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Property rumours shake investors

Monday 19 September 2016

Property rumours shake investors

If you are considering entering into residential property investment for the first time, or you have been burned by poor choice, and you expect immediate capital gain – the chances are that you will be disappointed.

Examples are provided in my book of multi-million dollar fortunes all of which were predominantly property.

Those investors did not get rich quick – rather they have invested over a long haul, riding the several property value cycles which inevitably arise. They also chose wisely as location is the key to creating property wealth.

Over the past 20 years South East Queensland has suffered a severe housing shortage due to migration from other states and overseas. From time to time there is a catch up in some locations and the demand reduces, hence price competition arises and prices drop. 

If you are reading the book go to page 23 which shows the history of property values in South East Queensland over the past 60 years.

Frankly I do not use history as a capital gain marker, rather, I use future planning/infrastructure for the location to determine what it may be like over the long term.

Capital gain is a product of demand from owner/occupiers and investors. Owners and tenants all want to live reasonably close to all of their life needs. When there is an oversupply of the type of property popular in the area prices and rents drop.

Of course, economic conditions can affect property values as can war or civil unrest.

Whilst capital gain is the cherished bonus many investors fail to take stock of the actual cost of the investment at the time of sale, depending upon capital growth to measure the quality of the investment.

I have used a few examples in my book. Let us use the actual case of a doctor purchasing an investment property in 2016 in a sound location where it is reasonable to assume five per cent average growth over the next 20 years with a rental yield of five per cent per annum. Her taxable income is currently $180 000.

Other assumptions are - repay interest only, inflation three per cent per annum, interest 3.5 per cent per annum using the discount he obtained through being a Property Investment Forum member.

Let us also assume that she will sell the property in 20 years.

What has the property actually cost her after all expenditure over the 20 year period?
Purchase cost: $600 000
Deposit: $60 000
Purchase expenses: $12 500 (two contracts)

Actual net cash in after tax each year

End year one $8,434, year two $10,105, year 3 $9,901, year five $9,438, year 10 $10,050, year 20 $15,077.
During year one she pays interest out of pocket.

Total of cash in over the 20 year period = $221 771 based upon the assumptions. These calculations are available.

Cash outlay total over the 20 years nil which includes first year costs and interest and deposit. 

Equity forecast using five per cent per annum: $1 047 000
Equity forecast using 2.5 per cent per annum: $436 870

Of course no one can forecast property values and interest rates into the future however we do have access to economic data and expert advice which indicates that it will be a long time before interest rates return to seven per cent and for the past 60 years property value increases have averaged much more than eight per cent per decade.

My purpose here is to suggest that for those of us who need to seriously consider investment to augment superannuation at retirement, property is as safe an investment as you can obtain considering the current taxation allowances available and that there is no other investment which allows the capital gain on the purchase price rather than on the instalments paid. The only condition I make is that the property choice must be the result of professional guidance with the investor making an informed choice.

Forget the gloom and doomsayers. 
If you buy and hold you give yourself the best possible chance of a successful outcome. Let capital gain work for you over the long haul and remind yourself of the net cost of ownership over the same period.

After all what other option is there for the average person?

Don Duncan
Principal Consultant

mediwealthaustralia.com
meredon.com.au

The information provided in this document is not intended to constitute Investment advice.
Appropriate professional advice should be obtained by any person prior to acting upon any of the information contained in this article.

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