Tax Tip 125: Break Even Point with Property Investing

Working out Break Even Point with Property Investing

Investors should know whether a property is making them money or costing them money. Taking into account any tax savings from claiming expenses it is a good idea to know how much a property would need to growth in value for it to break even. By this I mean to be costing you nothing.

To do this -

Step 1
Work out what a property is costing you, after tax, and annualise this.

Step 2
Divide the value of the property by this amount.


Example
Johnno buys a property for $500,000 and gets a depreciation schedule done and works out all the other costs associated with the property.

He calculates it is costing him $53 per week to hold. This is $2,756 per year.

So his property needs to grow in value by at least $2,756 per year to break even.

As a percentage this equates to $2,756/$500,000 = 0.55%

So the property needs to grow just 0.55% per year for it to break even. Anything more than this and the property will be 'making' money for its owner.

Keep in mind that if sold and the profits realised the profits can turn negative when buying and selling costs are taken into account.


Note that this figure will change from year to year. It may increase as depreciation and other non-cash deductions decrease.

 

Property Investment Analysis (PIA) software from www.somersoft.com.au is still the top shelf software for property investors. It can model almost anything. Time taken in setting up the portfolio / property details and loans will be repaid.

 

Is the cost of ownership factoring in the opportunity cost of funds used for the deposit and acquisition costs?

for example if John purchased a $500 000 property using $125 000 cash and $400 000 loan at 3% pa. Then the “cost of money” is just $12 000, $1 000 per month

would it be logical to assume 105% is borrowed, for the purposes of calculation?

In this same example John calculates that if he had borrowed 105% of the funds, then his “cost of money” is nominally $15 750, or $1 312.50 per month

this may impact the break even point

 

"break even point" is what we consider with income and cashflows. Not equity. ie the owners own cash contribution to the total cost. That may be a factor to consider for yield type calculations.

Our estimator tool attempts to address property cashflows and produce a weekly before tax and post tax estimate. The interest outgoing is based upon all borrowed funds whether against the investment or other property equity etc. Note that some deductible outgoings are non cashflow outgoings but may produce increased cashflows inwards through increased tax refunds. eg depreciation & capital allowances from a QS report. The owner may also invest cash into non deductible matters such as capital repairs that arent deductible or debt reductions (every $1 of principal = $1 of equity)

The deferred tax cost of the higher CGT impact of claiming QS deductions is not considered. Nor is the final realised CGT amount and tax. Reason : It is a complex calculation that has variation from year to year. Its a modelled result, at best. Means nothing as such.