Last week I highlighted the number of properties across Australia selling below their purchase price.
It underlined the risk of investing with 100% financing, using interest only repayments.
This week some figures to analyse:
A $250,000 property purchased in mid-2008 needs to be worth $283,000 by 2013 to keep pace with inflation, while a $350,000 property needs to be worth $395k.
Now some basic financing, rental returns and costs.
Take that $250,000 property using a 100% financed, interest only loan; assume an average interest rate across the period of 7% using a 25 year term.
With a weekly rent of $260 the income is $13,520 per annum (pa), the interest costs are $17,500 and assume $3,000 in rates, water and insurance.
The $6,980 loss, deducted from taxable income at the 32.5% tax bracket (where 72% of loss making investors reside), results in a tax saving of $2,269.
Out of pocket costs are $4,711pa and from 2008 to now, it’s an outlay of $23,555 – without a cent off the loan.
With a $350,000 property, the scenario is closer to the $9,756pa loss most property investors experience.
With rent at $350 a week, the loss is $9,300pa, when deducted from taxable income at 32.5% the tax saving is $3,022, but there’s still $6,278pa in out of pocket costs.
From 2008 to now, it’s an outlay of $31,390 – without a cent off the loan.
And these basic calculations ignore stamp duty, land tax and maintenance, while assuming 100% occupancy.
When real estate values decline, any investor only burns more money each year.
The risk in property comes from investors believing there is no risk; leading many to seek riskier financing options, assuming growth will follow.
Finally, had that $31,390 outlay been used for quarterly investments of $1,569 into a balanced portfolio from June 2008 until now, it would have grown to $39,212.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances.
