3. Chicken or Beef?

    Chicken or Beef? Well-Known Member

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    I wouldn’t be happy with it. Zero growth. May as well just stick the money in a managed fund or super and accumulate interest.
     
  4. Property Baron

    Property Baron Member

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    Thanks. Not sure what the managed funds would return on 50k after 20 years? Would it be equal to the loan being paid off? maybe more?
    Super not really an option, as for me personally it is to long to wait to be able to access it.
     
  5. Property Baron

    Property Baron Member

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    Do you mean turn the initial deposit of 50k into $1mil in a shorter time frame?
     
  6. euro73

    euro73 Well-Known Member Business Member

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    The problem with this is that you would be putting 50K cash to work, rather than using 50K to leverage into a 500K asset . The 50K is unlikely to grow to 500K in 20 years...
     
  7. PandS

    PandS Well-Known Member

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    No that is shockingly low return
    $10 positive gear a month
    $120 a year x 20 = $2400
    50k initial deposit equates to
    Less than 5% return over twenty years
    That is massive negative return in real term
     
  8. Property Baron

    Property Baron Member

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    Fair call 30 year loan would be more realistic.
    I don't understand?
    450k paid off over 20 years at no cost to owner = 5% return?
     
  9. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    No.

    Because it would amount to annual growth of less than 1% pa. Less than inflation
     
  10. Property Baron

    Property Baron Member

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    Thanks Terry.
    I don't understand that can you please explain for me.
    1% annual growth on 50k over 20 years = 450k?
     
  11. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Sorry that would be no growth at all as value doesn't t change
     
  12. Morgs

    Morgs Well-Known Member

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    No that is not a good investment. Try playing with this and having a look at what you'd return from a $50k deposit using current rates for a savings account. This should be your absolute baseline.
    Compound interest calculator | ASIC's MoneySmart
     
  13. Property Baron

    Property Baron Member

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    Yes no capital growth but no annual loss = 450k in front after 20 years less CGT
     
  14. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    But what is the opportunity cost in tying up your deposit and borrowing capacity. I.e. would could you have done instead?
     
  15. Property Baron

    Property Baron Member

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    After 20 years that 50k would make you just over 20k at today's current interest rate average 2.3%
    Not even close to the 450k in front you would be if the loan was paid off
     
  16. Property Baron

    Property Baron Member

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    Basically Terry that's why I'm asking you guys if this is a good investment on the 50k
     
  17. Morgs

    Morgs Well-Known Member

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    Are you forgetting the capital contribution in terms of loan repayment?
     
  18. Property Baron

    Property Baron Member

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    No because it is an investment property and without a renter there is no more capital contribution.
    Basically it's just starting out with 50k and that's it
     
  19. Shogun

    Shogun Well-Known Member

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    Using that calculator $50k turns into $246k (196k growth) at 8% a more long term historical return on Australian stock market
     
  20. Trainee

    Trainee Well-Known Member

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    If your saying the rent will also cover principal payments, start with 50k. End up with 500k in 25 years. 10 percent roi a year.

    Though shares will likely do better with much better liquidity and lower transaction costs, so no, not a good investment.