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How to calculate total return on an investment property

investment property

I am aged 56. My salary is $100,000 a year and I have a $400,000 mortgage on my home. I purchased a three-bedroom investment property in a regional area for $130,000 in 2008. My deposit was $30,000. The rent is $200 per week, expenses $7400 annually, so the property is about $3000 positively geared per year. How do I calculate the return on an investment property? Is it the profit from my initial deposit $3000/$30,000 x 100 = 10 per cent? Or is it the gross return $10,000/$130,000 = 8 per cent? The property over that time has gone up in value to about $280,000 and my mortgage has reduced to some $70,000. How can I, and should I, allocate the capital appreciation in the return, and then should I be factoring in the capital gains tax that I would pay if I sold the property? D.C.

British economist Ronald H. Coase once said you can play around with numbers and, if sufficiently tortured, will confess to anything.

The usual figures presented to a purchaser are a “gross yield” i.e. total income on total value, or $10,400/$280,000 = 3.7 per cent, or a net yield after expenses or $3000/$280,000 = 1.1 per cent, which indicates just how overpriced property is today.

However, a purchaser would only be presented with necessary expenses e.g. council rates, strata levy, etc. You, as an investor, would be interested in your net return on equity or capital. The latter is the sum of your original $30,000 plus an additional $30,000 that you paid off from the mortgage, plus, say, $4550 stamp duty, less CGT, plus any other capital costs for which you have not claimed a deduction against annual income over the years, which we will assume is zero.

To calculate CGT, half of your $150,000 profit would be added to your taxable income and, since you are in the 34.5 per cent tax bracket, extra tax would come to about $28,350.

Most people would say “I bought for $130,000 and sold for $280,000 for a 115 per cent return, or 6.1 per cent a year compound over 13 years,” which is how the Australian Taxation Office would see it.

However you, as an investor, should say, “I’ve put $64,550 of my capital into the house and am walking away with $280,000, less a $70,000 mortgage and $28,350 CGT for a cash profit of $117,100, which is an 81 per cent return, or 4.7 per cent a year compound”.

It’s still not the whole story as it doesn’t take into account your net income gain (or, more commonly, net loss) over the years.

I am aged 68 and on long-service leave at half pay until early January, when I intend to retire. I will be 70 in December, 2022, and have $360,000 in superannuation. My wife is aged 61, earning $90,000 a year and will work for another 1-2 years, when her Public Sector Superannuation Scheme defined-benefit pension will be about $43,000-$45,000 a year, plus a lump sum of $30,000. We have a mortgage of $220,000 at 2.35 per cent interest on our home, valued at $1.75 million. I expect to inherit $200,000 in cash, plus a share portfolio valued at about $360,000. Is it best to put the inheritance into our mortgage, or into my super before January to purchase a pension or other annuity? Also, will any pension I might receive be affected by my wife’s PSS pension? R.P. 

If you accept that a prime goal is to retire with a debt-free home, then your inheritance is a timely boon. So, put the cash into the mortgage and decide whether you want to keep the entire share portfolio, or sell some $20,000 worth and pay off the mortgage completely.

You will probably be eligible for a part age pension (its tests would ignore the family home and any remaining mortgage) when your wife retires, which would result in a drop in family income and a likely fall in expenditure.

The age pension granted would count your combined assets and income and so, yes, your wife’s pension would reduce your married pension, but her PSS pension would be the basis of your retirement income and you will be grateful for it.

The completion of my late sister’s estate is expected soon and our inheritance is expected to be $450,000-$500,000. I am aged 83 and my wife is 82. Downsizing in the future is not out of the question, possibly into a retirement village, with the costs unknown. I expect our monthly pension payment to be affected and would appreciate any suggestions you may make for a safe investment of this inheritance to minimise the loss of the pension. D.D.

It is hard to say without knowing whether you have half a million dollars in other assets, or none. Assuming the latter, then the question is “How is your health? Can you see yourselves spending another decade in your home before downsizing? Or perhaps a year or two?”

Again, assuming the latter, you cannot afford to take the chance of placing the money into a diversified managed fund, especially at the high valuations now being seen in the stockmarket and the historically low interest rates, plus the uncertainty of whether higher inflation is likely coming and here to stay. That would normally require a 3-5 year time horizon.

