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The real cost of buying an investment property

By now, everyone in Australia should understand the potential for property values to increase resulting in a capital gain, yet in 2018 the Australian Tax Office reported that less than 16% of Australians owned an investment property. In our experience, the main reasons for this include:

  • The fear of entering into more debt and adding another home loan to your name
  • A lack of understanding around the real cost and affordability of actually purchasing an investment property

Broadly speaking, property investment is a wealth creation tool to help Aussies prepare for their retirement.  For most, a retirement with no reliance on government income support seems unachievable. In fact, currently 77 per cent of Australians over the age of 65 receive income support. The realisation of the minimal income which a pensioner receives is often the driving force behind someone’s decision to make a change and begin growing their wealth to fund a more self-sufficient, enjoyable retirement.

The best way to achieve this is to grow your wealth. The most common way of doing this, is by investing your money in income producing assets with the potential to grow in value. The obvious two being shares and property.

Take that one step further and it involves building your asset base as large as you can with the money available to you. Property enables people to do that with its leveragability. As a tangible asset with a historic stable past, banks comfortable lending property investors money to purchase a property with a 10 or 20% deposit (pending the relevant service requirements are met and the type of property you purchase).

What this means is that an investor with $70,000 in savings could potentially purchase a property worth $500,000 (including stamp duty costs). Despite the daunting thought of a $450,000 loan, if that property were to grow at 5% which is history indicates is highly possible, the capital growth on $500,000 is $25,000 as opposed to a $3,500 gain if you had invested your $70,000 with no leverage an achieved a 5% return.

Sounds positive, right? Well below we look at how much it will cost to hold this property based on some pretty typical estimates.

Purchase Price $500,000
Stamp Duty $15,925 Based on QLD Stamp Duty rates
Investment/Deposit $50,000 10% of the purchase price
Lenders Mortgage Insurance (LMI) $9,585 When borrowing 90% of the property value you are typically required to pay LMI. This amount is normally added to the loan.
Interest Rate 4.5% Slightly above what is currently achieveable
Annual Interest $21,568 Interest only loan structure
Annual Expenses $8,285 Including agent fees, insurance, strata fees and council/water rates
Annual Rental Income $20,000 Based on a gross rental yield of 4%

Pre-tax cash flow $189 per week

One of the main drawcards for investing, aside from the potential gain is the tax deductibility. When you consider the total deductions available through the property’s expenses and the depreciation after-tax cash flow becomes even more compelling. For this scenario we’ve adopted the average Australian household income of $75,000.

After tax cash flow $24 per week

Note: These cash flow projections are based on a new property where depreciation deductions are maximised. The first year depreciation equates to $12,521 across the depreciation of building and fixtures & fittings.

The out of pocket expense is minimal. For as little as $24 per week you could be holding an asset worth $500,000.

To put this in perspective, in 2011 you could have invested $500,000 in Sydney. Although interest rates were higher, it’d still be costing less than $80 per week. Based on median house price data, that home would now be worth double, a $500,00 gain. For most people we’re paying more on our phone bill than what we’d be able to hold a property for.

We dare say that there’s potential for many more Australians to be taking the leap into the property investment world and working to secure their future.

More often than not, the realisation that people need to make a move to secure their future comes too late. With the right guidance you can start your wealth creation journey in the early stages of your working life.