Here’s a 3 bedroom property at 2/83-85 Warrandyte Road, in Ringwood, VIC. Jumping straight into the figures; at a fully borrowed purchase price of $460,000 and estimated weekly rent of $440, we’re getting a gross rental yield of about 4.97%. Average, but not too bad as a starting point.
We’ll make some standard assumptions about rates, body corp, maintenance and property management expenses, etc, and suddenly our net position is down to about $9,600 pa negative. Ouch. The beautiful thing here is, though, that the property is brand new. So depreciation could be a shade over $15,000 (for all fittings and the building itself) and combined with the capitalised borrowing costs and the tax benefit of the net loss above, this actually brings the property into a neutrally geared situation from year one. Over time, of course, the rents should increase and that should bring this property into positively geared territory in a fairly short amount of time.
You might have noticed James talking in his latest blog post about the effect council and state plans can have on property prices and local growth. Well, it turns out the government has grand plans for Ringwood to become a Central Activity District, detailed in the Melbourne 2030 project. Good news? Make of it what you will, but the powers that be are looking to encourage growth and investment in the area.
My aim with these posts is to provoke a bit of thought and encourage a little discussion. So by all means, please give your input and share your thoughts. I’m sure you’ve got something to add…
Nice one, Danny.
I’ll also just point out that while the tax benefits can help, and in cases like this can actually make a substantial difference… we should never invest purely for a tax benefit.
But if the deal stands up, the assumptions make sense and cashflow is sound; it’s hard to go too far wrong. Ringwood is a great area (although I’m biased) and I’m fairly bull-ish on its potential. Good work, mate.
The other thing not to forget is that today most of the lenders require at least 5% (and majority of those even 10%) of the property price as a deposit. Another 5% for purchasing+borrowing costs and we’re looking at around $50-60k to be had before you get into the deal.
That is the only thing that stops me right now from the next purchase 🙂
Thanks for posting the series – please keep on.
A very good point; its undoubtedly a common hurdle for most investors. However, for my various analyses I’m assuming the hypothetical investor is using equity in their current portfolio to borrow the full purchase price plus borrowing costs.
Thanks for your interest, I hope you’ll keep reading and giving feedback in the future 🙂
And good luck securing the finance for your next property. Just let us know if you’d like us to introduce you to one of our favourite mortgage brokers.