The first of our investment properties (IP) has officially been sold 🎉👏
This is part of our strategy for creating a passive income to fund our lifestyle in retirement. The investment properties had a different purpose in our original strategy for reaching financial independence, but they now will be sold off over the next few years when the time is right.
What Was The Return?
I’m so glad I can finally crunch all the numbers for you accurately now it’s been sold because you never quite know how much your true return will be until you actually sell your investment property.
Without a doubt the most interesting question on most peoples minds would be:
‘So how much did you make?’
To cut a long story short, we had an annualized after-tax return of 36.48%.
If you’re interested in all the finer details of how we arrived at that figure please read on.
This IP was built in south-east Melbourne for $340K in 2013. I lived in it originally to receive the FHOG.
- $30,000 – Deposit ($9,000 from me plus $21,000 FHOG)
- I borrowed 91.33% of the property plus LMI. I would not recommend this but that’s what I had and the banks were allowing it back then. I wouldn’t have got that loan in today’s market.
- $4,634 – LMI even though my parents could have gone guarantor (no hands out for me)
I built this house so there were no expenses for conveyancing or stamp duty. All the loaned money went to the builder who was selling land and house packages.
I had a loan of $319,815 (the LMI got attached to the loan plus some other expenses).
Actual money spent so far: $9,000
- $3,840 – Landscaping. A new garden for the front, back and sides. Plants, pots, mulch, stones etc.
- $12,000 – Built a deck. Materials, building permit, labour help costs
- $1,400 – Concreating
- $4,410 – Other costs. Materials, Skip bins, money spent on food and other things while renovating etc.
I spent countless weekends with my old man and mum going up to the house to add value to it. This not only saved us money, but I also learnt a bunch of new skills. Win-win.
Actual money spent so far: $31,061
Cash Flow/Holding Costs
|Cash Flow||Year 1||Year 2||Year 3||Year 4||Year 5|
|Rent – All Expenses||-$7,590||-$3,929||-$2,744||-$3,047||-$5,841|
Total cash flow over the 5 years = -$3,927
- The first year I had to live in the house for 6 months receive the FHOG. This meant that I couldn’t claim all of the expenses for that year. Only for the 6 months I had it as an investment
- I ended the lease with the tenants and cleaned the house up a bit which is why year 5 is so expensive. I had to cover interest repayments for a few months before the house was sold.
- Depreciation is not including in the cash flow because it’s not an actual loss of cash flow whereas the tax refund is money coming into my account
- I used the diminishing value method for depreciation. Don’t ask me why it somehow depreciates more in year 2 than year 1 🤷, that was what was on the report.
- Tax refunds are based on the 37c tax bracket
Actual money spent so far: $34,986
- $700 – Conveyancing (had a friend do it cheap)
- $2,210 – Used an online agent to sell the property. No way I’m paying 2.5% plus marketing just to list it on RealEstate.com and host a few open days
- $3,850 – Staging. Maybe unnecessary but I like to think it worked
Total Selling Costs: $6,760
Total money committed to this investment over 5 years: $41,746
The IP was sold last month for $512,500
I invested $41,746 of my own money and received $197,697 in return over a 5 year period.
ROI vs ROI On Money Invested
Way too often when anti-property commentators are trying to convince investors that another market has had superior returns over the last X amount of years they usually leave out the most important part of the equation.
Property investors use leverage to buy their investments.
Without factoring in leverage, I don’t understand how anyone can make blanket statements about the true returns of real estate. It’s not comparing apples with apples.
With that said, I want to provide you with both returns numbers so I can further illustrate the point that the only real return number you should be measuring is how much money you put in and how much you get out.
