I have been reading most of what has been posted over the last week or so. Some of it with much interest and some of it with a shake of the head...really, some of the stuff that appears to be trotted in a serious tone has become very sad.
With the exception of a couple of posters on the extremities, there is some very decent posting coming from those that are not so positive on the future of property and there has actually been some constructive discussions..well done.
Anyway, I have been looking at our investments from a new perspective with a view to some big lifestyle decisions to be made in 2012.
We have a property with the following broad figures;
Rent (net of agent fees) $28,500
Interest on $400k @ 6% $24,000 Misc (water, repairs,etc) $ 5,000 Non cash depreciation $ 5,300 Total expenses $34,300
Loss for tax purposes $5,800 Tax benefit @40% $2,300
Net cash flow for period approx + $1,800
Property cost (incl one offs) $650,000 Own funds deposited $250,000 Loan $400,000
Here is the thing I am not sure of, I have $250k of my own money in the property (actually, the property could be easily sold for $740k) that flowed out of my pocket.
I would expect that a return of 8% on my own money is not too much to ask, ie, 8% of $250k = $20k pa. In a little over 2 years the property has given me this return if I sold now. Specifically, over the 2 years the return has been a total of 36% (increase in equity from $250k to $340k). This excludes agent, solictor and taxation consequences.
Here is where I get confused, I have put $250k into the property but the ' equity ' is around $340k.
I probably should be saying for the year to come " I can sell this now and walk away (excl agent fees) with $340k so for the coming year I want 8% return on the $340k (ie, $27k) "
If that is the case for me to get an 8% return on the ' equity ' the property will need to increase by $27k or 3.65% (from $740k to $767k).
It is probably not the way to look at things but we broke it all down and basically looked at it from many angles and this was just one.
We have decided to keep the property as it basically funds itself & of course, property is a long term investment. I don't look at it on a pa basis normally but big decisions to be made in our lives have required us to look at things slightly differently.
I have a feeling that next year the 3.65% increase in the price of the property will be achieved. My gut is saying it will be around an 8% increase (that is my opinion on this property in this part of Sydney), ie, approx $59k which (if it did happen) would be a 17% return on the $340k.
If we exclude the ' dooms day ' poster predictions which have been ever so wrong in the past (not they will ever admit it) there is a situation where a decent family is renting the property and paying the mortgage for us and helping us parlay our capital. Conversely, they are living in a great property and have made a nice home.
I truly hope that people like that are providing for their future as whatever predictions are made here on HC as to the trend in property prices - rents will not be going down!
Anyway, if I have got this upside down and wrong, I TRULY look forward to feedback. Either way, I think the example illustrates what is going on out there which endless searching on google and re-hashing of its contents (sometimes, selectively) just simplifies the complex nature of the property market.
Essentially, we believe that we will again exceed our 8% return on funds invested for the 3rd year in a row.
I look forward to reading anyone else's real experiences and how they calculate things. I place this example forward as the way an average schmuk looks at things and I look forward to any learnings that I can get.
The usual suspects are on my ignore so I won't have the pleasure in reading their posts but I can imagine the content :)
Some real feedback / own experiences would be appreciated.
