Andrew from Vista Financial Posted May 10, 2014 Share Posted May 10, 2014 Some good basic pointers around investing in residential property. https://www.moneysmart.gov.au/investing/property Quote Link to comment Share on other sites More sharing options...
Gbye grey sky Posted May 10, 2014 Share Posted May 10, 2014 Interesting if a bit simplistic. The Rod and Karen example lists 3 assumptions. One is plain wrong; if it is an interest only mortgage then the capital is not being paid so the interest will not fall over time. And the biggest assumption is 100% occupancy which is not even on the list though mentioned elsewhere in the article. It also says that Rod has a stake in the property but the example appears to be that he has borrowed 100% of the property value so he only owns a stake in the property if the value increases and then by quite a lot as no mention in this example of the purchase fees let alone any future selling fees. These omissions make it seem a better investment than it is and even then Rod's net income is lower than it would have been. Karen has sunk $300,000 into this investment for a net income return of around 3% despite not factoring in purchase costs such as legal and stamp duty and assuming 100% occupancy. People looking at this case study in isolation would be seriously misled I feel. Quote Link to comment Share on other sites More sharing options...
flag of convenience Posted May 10, 2014 Share Posted May 10, 2014 No thanks way out of date. Far better investments than low yield, over inflated housing as it stands. Quote Link to comment Share on other sites More sharing options...
Andrew from Vista Financial Posted May 11, 2014 Author Share Posted May 11, 2014 Interesting if a bit simplistic. The Rod and Karen example lists 3 assumptions. One is plain wrong; if it is an interest only mortgage then the capital is not being paid so the interest will not fall over time. And the biggest assumption is 100% occupancy which is not even on the list though mentioned elsewhere in the article. It also says that Rod has a stake in the property but the example appears to be that he has borrowed 100% of the property value so he only owns a stake in the property if the value increases and then by quite a lot as no mention in this example of the purchase fees let alone any future selling fees. These omissions make it seem a better investment than it is and even then Rod's net income is lower than it would have been. Karen has sunk $300,000 into this investment for a net income return of around 3% despite not factoring in purchase costs such as legal and stamp duty and assuming 100% occupancy. People looking at this case study in isolation would be seriously misled I feel. Yes it is a very basic article however it is meant to be as is likely directed at people who have never owned an investment property in the past. I think for the limited amount of information it does cover off quite a bit and helps people understand the basics. I think that you may have over analysed the example and really within the context of the paragraph it does demonstrate what is needed ie comparing a positively geared property versus a negatively geared property. I can see what you are saying on the assumptions however again they are just basic and from what I read in the example it does not seem to say that the apartment cost $400,000 to purchase this seems to be your assumption, it is the loan that is $400,000 for Rod and $100,000 for Karen, within this assumption it may be the loan is inclusive of purchase costs or perhaps they could have purchased an off-plan apartment in Adelaide whereby there is currently an exemption on stamp duty. We could question it further as there is no mention of Rod having to pay lenders mortgage insurance (LMI) and if borrowing over 80% of the property value then this is also a likely further cost but then there could also be reasons that are not shown as to why he would not have to pay it, for example he may have leveraged using an existing higher value property as security or used another property to cross collaterise and therefore reduce LVR so LMI is not payable. The case study above the Rod and Karen one does cover off costs off buying, again the case study in question is there to demonstrate positive versus negatively geared investment properties. On your reducing interest assumption point, (maybe they know something we do not, it is a government website after all, lol), the second sentence does say that it is interest only (IO) initially and therefore if it is assumed the loan will at some point move to a principle and interest loan (P&I) the interest payments will therefore come down at that point, the example isn't really trying to detail cash-flow more so tax payable. Kind Regards Andy Quote Link to comment Share on other sites More sharing options...
JJJB Posted May 11, 2014 Share Posted May 11, 2014 No thanks way out of date. Far better investments than low yield, over inflated housing as it stands. Care to share? Quote Link to comment Share on other sites More sharing options...
