Following from my last post Lidcome = Bubble the inner city suburb of Ashfield is in a big bubble that can not be sustained.
The subject property is 1A Brunswick Parade Ashfield.
The property is a 3 bedroom 1 bathroom 1 car house on 408m2 of land. The house presents very nicely and probably does not require any cosmetic work. It is an older art deco house approx 50+ years old.
The property sold on the 17th September 2013 for $1,200,000
Once settlement arrived it looks like the owners placed it on the market for rent at $820 - $850 (13/11/2013). It seems it didn't rent out so the price was lowered to $790 - $820. The property seems to have rented so in the below scenario I will give the owners the benefit of the doubt and snagged a tenant at $820.
Rental Expenses: - Agents rental commission @ 6% = 2,758 - Letting Fee = $820 - Council Rates = $1,500 - Water Rates = $500 - Insurance = $1,000 - Maintenance = $2,000 (conservative as this is an old house and structural issues will continue to appear)
Total Rental Expenses = $8,578
There won't be much depreciation
If the owner was on $150,000 income they would be paying $32,880 p.a. to hold this property, or $632 per week. Before negative gearing the amount is $42,554, negative gearing only gives them a $9,674 credit (hardly worth it).
The gross yield on this property = 3.48% The net yield on this property = 2.77%
If you take into account opportunity cost, holding costs and the slow increase in maintenance I do not see this as a good buy/hold strategy. Ashfield is a beautiful place to live but with investors pushing the price of property up this will be one of those suburbs to fall back once there is an interest rate rise.
The reason I do this analysis is to give myself and hopefully others comfort in knowing these people are only buying these properties in hope of high capital gains to make any kind of return. I also like this type of analysis as it shows how negative gearing is not a major factor but the pure speculative nature of prices rises being the main factor for investors jumping into the market.
Shows how much blind faith some property investors have in the market, where they "invest" by losing more than $40k per annum, obviously very confident the capital gains will outweigh their horrendous losses (or more likely they haven't run the numbers to realise how much cash they will be bleeding). For this to happen obviously they need also to factor in 8% transaction costs (or $96,000) as well. So in a flat market for say three years they are down over $220,000 including transaction costs, that type of loss would bankrupt a lot of people.
Most of the property investors on this forum are at least a little more savvy and would aim to be cashflow neutral or positive, which if achieved is a reasonable strategy over a long period. Agree though this type of "investment" where the numbers are that bad is a symptom of an overcooked property market.
Following from my last post Lidcome = Bubble the inner city suburb of Ashfield is in a big bubble that can not be sustained.
The subject property is 1A Brunswick Parade Ashfield.
The property is a 3 bedroom 1 bathroom 1 car house on 408m2 of land. The house presents very nicely and probably does not require any cosmetic work. It is an older art deco house approx 50+ years old.
The property sold on the 17th September 2013 for $1,200,000
Once settlement arrived it looks like the owners placed it on the market for rent at $820 - $850 (13/11/2013). It seems it didn't rent out so the price was lowered to $790 - $820. The property seems to have rented so in the below scenario I will give the owners the benefit of the doubt and snagged a tenant at $820.
Rental Expenses: - Agents rental commission @ 6% = 2,758 - Letting Fee = $820 - Council Rates = $1,500 - Water Rates = $500 - Insurance = $1,000 - Maintenance = $2,000 (conservative as this is an old house and structural issues will continue to appear)
Total Rental Expenses = $8,578
There won't be much depreciation
If the owner was on $150,000 income they would be paying $32,880 p.a. to hold this property, or $632 per week. Before negative gearing the amount is $42,554, negative gearing only gives them a $9,674 credit (hardly worth it).
The gross yield on this property = 3.48% The net yield on this property = 2.77%
If you take into account opportunity cost, holding costs and the slow increase in maintenance I do not see this as a good buy/hold strategy. Ashfield is a beautiful place to live but with investors pushing the price of property up this will be one of those suburbs to fall back once there is an interest rate rise.
The reason I do this analysis is to give myself and hopefully others comfort in knowing these people are only buying these properties in hope of high capital gains to make any kind of return. I also like this type of analysis as it shows how negative gearing is not a major factor but the pure speculative nature of prices rises being the main factor for investors jumping into the market.
I'm wondering about possible legalities of doing a case study on chosen properties.
If the owner was to read this & not be impressed....
Not trying to knock the effort you've made ...but maybe things could get nasty...
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$ It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do. Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
I'm wondering about possible legalities of doing a case study on chosen properties.
If the owner was to read this & not be impressed....
Not trying to knock the effort you've made ...but maybe things could get nasty...
The owner may or may not be impressed, but what legal case would they have? They have not suffered any loss as a result of the analysis being published on APF. Without a loss, what damages can they sue for?
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
Income = $41,787 Interest = $53,498 Other costs = $8,587 Total outgoings = $62,085 Outgoings - income = $20,298 After negative gearing approx $11,000 per year
What am I missing?
This time next year the owner will have made enough capital gain to cover his costs for fifteen years
Collecting desperation. Ex-Bp Golly April 2 2015. "I see with a slight overshoot -70% [fall in Sydney house prices] as being well within possibility"
Income = $41,787 Interest = $53,498 Other costs = $8,587 Total outgoings = $62,085 Outgoings - income = $20,298 After negative gearing approx $11,000 per year
What am I missing?
This time next year the owner will have made enough capital gain to cover his costs for fifteen years
I don't think that your missing anything. This could simply be a case of someone buying their home before it goes up any higher, and renting it out until they want it.
Who knows why some people buy a house - it's their business.
I don't think that your missing anything. This could simply be a case of someone buying their home before it goes up any higher, and renting it out until they want it.
Who knows why some people buy a house - it's their business.
I don't know where the OP got $33k holding costs where it's actually a grand a month to buy into a booming market.
I'm mystified by the OP too.
I don't see where the holding cost of $42.5k pa (before negative gearing) comes from.
I also don't see how, if the holding cost (rental loss?) really is $42.5k before negative gearing as claimed by Labrynth, how a $150k income person (with a marginal tax rate of 37% on everything over $80k) only gets a negative gearing credit of $9k as claimed by Labrynth.
No response from OP author as yet? I would also add to comments made above by others that the amount borrowed is also a big assumption. The purchaser may be an investor (personal or SMSF), or as others have said a PPOR purchaser planning to move in later? In either case they may have put in a much larger amount of equity into the purchase up front than the $150k suggested? In this case, they may simply be quite happy that the net rental return will cover all their costs and maybe then some? Remember not everyone has the stomach to throw $500k into the volatile and risky sharemarket, and cash in the banks returns are very low (especially after tax), so this purchase might be Ok to someone in that position due to the ongoing potential for capital gains, rental growth, and so on.
One man's property "bubble" is another man's property "boom" I reckon. These sorts of sales, the current auction market etc remind of Sydney circa 1999 (Iwas active in the market and sold/bought property that year) - the price rises from that period were never reversed.
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