Capital Gain = (gain from investment – cost of investment) / cost of investment
= ($512,500 – $386,821) / $386,821 = 32.49%
Annualized Capital Gain = 5.79%
Gross Yield = Annual Rent / Purchase Price * 100
= $18,720 / $340,000 *100
Gross Rental Yield = 5.51%
Net Yield = (Annual Rent – Annual Costs)/ Purchase Price * 100
= $15,985 / $340,000 *100
Net Rental Yield = 4.70%
Total Annualized Return
8.28% + 4.70% = 12.98%
- I’m not 100% sure I can simply plus the two return figures together since one is annualized and the other is just an average rent of $360 per week (maths wizards please correct me). But the overall point still stands that the investment doesn’t look great without leverage.
- The above calculations are assuming that we buy the property outright. This would mean no interest repayments or LMI costs.
- 12.98% may sound like a decent return, but what’s not factored in is the 100s of hours of labour and travel spent on this property to achieve this result. Considering you could have got better returns from shares over the same time period with no work required, you’d be mad to buy an investment property outright.
- I have not factored in the replacement costs as the house depreciates. This hidden bill will rear its head eventually. Something shares don’t suffer from.
ROI On Money Invested
This one is a lot easier to work out and the true measure of the investment, not an assumption.
ROI = (gain from investment – cost of investment) / cost of investment
= ($197,697 – $41,746) / $41,746 = 373.57%
Annualized Total Return = 36.48%
In an extremely fortunate turn of events, IP1 became my PPOR after I first moved in to receive the FHOG.
Even though I rented it out, I never bought another house to live in which was not specifically planned but worked out incredibly well. There’s a special rule where you can treat your dwelling as your main residence after you move out for up to six years even if it’s used to produce an income.
Believe it or not, this means that I don’t have to pay a single cent of tax due to the CGT exemption for main residence rule 😱🤑.
My Experience With IP1
Investment property 1 taught me more life lessons than any investment in the future ever will.
It was the first house I ever bought, renovated, sacrificed countless weekend adding value to it with my old man helping me out and a whole raft of issues that I had to figure out along the way. From dealing with tenants, discovering how many hoops you have to jump through with banks, lodging insurance claims, rushing to finish the concreting in 38-degree heat (would not recommend), hosting open days and so much more.
Some say property investing can be passive. IP1 was definitely not passive!
It was hard work which did eventually pay off in the long run. Now, how much of its success can I take credit for? That’s a very good question.
Looking back in hindsight I can point out a few key things that happened that I had nothing to do with and was 100% luck
- FHOG being available boosted my deposit meaning I only had to put down $9K (crazy)
- The banks lending criteria was completely different back then. No way I get a loan in today’s market only having $9K to put down
- For the majority of my loan, interest rates were being cut. Every couple of months I had to pay less and less in interest which at the time seemed cool but it’s only with hindsight I can truly understand how fortunate of a time it was to be in real estate. It has only been the last 18 months I have seen my I/O loans rise in rates
- Melbourne experienced a property boom basically the whole time I had the property. It was only the last 3 months that the prices started to drop and the loans market really tightened their belt. The property was actually under contract before I sold, but it fell through because the buyer couldn’t get finance. I experience this two more time (not officially under contract though) before I had a buyer who was cashed up. Based on what similar properties were selling for, I estimated that IP1 dropped by around $30K since the start of 2018.
I fully admit that all of the above was unforeseen, I was just hoping for the property to keep up with inflation and use leverage to amplify the gains.
One of my favourite quotes of all time comes from the Roman philosopher Seneca.
I’m a big believer that you can create your own luck. Whilst I still think that the majority of the return from IP1 came from an uncontrollable event (market boomed), there were things that definitely helped bolster the profits that were in my control.
- I actually identified the FHOG as an opportunity not to be missed. I signed my contract on the 29th of June which was one day before they scraped the FHOG all together back in 2012. This opportunity was available to all my friends, but most of them did not take it
- I realised that it was unlikely for me to make a lot of money if I paid for everyone else to do the work for me. I looked to physically add value where I could and since I was full of enthusiasm and energy back then. Countless weekends were spent working on the house. Sacrifices were happily made if that meant I could reach my goal of FIRE quicker
- I sought advice from experienced property investors who knew what to look for when investing…my parents of course! I understand this luxury isn’t available to every but it’s worth seeking one out if you can. There were small things that helped the investment like buying near public transport, schools, amenities, easy access to the M1, in an area with strong employment options and projects scheduled for the future etc.