Gbye grey sky Posted May 12, 2014 Share Posted May 12, 2014 Yes it is a very basic article however it is meant to be as is likely directed at people who have never owned an investment property in the past. I think for the limited amount of information it does cover off quite a bit and helps people understand the basics. I think that you may have over analysed the example and really within the context of the paragraph it does demonstrate what is needed ie comparing a positively geared property versus a negatively geared property. I can see what you are saying on the assumptions however again they are just basic and from what I read in the example it does not seem to say that the apartment cost $400,000 to purchase this seems to be your assumption, it is the loan that is $400,000 for Rod and $100,000 for Karen, within this assumption it may be the loan is inclusive of purchase costs or perhaps they could have purchased an off-plan apartment in Adelaide whereby there is currently an exemption on stamp duty. We could question it further as there is no mention of Rod having to pay lenders mortgage insurance (LMI) and if borrowing over 80% of the property value then this is also a likely further cost but then there could also be reasons that are not shown as to why he would not have to pay it, for example he may have leveraged using an existing higher value property as security or used another property to cross collaterise and therefore reduce LVR so LMI is not payable. The case study above the Rod and Karen one does cover off costs off buying, again the case study in question is there to demonstrate positive versus negatively geared investment properties. On your reducing interest assumption point, (maybe they know something we do not, it is a government website after all, lol), the second sentence does say that it is interest only (IO) initially and therefore if it is assumed the loan will at some point move to a principle and interest loan (P&I) the interest payments will therefore come down at that point, the example isn't really trying to detail cash-flow more so tax payable. Kind Regards Andy Because it is aimed at people who have not invested in property before there is an even greater need to clarify the numbers and although I accept it compares positive and negative gearing I believe that the numbers work out too favourably for both and the assumptions are woefully incomplete or inaccurate. I do wonder sometimes whether the governments (here and in Oz) have a vested interest in promoting property investment and therefore sugar coat it. Investing in property especially borrowing to invest has only been viable due to capital appreciation. When that stops or declines then it is a dangerous investment. Would anyone advocate borrowing to buy equities for example? There is something about buying property as an investment that defies reason IMO. Quote Link to comment Share on other sites More sharing options...
flag of convenience Posted May 12, 2014 Share Posted May 12, 2014 Care to share? Not sure if you mean why housing is a poor investment or what is better? If you refer to housing just crunch the figures. Make allowances for rising interest rates and very low yields on the prices demanded. Take the cost of a half million dollar loan over it's lifetime and all costs around the said investment. I wouldn't buy to lose money in order to negative gear. Sounds dumb to me. Quote Link to comment Share on other sites More sharing options...
Bobj Posted May 12, 2014 Share Posted May 12, 2014 In today's reckoning; no, but 20 years ago; $$$$ I bought for $21k now worth $200k. Cheers, Bobj. Quote Link to comment Share on other sites More sharing options...
Gbye grey sky Posted May 12, 2014 Share Posted May 12, 2014 In today's reckoning; no, but 20 years ago; $$$$ I bought for $21k now worth $200k. Cheers, Bobj. Like with any investment. Buy low and sell high then all is rosy but with a property you have to sell the whole thing to realise the profit and suffer the inevitable capital gain. I assume that you are referring to your own property though Bob which is different. Quote Link to comment Share on other sites More sharing options...
buzzy--bee Posted May 13, 2014 Share Posted May 13, 2014 20 years ago I was told not to buy, the market had reached its peak, there was going to be a crash yadda yadda yadda. Thankfully I didn't listen to any of that. I'm still not listening to it, I'm still buying property, and in 20 years time there will be a lot of people who will be saying "I wish I had bought 20 years ago". BB Quote Link to comment Share on other sites More sharing options...