ME Bank has a savings account offering 0.8 per cent interest for 12 months. That is one of the best rates being offered by a large regional bank.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

 

Article Source: www.brisbanetimes.com.au

 

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Brisbane

Investors continue to tip metropolitan markets as offering the best investment prospects: PIPA survey

Investors

Nearly 62 per cent of investors believe now is a good time to invest in residential property

Investors continue to tip metropolitan markets as offering the best investment prospects, according to the 2021 PIPA Annual Investor Sentiment Survey.

The national annual survey, which gathered insights online from nearly 800 property investors during August, found that more than 76 per cent of investors believe property prices in their state or territory will increase over the next year.

It was up strongly from 41 per cent last year, PIPA chairman Peter Koulizos said.

“Few people believed the positive investor sentiment in last year’s survey, even though history had showed the resilience of real estate time and time again.

“When we think back to last year, which was a time of much fear and uncertainty, it’s clear that property investors and the market in general has weathered that turbulent period better than anyone dared to hope,” Mr Koulizos said.

The key findings found the pandemic continues to make it less likely that investors will sell a property over the next 12 months, according to 59 per cent of respondents (down from 71 per cent last year). However, about 18 per cent (up from seven per cent in 2020) said it had made them more likely to sell.

Queensland emerged as the winner by a serious margin with a staggering 58 per cent of investors believing the Sunshine State offers the best property investment prospects over the next year – up from 36 per cent last year.

 Investors

Trellis 20 Edmondstone Street, South Brisbane QLD 4101 

New South Wales was second at 16 per cent (down from 21 per cent in 2020) and Victoria was third at 10 per cent, down significantly from 27 per cent last year.

“While investors continue to tip metropolitan markets as offering the best investment prospects at nearly 50 per cent (but down from 61 per cent in 2020), regional markets are in favour with 25 per cent of investors (up from 22 per cent) as well as coastal locations with 21 per cent of survey respondents (up strongly from 12 per cent last year),” Mr Koulizos said.

The two leading concerns of the investors surveyed were gaining access to lending and Australian economic conditions – “the same situation as last year.”

 

Article Source: www.urban.com.au

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Finance

Property Refinancing Hits Record Highs

Refinancing

Mortgage refinancing hit a record high in August, surpassing the record set in June 2020 when the Reserve Bank of Australia’s double rate cut impacted activity.

The Pexa index showed refinancing activity has steadily increased since 2019 with approximately 300,000 refinances completed in the past financial year, up around 10 per cent on the previous year.

Pexa Insight head of research Mike Gill said the index stood at 187 points for the week ending August 29, 2021, up 46.9 per cent on last year.

“Whether it is the forced downtime to reassess finances during Covid-19 related lockdowns, or speculation surrounding a potential interest rate rise as early as late 2022, refinance activity has reached new heights nationally,” Gill said.

“We anticipate a dip in property sale transactions as a result of the extended Covid-19-led lockdowns in New South Wales and Victoria, however, refinance activity is expected to remain elevated in the near future based on the current trend line.”

The reserve bank decided to hold the cash rate at 0.10 per cent this week, as the delta outbreak had interrupted the economic recovery.

Governor Philip Lowe said they would not increase the cash rate again, until actual inflation is sustainably within the 2 to 3 per cent target range, which was estimated to be in 2024.

“Housing prices are continuing to rise, although turnover in some markets has declined following the virus outbreak,” Lowe said.

“Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors.

“Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

 

Article Source: www.theurbandeveloper.com

 

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Finance

Developers Big Winners in Lending Battle

Developers

First, the bad news. A wave of increasing construction costs is hitting Australia’s property development sector.

Now, the good news.

According to Barwon Investment Partners head of property finance Jonathon Pullin: “It has probably never been a better time to be a developer or property owner wanting to take on debt”.

Pullin, who was a speaker at The Urban Developer’s recent Construction and Finance webinar, said Australia’s lending landscape had become increasingly competitive during the past 12 to 18 months.

Record low cash rates are prevailing and there are large amounts of capital available out in the market both on the debt side and also coming through on the equity side.