- Getting out of my comfort zone to learn new things such as selling IP1 online saving over $15K in commission fees. The experience I gained from negotiating the deals was invaluable. Some might argue that a skilled and experienced agent could have secured a better sale price. That may be true but we’ll never know. What I do know is that I saved over $15K doing it myself and I’m choosing to save $15K over potentially getting a higher profit every day of the week!
Why Did I Sell?
The strategy moving forward is to sell all the investment properties and transition to a more cash flow portfolio of ETFs/LICs. IP1 was the first cab off the rank for the following reasons
- The market had gone bananas and I was very keen to lock in that profit and not risk something happening, which sorta happened with the market pullback in the last few months. But I’m very happy with the return we got so no complaints here 🙂
- I would have reached 6 years next year which would have affected the main residence status for tax purposes. This means that I would have had to pay taxes on part of the sale
- There was some upkeep work that I was fed up with. IP2 and IP3 are part of a body corp which takes care of a lot of the maintenance.
- Whilst IP1 had gone up considerably in value, the cash flow was still shithouse! Technically positive cash flow after the tax refund during the last few years (apart from the selling year due to the extra costs). It still was nowhere near as good as what shares could offer for half the investment.
Overall IP1 has been a very successful investment in terms of both return and life skills obtained. I was very fortunate to be in the market during the time I was and I’m pretty confident in saying that I’m most likely never going to make as much money in any other investment ever again.
This may sound like a bummer but the truth is that IP1 was a hell of a lot of work! I can’t be effed doing all that again and I doubt I will have as lucky timings with the market twice. It’s a risk I don’t have to take and Strategy 3 suits our current lifestyle better being so passive.
What’s really hard to measure and has not been factored into the above return is all the physical work required. It was essentially a side hustle I did on weekends (not every weekend but a lot). If I deducted the hours worked * an hourly rate, the return would be less.
I’m still a fan of property investing for the right investor, but I am no longer the right investor and will continue with our strategy of selling off the other two IPs when the times right. It’s my opinion that there are more problems to solve with real estate and more opportunities for those who seek the challenge vs shares.
How has your experience been with real estate? I would love to hear from others positive or negative in the comment section below 👇
Brilliant analysis mate! I agree, a lot of people don’t look at the return of property compared with the cash invested – this is property investments party piece…good ol’ leverage.
In saying that, I totally agree that there a lot more of your personal time and mental capacity taken up with managing a property, they are never truly “set & forget”.
Keep killing it man!
Thanks Ash 😊
Well done. Very lucky to get out cap gains tax and ride the Melb price book. Leverage works both ways and things could of gone differently. But you have made some good money and learnt some life lessons aswell. I’m in WA and I also learnt some life lessons with our IPs but with capital losses.
” Leverage works both ways and things could of gone differently.”
Ain’t that the truth. Was very fortunate with the market 🙏
So are you going to be doing 10k a month deposit on lics/a200 now instead of the normal 5k?
We’re ganna be dropping around $15K each month over the next 18 months 👍
Suggestion: Invest in Quarterly instalments LICs trading at a discount after they have made their quarterly distribution.
Rather than kick in A$15K monthly, why not wait until after they announce their quarterly dividend before you invest and the NTA adjusts for the cash distribution and then buy $45K worth.
The problem of investing before the quarterly dividend is you will be turning tax paid capital into a taxable income stream payout from the LIC.
Timing your purchase when the LIC is trading at a discount to the NTA is like buying assets at a discount. At a minimum it would offset any brokerage you pay by reducing your purchase frequency from 3 times a quarter to once a quarter.
Check here to see which LICs are trading at a discount to NTA and the historical discount/premiums it usually trades.
Page 2, shows all the Australian LICs and their 5 year Range of High and Low premium.