ramot Posted May 13, 2014 Share Posted May 13, 2014 We bought properties to rent out nearly 20 years ago in UK. We have an interest free mortgage on one, and yes we know we have to pay it off in a few years, but as it is in London, we won't have a problem as it has increased in value beyond expectation and the mortgage is only 1/12% above base rate, and we are paying extra every month to reduce it. We initially bought for family offspring in Uni and rented out the other rooms and have kept on renting out since. No property has ever been empty more than a few days, and as far as we know we won't pay capital gains as we don't live in UK. Now in retirement we get a really good boost to our income. Don't profess to any sort of financial expertise, especially as we bought in UK, but we have no regrets investing in property all those years ago. Not advising any one else what to do only telling our story Quote Link to comment Share on other sites More sharing options...
flag of convenience Posted May 13, 2014 Share Posted May 13, 2014 20 years ago property was cheap in OZ. No comparison at all with prices today. Almost everyone could get on board that had a job. No comparison at all apart from a time further back than twenty when interest rates hit something like 17%. Property was in the doldrums late 90's after GST was brought in and every body was waiting for Howard's first Home Buyers Grant. Only time I know when folk were advised not to buy. Prices were some 3 or 4x average wage. Double that now. The rises that were witnessed during the boom will hardly be sustainable. In fact corrections are in order to return to affordability. Buying to rent results in usually pretty dire yields. So unless buying a house to do what it is designed for, that being living in, you are taking a risk. Some may have seen the woman hoping to get rich on the Ponzi scheme of buying multiple houses paying only interest the other morning on TV. Her "wealth Advisor" was with her, both very convinced of their wisdom. Paying only interest on several properties scattered around Victoria. Had about $2 million in capital and owed over $4 million. Talk about flying on a wing and a prayer. If there is a property downturn long expected in many circles, interest rates rise and difficulty renting out in the future that person would be in deep trouble. Quote Link to comment Share on other sites More sharing options...
flag of convenience Posted May 13, 2014 Share Posted May 13, 2014 20 years ago I was told not to buy, the market had reached its peak, there was going to be a crash yadda yadda yadda. Thankfully I didn't listen to any of that. I'm still not listening to it, I'm still buying property, and in 20 years time there will be a lot of people who will be saying "I wish I had bought 20 years ago". BB More likely more will be saying "I wish I waited until prices corrected". As already been said, buy at a low like shares, not in a boom. Quote Link to comment Share on other sites More sharing options...
buzzy--bee Posted May 13, 2014 Share Posted May 13, 2014 More likely more will be saying "I wish I waited until prices corrected". As already been said, buy at a low like shares, not in a boom. Property investment should be treated very differently from share investment. With property, it is "time in the market" not "timing in the market" BB Quote Link to comment Share on other sites More sharing options...
flag of convenience Posted May 13, 2014 Share Posted May 13, 2014 Property investment should be treated very differently from share investment. With property, it is "time in the market" not "timing in the market" BB There I agree. This has largely been subverted over the past decade with buying to sell to make quick gain in as little time as possible. Quote Link to comment Share on other sites More sharing options...
Marisawright Posted May 14, 2014 Share Posted May 14, 2014 Some good basic pointers around investing in residential property. https://www.moneysmart.gov.au/investing/property The big thing missing from this article is Capital Gains Tax - which is dismissed in a single sentence, even though it's likely to be the largest of all the "exit costs" unless you're selling within a year or two, and can therefore wreck the whole viability of the investment. It's particularly vital for migrants, if there's a chance they may want to go back to the UK to live. For instance, I have a house worth about $500,000. If I sell the property before I move back to the UK, I'll have to pay around $40,000 in capital gains tax. But If I move to the UK and subsequently have to sell for some reason, the CGT will double - i.e. I'll lose $80,000. That's potentially a problem for returning migrants - there's no guarantee that when they decide to return to the UK, it will be a good time to sell. Quote Link to comment Share on other sites More sharing options...
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