“The major bank lenders in Australia that have had a rough time of it over the last five or six years, they’re coming out the back of the Royal Commission, they’re coming into a bit more certainty through the Covid journey,” he said.

“And what we’re seeing across the country and in all sectors, they’re starting to become a little more front-footed in terms of wanting to get back into the market and claw back some of that market share that they lost to the larger non-bank lenders.

“Also, on the equity side of things, we’re not only seeing valuations hold up but improve—particularly in the residential side of the market—and a strong level of confidence from buyers.

“Put all that together … as a property owner or a developer it’s probably never been a better time for you in terms of financing your project and moving it forward.

“There are a whole lot more options out there in the market than what there and all of those options are broadly cheaper than where they were a few years ago.”

Pullin said the major banks had started to loosen some of their traditional covenants to win back business.

“Going back three years, across the market it was a 100 per cent pre-sales requirement for any residential project but you’ll see that’s now more a conversation around 80 per cent coverage and even in some cases lower than that,” he said.

“Funding limits also are increasing. At its worst, only a few years ago, the major banks were typically stopping at 65 per cent, maybe 70 per cent, of total development cost… we’re now seeing it coming up to 75 per cent of total development cost, sometimes 80 per cent.”

Pullin said institutional-grade mezzanine debt lenders were becoming an increasingly accepted part of the capital structure with the major banks working in conjunction with them to win business.

He said non-bank lenders, particularly institutional non-bank lenders, were “very hungry to do business” and broadening their sector and location coverage.

“Non-bank lenders are going up and over where the traditional bank will go to because they know their cost of capital is higher … but they will bring with it a lesser requirement around pre-sales.

“Typically, we’re seeing them look for 30 to 50 per cent pre-sales just to validate that project is accepted into the market.

“The benefit of these slightly higher cost solutions is projects can get going earlier and it allows developers to potentially lessen further increases in costs that are sitting on the horizon, like that wave of increasing construction costs.

“We are seeing a lot of developers really wanting to get their skates on at the moment and get projects under construction. So, if they don’t have pre-sales yet they’ll make as decision around whether they need to go with a non-bank solution with a lower pre-sales cover.”

Developers

▲ The major banks are loosening traditional covenants to claw back business lost to non-bank lenders.

Pullin said he expects the lending landscape to become even more competitive over the next 12 to 24 months with the possible emergence of alternate funding structures and some opportunistic lending coming into the market around sectors heavily Covid-affected.

“What does that mean for developers and property owners?

“An increased focus on hard costs from financiers in terms of looking at feasibilities and scenarios, further reductions in lending costs and loosening of covenants around the edges in a requirement to deploy capital.

“So really what you get at the end of day is more options available to developers that hopefully leads to better projects and better outcomes for them.”

Pullin said institutional-grade mezzanine debt lenders were becoming an increasingly accepted part of the capital structure with the major banks working in conjunction with them to win business.

He said non-bank lenders, particularly institutional non-bank lenders, were “very hungry to do business” and broadening their sector and location coverage.

“Non-bank lenders are going up and over where the traditional bank will go to because they know their cost of capital is higher … but they will bring with it a lesser requirement around pre-sales.

“Typically, we’re seeing them look for 30 to 50 per cent pre-sales just to validate that project is accepted into the market.

“The benefit of these slightly higher cost solutions is projects can get going earlier and it allows developers to potentially lessen further increases in costs that are sitting on the horizon, like that wave of increasing construction costs.

“We are seeing a lot of developers really wanting to get their skates on at the moment and get projects under construction. So, if they don’t have pre-sales yet they’ll make as decision around whether they need to go with a non-bank solution with a lower pre-sales cover.”

Pullin said he expects the lending landscape to become even more competitive over the next 12 to 24 months with the possible emergence of alternate funding structures and some opportunistic lending coming into the market around sectors heavily Covid-affected.

“What does that mean for developers and property owners?

“An increased focus on hard costs from financiers in terms of looking at feasibilities and scenarios, further reductions in lending costs and loosening of covenants around the edges in a requirement to deploy capital.

“So really what you get at the end of day is more options available to developers that hopefully leads to better projects and better outcomes for them.”

 

Article Source: www.theurbandeveloper.com

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