Of the Large Cap LICs, MLT is trading at a small -0.9% discount when it’s traditional trading range is a Low of -5.0% to a High of 7.6% over 5 Years.
Great outcome AFB congrats mate! If you dont mind me asking, who was the online estate agent you used?
I’d love to know too – we’re about to begin selling a property.
Property Now (propertynow.com.au).
Property Now (propertynow.com.au).
I have some tips with using them (or any online agent). If you are thinking about doing it, drop me a line and I’m happy to share my experience and what I would have done differently.
I would love some of your tips you have inspired me to do the same as you.
The biggest thing I would do differently is pay the extra to get it listed as a ‘premium’ listing on real estate.com
Getting your house on the front page is just as important as having your business or site ranked top 3 within Google. It makes a lot of difference and is 100% worth the extra you pay for it.
You can list online for as little as $500 or something. But the premium add-on is around $1,000.
My other tip would be to aim to sell within the first 2 weeks. You don’t want your property sitting around too long.
Have a clear understanding of what your minimum price is and stick to it.
Get the offers in and if someone has offered a price that you had previously said you’d be happy with, pull the trigger and accept. I wish I had accepted an offer that was put in at week1. But I got a bit greedy and wanted to wait for the open day that weekend.
A week later I went to ring the first offer to accept but they had already bought another place.
Congratulations on a great result AFB! It’s good to see you acknowledging that at least some of it was being lucky enough to have a huge boom in Melbourne property and being able to get a loan for it with just 9 grand down, as you say you wouldn’t be able to get that now! Hopefully the time spent doing up the property with the old man helped the family relationship as well, and maybe you get a double whammy of not only increasing the value of your property but also not getting out on the lash the night before and spending a fortune on drinks etc like plenty of others (including myself back before kids!).
Have you got a plan for the funds you got back after paying off the mortgage, paying off more of your IP loans, buying your own property, putting it into the market etc?
One of my favourite parts of this whole experience was the time spent with Ma and Pa. It was such a life lesson that I hope to go through something similar with my son/daughter if we have kids one day. Whole weekends working away, music blasting, mum bringing in lunch and cold drinks, dad and I working away, brother in law helping out on here and there.
It’s so much more than just an investment. There was a lot of emotional attachment we had to that house and my mum actually didn’t want me to sell it lol. She was emotionally attached which is basically the number 1 thing not to do with property investments.
At the end of the day, I bought it was the sole purpose to make money. It held up it’s end of the bargain but there were a lot more dividends paid than just a payout at the end.
The funds are currently sitting in an offset and we plan to drip feed them into the market at around $15K a month over the next 18 months. Too scared to drop it all in as a lump sum even thought the statistics say it’s technically better.
Hi Firebug, i just have a question, i am very new on buying ETFs share, if I put money into ETFs every month is that mean I need to pay brokerage fee 15 aud to 30 aud every trade every month?
Depending on your broker, yes. You can get cheaper brokerage if you shop around but every time you make a trade, it will cost you.
Well done, firebug. Im glad you pointed out leverage. I couldn’t have made it to 20 cashflow positive IPs without that. The analysis you presented was clear. Thank you.
Nailed it with this “I’m still a fan of property investing for the right investor, but I am no longer the right investor and will continue with our strategy of selling off the other two IPs when the times right. It’s my opinion that there are more problems to solve with real estate and more opportunities for those who seek the challenge vs shares.”
Everyone values different things, so to say one is better than the other is bullshit. Thanks for this and what you do!
Yep. Horses for courses. No such thing as a perfect investment.
So what you gonna do with all that money…?
See above mate
Is there an error in your year five “total” cash flow?
Yes there was! All fixed up. Thanks for pointing that out.
Back when I bought, I was advised that if my parents went guarantor for me, i’d miss out on the FHOG, bonus etc so worked out better to get the LMI since it was under 24k. Although, I have never checked if this was true.
