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Your opinions on this investment

Discussion in 'General Property Chat' started by teetotal, 23rd Apr, 2016.

  1. teetotal

    teetotal Well-Known Member

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    So the property I used to rent has just been sold. I ran some guestimate numbers with the data below and it appears to be that it was a poor investment,
    What do you think if it has been a good or poor investment for the owner ?

    Background -
    • I rented it for 5years from 2010 to 2015. Its a 2x1x2 unit in Merrylands NSW.
    • Paid $330/week for first 3 years and $350 for 4th year and $370 for 5th year.
    • Property was purchased for $299,000 in 2003 according to onthehousedotcom.
    • Sold for $487,000.
    Things I know -
    • It was vacant for about 4 months when i started renting.
    • It was vacant for about 5-6 months when i left.
    • Owner renovated the property before selling (i did a sneaky open house;)) with new Carpets, paint, dishwasher, cooktop oven, shower cabinet, vanity in Bathroom.
    • Owner never lived there.
     
  2. Nick Valsamis

    Nick Valsamis Well-Known Member

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    The property increased in value by 60% and averages out to about 4.5% a year. Hard to work out any real net gain because the positive/negative costs during the 13 years of holding are unknown.

    But the problem was that the owner bought it at the peak and had to hold it for a long time to see some decent gains.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    $188,000 capital gain 13 years
    Based on the purchase price this is a 62% gain or about 4.8% per year before tax.

    Probably spent about $20k on renos maybe. Wonder if he paid land tax too

    Doesn't seem to have been worth his while.
     
  4. sash

    sash Well-Known Member

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    Agree with Nick that the return was only 4.5% pa in terms of real growth.

    However...let say the owner put a 10% deposit about 30k..paid 10k stamps and legals ..8k selling costs, and say another 7k in renos. So they have made 188k. so they sunk 55k in total for a return of 133k. So if we look at cash on cash return ...it works out to 240% gain ot a 14% annum return...so from a cash on cash return that is pretty healthy!
     
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  5. datto

    datto Well-Known Member

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    If the owner was a good saver he/she could have made more money through saving and compound intrrest.

    But realistically how many people are good savers?

    The owner has helped keep people in a job by investing in an IP.
     
  6. sash

    sash Well-Known Member

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    Now that is the seclet......savings...get compounding in it via parking into an offset..and before you know you have $2m in the bank! ;)
     
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  7. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    I agree with Nick, the owner must have bought at peak. Because I bought a unit at West Ryde in 2005 for $252,500 and West Ryde is generally considered better than Merrylands. Even the better 2br units at West Ryde would have sold around the 300k mark back in 2005

    Was it fairly new (with a lot of depreciation benefits?)
     
  8. teetotal

    teetotal Well-Known Member

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    It was newly built in 2003 so might have been off the plan i guess.
     
  9. teetotal

    teetotal Well-Known Member

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    True. Thats what i came conclude as well.
    It seemed to me that at the end it was just breakeven for the owner.
     
  10. teetotal

    teetotal Well-Known Member

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    In these CoC calculations do you consider any net amount paid to banks(interest-rent) as a cash out ?
     
  11. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    There's your answer right here....
     
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  12. MarkB

    MarkB Some guy on the internet Premium Member

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    The screen you are reading.
    Less.

    A lot less.

    Over the period June 2003 to Dec 2015 the CPI index in Australia has risen 37.84%.

    So $299k in June 2003 = $412,140 in December 2015 (the latest CPI figure available).

    The real growth in value (over and above CPI) = $74,860.

    Which as a percentage of the purchase price = 18.16%.

    Which is about 1.3% pa in real terms.
     

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    Last edited: 23rd Apr, 2016
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  13. Northy85

    Northy85 Well-Known Member

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    Interest rates got to about 8% during that period too. I wonder how much it would have cost per year to hold. You have to remember though that inflation is good for borrowed funds. Inflate the debt away.
     
  14. sash

    sash Well-Known Member

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    No but you should add negative cashflow to the cash put down...
     
  15. sash

    sash Well-Known Member

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    Yes that is correct...but important to look at return on capital as this is what matters in the end minus the negative CF after taxes added back.

    That is the real numbers.



     
  16. MarkB

    MarkB Some guy on the internet Premium Member

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    The investor made money (as to how much, that depends on how you slice the numbers and the assumptions you make around CGT liability).

    But I think the owner would have made a lot more money had they not bought in Sydney in 2003 and instead bought elsewhere (a lot of places hadn't really started moving by that time).

    So was it a good investment?

    On balance, probably not. But they came out in the black and didn't lose their shirt.
     
  17. sash

    sash Well-Known Member

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    At the end of the day if it meets the financial goals who cares.

    For example...the example below...if they bought 5 of these...even at the peak and held it one cycle they would have $1m in bank they did not have before.



     
  18. MarkB

    MarkB Some guy on the internet Premium Member

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    There's a couple of approaches to this -

    1) the phrase "inflate the debt away" is often bandied about with regards to government debt. Eg the US Government - never mind our $18 trillion debt - they will just devalue the USD so much that $18t is the cost of a loaf of bread. Problem solved.

    2) for small investors the theory is that inflation is good for asset prices. But if you take away the asset growth you're basically left with nothing.
     
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  19. Northy85

    Northy85 Well-Known Member

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    It's only good if you own 2 or more houses otherwise you're either staying where you are or going backwards, because housing inflation will make every place more expensive.
     
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  20. Plutus

    Plutus Well-Known Member

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    If I could look into a crystal ball and see something on the market right now in my state, I would probably buy it.. but i'm not particularly adventurous.
    • $59,600 deposit (20%) $9,600 stamp (QLD stamp for investment), $5,000 conveyancing & misc = $74,200
    • $3,000 - $5,000 deprecation pa = $40,000+ in depreciation. lets say 37.5% bracket, that's worth $15,000 after tax to me..
    • Probably a bit neg initially but should've been positive easily positive by the time OP moved in and I would expect another say, $10k positive in rental income over that period
    • Sold for a $188,000 gross profit.
    • Ballpark profit to me over that period is ballpark $213k gross (too much effort to work out tax, sales cost, etc)
    I'm not going to sneeze at an 8%+ pa ROI on my money. I'm aware plenty of people do better & see returns quicker, but personally I'm investing on a 50-ish year timeline, so I'm more than pleased with that sort of return & personally, I probably wouldn't have sold it.