analysis of return on investment property

[elliot]

I have an investment property worth $360000. My net yield is 4.4% (rent - rates, insurance). However my equity in the property is 180000. This makes the yield on my equity 8.8%. I pay 5.6% interest on the other 180000. I see little capital gain. How would you rate this as an investment? The house is 3 years old and basically has no maintenance.

[eri]

what else would you do with the money

have it in the bank at 4.5%?

this is most difficult time

hang on if it's still positive

[One]

So you're making $15840 after rates and insurance but before interest. And you're paying $10080 interest. That means your pre-tax income is $5760.

5760/180000=3.2% pre-tax return on your equity. And that's assuming nil vacancies, repairs (it'll need some eventually), advertising, management fees etc. Chattels depreciation will make it look a bit better, but not much.

Are you really expecting little capital gain in the long term?

[elliot]

thanks for the comments, i do not think anyone can bank on much capital gain, unless you are in auckland.

[Harvey]

Unless you are in a declining area you should be able to expect a capital growth in line with inflation 2-3%pa.

Where abouts is the property?

[One]

yeah, there's a difference between "not much" and "none". As long as your capital gain at least keeps up with inflation on long-term average, your IP looks better than a bank account.

Have you considered selling it and buying a better-yielding place?

[elliot]

In Rotorua, Lynmore. Top area. On small subdivided section. Rather have good area with good tenants.

[spaceman]

thanks for the comments, i do not think anyone can bank on much capital gain, unless you are in auckland.

You have tax deductible debt and inflation is your friend .... I'd say it's an OK investment, you could do better/worse .... keep it long term and I'm sure you'll be glad you did.

Cheers
Spaceman

[Teresa024]

Its a good sounding investment. Remember the property market works on approx 7 yeat cycles so hold onto it as it will increase capital growth. If you want to invest in a property with a higher return on equity i would recommend an apartment however much lower capital growth. It's all about what you want in an investment

[flyernzl]

Don't forget that the inflation percentage is on the whole value of the property, $360,000 at say 2.5% = $9000
But you personally have only $180,000 invested.
Therefore in the first year the appreciation on your investment is $9000 on $180,000 = 5%
Not too dusty.

I personally own a house that I bought five years ago for $188,000.
Now it is worth about $225,000
Not a particularly great return on those figures I agree.
But
I got 100% finance at time of purchase. The only cash I had to put in was the cost of the valuation report and legal fees.
So the inflation return on my own money is .. um .. pretty good.

[drelly]

I got 100% finance at time of purchase. The only cash I had to put in was the cost of the valuation report and legal fees.
So the inflation return on my own money is .. um .. pretty good.

And there is the catch. You need to be leveraged enough for capital gain to be most effective but not so leveraged that your risk is too great. This balance will be different for every individual based on their own circumstances.

[elliot]

thanks for the comments, leverage only is good if there is capital gain otherwise not a wise investment unless the gearing is positive.

[kapitibeanman]

And there is the catch. You need to be leveraged enough for capital gain to be most effective but not so leveraged that your risk is too great. This balance will be different for every individual based on their own circumstances.

I agree. Also, the risk environment is changing, with world-wide fear of debt increasing. A few years ago, who would have thought that all the Banks would get the jitters so badly that they would stop lending even to each other for a while? Old truths and rules of thumb may not necessarily apply in the future. A good time to be alert and protect capital. Be aware that leveraging is more risky than it was say 5 years ago.

[Rosco]

1) figures long term - Your rent is $15,840 from your figures, less say interest at 7% long term (now 5.7% but long term averages are over 7) $12,600, repairs $2000 and other say $500, leaves $740 cash profit. As a cash return on your $180k investment, this is only 0.4% before tax. Depreciation might improve this slightly.
- at least this is positive
- at current interest rate $3,080 cash profit,

2) To really grow your equity and wealth, you need capital gain. As the others have put, even 3% capital gain per year can make a huge difference, or give you a 5% return after tax, just from the capital gain. BUT, no one really knows what will happen with capital gains. If after reading this, and doing further research, you still think you will get NO capital gain over 10 years. Then the investment doesn't make sense, and you are better to look for something different.

Think hard on the capital gain, as I think just about every investor has at some time gone, "I wish I hadn't sold that, as its now worth $XXX more", or "I wish I had have purchased that property"

Ross

[Harvey]

Also remember interest rates and capital gains are correlated. If there are low interest rates you will expect low capital gains. Higher interest rates will probably mean there is inflation/capital gains in the market.