I own 3 IP in Brisbane. I plan to do the same thing over the next 5-10 years when Brisbane hits the peak of the market. I will then allocate the funds into buying LIC for the passive income.
Congrats buddy, you killed it with that investment. Though property investment is not for me, you have clearly done very well here.
Looks like you may win the race to a million 😨 🙂
Haha who knows hey. Although with this latest bump, the old networth has soared into new heights 📈.
Next net worth post will be interesting 😁
I love how you turned a First Home Buyer starter property lifestyle asset into a income producing rental property investment asset AND successfully exited the investment with a nice tax free capital profit!
You certainly benefitted from Free Government money, geared interest tax savings , personal exertion cost savings, stamp duty, land tax and capital gains tax exemptions, low purchasing and sellng costs and a well timed your exit after the peak of the residential property market.
Going forward, it will be really interesting to see how IP2 and IP3 turn out if they are both Queensland based rental apartments and don’t get the benefit of all those exemptions, sweat equity and reduced selling costs in a less buoyant future market.
Units and apartments tend to appreciate at a much slower rate than a free standing house (IP1) because the purchase cost is the more building (depreciating asset) than land (appreciating asset).
For rental apartment property investors, depreciation becomes a real issue as wear and tear means a capital contribution from the owners to the body corporate will be required to replace worn out lifts and shared services to maintain the property in a rentable state.
The removal of the tax deductibility of travel related to investment properties as well as the loss of stamp duty exemptions on new properties as well as the deductibility of a depreciation schedule on an existing property as well as slower rental income growth make it even harder to balance the investment property equation.
Even worse, ongoing escalating Land Tax payments for investors will further crimp your rental returns.
“Land tax rates rise steeply once land values surpass $1.8 million. Sites valued under $250,000 do not attract tax and, unlike local council rates, land tax is not capped.”
So if Matt had continued along his path to owning 10 negatively geared investment properties (Assuming the banks would lend him enough to buy), he would have hit a wall of a huge jump in land tax payable annually to the various State Governments where his rental apartments reside.
“In another case, an elderly 90-year-old woman who owns a Swanston Street shop and lives off the income with a full-time carer, has seen her most recent [land] tax bill jump from $6095 to $40,950.”
So if his end goal of selling off half his rental properties to be debt free with passive income stream, the cost of land tax could crimp that cashflow.
Good points Keith.
The Queensland propeties will have no where near the same return as IP1 has had, a lot because of the reasons listed above.
I also didn’t commit as much time and energy into them as IP1, which will be reflected in the return.
Well done on knowing when to exit on your IP’s. truth be told however the seasoned pros with interest only leverage lending were out of Sydney in first half of 2017 and many were in the United States investing in Atlanta since 2010.
Very few Aussie know what is about to hit them over the next decade at least. Anybody who bought a house in Sydney or Melbourne or Newcastle or Wollongong from 2015 onwards using only LMI, or with less than 20% deposit is going to see how a decade will pass and they will have received zero capital gain at best and loss of 10-20% of their property value at the very least. That’s assuming they are employed. They will realise that they spent the best years of their lives subsidising somebody’s life as a renter. I was a sucker like that once when I never listened to my intuition to exit the housing market on an IP in 2015 in WA, I was paying the bank $850 a week in repayments while the tenant was paying $460 and after all taxes and maintenance and management fees was barely taking home $400. It trapped me and in the end the only way out was to pay down the mortgage by moving money from another source.
A meth and houso capital of Australia, Newcastle in NSW, a coal port , with wood and rusty nail asbestos housing on tiny blocks for instance, is less affordable then London, New York, San Francisco with millions of people.
Australians have the highest personal debt and the governments debt of $550 billion increasing still with few assets left to sell, in a coming high interest rate environment will mean that employment will be lost as people cut spending to pay down mortgage traps.
Back in 2011 everyone was talking about the Sydney bubble and how unaffordable houses were, nobody was willing to buy into Sydney, since then salaries have stayed the same only the fact that European and US interest rates are so low and credit easy, enabled this latest boom. Plus of course opening up our housing market to foreigners, which should be a crime against the young people of any country.
