Property analysis #1 - positive gearing, easy

Ok, first up, I’ve spotted a neat little 2 bedroom unit at 22 Bond Place, in Karratha, WA. I figured it was certainly one worth looking at, as the benefits struck me right away. Let me show you the potential this property could have…

Just a reminder, for this hypothetical investment we’re assuming our investor has a taxable income of $100k prior to the purchase, no other properties in the state, and is using equity in their current portfolio to borrow the full purchase amount including costs. And, of course, this is all guesswork and we’re not recommending that you rush out to buy this property without doing your own due diligence.

Now, the beautiful thing about this property is that it’s highly likely to be positively geared straight off the bat. We can see in the ad that it’s currently pulling $1,200 a week, leased until the end of March next year. We’ve assumed about $2,000 for rates, $1,000 for insurance, similar figures for ongoing maintenance and 9.5% property management fees (plus various letting fees, land tax, etc). Asking price is $650,000 and we’ll assume that our investor can’t negotiate a discount on that.

The interest amount isn’t too scary, either. We’ve assumed an average interest rate of 6.30% over the full purchase price plus costs, which gives annual payments (on an I/O loan) of approx $43,000. Even with the instability of rates at the moment, we can be fairly confident that the rental income will still manage to cover the interest even with a few increases over and into the new year.

So, the bottom line? Our estimate for how it works out in the first year shows about $8,000 cashflow positive; or, about $154 per week. That includes a relatively small tax benefit for the depreciation, too. Remember, our investor didn’t put any actual cash into this deal, so that’s all pure profit.

We’ve also worked on a fairly modest capital growth rate of about 6%, being a tick over expected inflation of 4%. Using that, at that 10 year mark, our investor would be sitting on almost $500k equity in a $1.16 million property and will have pocketed something close to $130,000 in positive cashflow in the meantime. Nice!