The reason interest rates are so low in Australia is because the underlying economy that is supporting jobs and the house prices is in a crisis. The government is desperately trying to flood the country with immigrants in order to keep the existing people employed and create new jobs also. Because Australia produces nothing but raw materials at the lowest possible cost, the only way to keep people employed is to create a sugar hit in the property market and construction. Thus the debt fuelled spending of government on light rails, and other over priced garbage, like the shortest, most expensive light rail line in the world , 1.7 km long into a deserted and dilapidated CBD in Newcastle, 35 times more expensive than the next cheapest option, just to create jobs and boost temporarily the population allowing a few buildings to go up, allowing a few fools to buy off the plan so that in 5 years time their equity disappears but they have been subsidising rental property for someone.
But eventually the debt must be paid and it will be , from the deposits and higher interest rates and higher taxes that will eventually come in a low inflation environment.
Economics can’t be cheated , you can only roll the problem up the hill so long before it rolls back down.
There is no sadder sight than a young pessimist – Mark Twain
I’m afraid you aren’t well versed on what has happened in other countries where property bubbles have burst!!
How do you plan on investing this cash into shares? Obviously dropping it in at once is a risk in case the market drops soon after. Will you be using value cost averaging?
Interested to see how you move a lump sum into the share market whilst keeping risk low.
I went over your calculations after I did mine on my house again.
I am not sure that the profit you calculated is correct?
I calculated your break even price to be about $408k but then there are other costs like land tax and council rates have you included those?
Did you add the rent you paid to live elsewhere while you were not living in the ip1 house as an expense?
Council rates are included. There’s no land tax for IP1.
Not sure what you mean about rent paid elsewhere? Can you expand upon this please?
By my calculations on a spreadsheet, if you received free rental accomodation where you physically lived while you were not living in IP 1 then your profit from the sale was about $156530. It’s about because you have not included all purchase costs.so difficult to get exact figure but it’s in the ball park.. I have spreadsheet I can send, showing my calls so just email me.
If you buy a house with full payment in cash and live in it, then you don’t pay any rent to anybody. All your salary is used for investing or consumption.
If you buy a house with a mortgage, you live in it but your rent is exactly equal to the interest. Your landlord is the bank and a portion of your salary goes to pay them the rent which is called interest and the house is theirs until you get your mortgage documents from them.
If you buy a house with a mortgage and rent it out to somebody then you have two landlords, the bank and the government. The bank wants their rent for use of their house and the rent you pay them is called interest. The government also wants their rent called taxes. However this time there is a tenant in your house, called Bruce, and the bank allows you to sublet to him and Bruce pays you rent money.
BUT while Bruce lives in your house, you now live in another house that belongs to Sheila, where you pay rent. That rent that you pay as a tenant now is a portion of your salary that is not being used to pay down your own mortgage, instead, Sheila is using it to pay her mortgage down.
So you need to take all the rent that you paid Sheila and include it as an expense against your own property,
So say your total property purchase price is 100k (after all fees and stamp duty), and you put in a 20k deposit, as soon as it settles, the next day, if you sell the property your break even selling price is now $100k. If you do a 24 hour renovation yourself, no receipts, for $20k and sell your property, your break even selling price is now $120k.
If you renovate for $20k, rent it out for 1 year for $30k rent income to Bruce, pay the bank $4K interest on IO loan at end of year but live somewhere else, where you rent from Sheila for one year but paying 40k rent, then your break even selling price is now ($100k + $20k – $30k + $4k + $40K) = $135k.
If you sell your property for $80k you give the bank $80k, but you lose $20k on deposit, $20k on renovation, $4k of interest and $40k of rent you paid to Sheila. You still have the $30k from Bruce. Total loss of your salary and capital is ($20k + $20k + $4k + $40k – $30k) = $54k. Assuming your marginal rate of tax is 30% the government gives you a tax rebate of $1200 on your interest payments and you have no receipts from the renovation so they don’t recognise that a renovation occurred and they dont care that you paid Sheila rent.
If you sell the house for $140k your real profit is supposedly $5k, even better the government gives you a rebate of $1200 for interest losses, however, in the eyes of the government your profit is $40k as they dont recognise the renovation or the rent you paid to Sheila as losses so they take 50% of your marginal tax rate on what they consider as profits. So you must then pay them $6k and you actually make a loss of $1k on the property. So the break even is actually higher than $140k by some small amout as you need to pay tax in my example.
The government and the banks have set the system up in a particular way so that they always win.
Hi Kelso, thanks for the write-up dude.
But this is a bizarre and strange way to evaluate an investment if I’m being honest. I’m not sure that anybody subtracts the rent paid elsewhere into the return calculations for an IP.
I’m wondering how this theory would work if I rented out a multimillion-dollar waterfront property for $170K a year. Now I would never do that. But the point I’m trying to make is that if we use your methods of subtracting your own rent off the returns, the IP would have a shocking return even if it had been through an absolute bull market and in a vacuum killed it returns wise.
How does your method account for multiple properties? Do you subtract your own rent or mortgage repayments off each investment property?
“I’m wondering how this theory would work if I rented out a multimillion-dollar waterfront property for $170K a year”
Episode 60 | Building a portfolio through Rentvesting – Chat with Chris Gray
By The Property Couch April 21, 2016 in Podcast
“We renting a $1.5M townhouse on the waterfront where you could literally smell the ocean and we were paying A$620 a week. which is a 2% yield. After 5 years the most the rent went up was A$650.
I now stay in $5-6M homes with the rent at less than 1% yield as we needed more space for the wife and the kids.
If your not financially literate, it’s hard to back it up that this is better.
“How does your method account for multiple properties? Do you subtract your own rent or mortgage repayments off each investment property? ”
You treat your bundle of Investment Properties like a single property investment entity. Just like an ETF or LIC is a bundle of many different investments in hundreds of companies.
Hence, you would deduct your rent once against your total investment property portfolio (IP1, IP2, IP3) and see whether you are ahead or not on an ongoing cashflow basis.
It would be a brave investor to count unrealised capital gains on their investment property using comparable sales given that Sydney and Melbourne and Queensland Properties are teetering on the same edge that the WA Property fell off once the Mining boom ended.
The key conclusion is that residential investment property is not the best way to start your financial journey due to the requirements for active involvement, higher purchase and sale costs, higher debt levels, lower yields to realise the returns you can get compared to a trouble free Large Cap Indexed ETF/LIC.
I know that few people don’t consider the rent they paid elsewhere as a expense against their property. But ask yourself how could you not do that? It’s an economic nonsense not to.
That was your salary that you used to pay rent elsewhere. Had you not moved out of your house you could have used that rent money to pay down the principal
But aren’t we trying to work out how the investment performed? Once we start factoring in outside noise, I don’t believe it paints a true picture.
Each to their own though. If it works for you then go for it!
It’s not outside noise. And it’s not a case of whatever works for you either. Try think about it as a total balance of your money flow, if your IP1 had no capital growth whatsoever, you would have been better off living in it. If you move.
I am not here to challenge you, not my intention, it’s none of my business how you calculate your profit, I just know how it’s done when you are trying to calculate your real profits.
I will do a spreadsheet up to show it visually, it’s a case of once you see it you can’t unsee it and you then understand. If you have an email I will send it to you. It gets confusing because a rental property that you live in becomes involved but it’s about sending all your dollars to work for you.
Imagine no property ever gets a capital gain it just stays the same price you paid for it. Now you only have tax deductions and rent income to help you pay for the mortgage interest and repairs and expenses.
Think about it this way for a while ,realise you moved out of your IP to get the tax deductions and to get someone else to help pay the property off.
You need to rent cheaper then your tenant does in that case , the one where no capital gain ever occurs on a property, plus get tax deductions in order for your property to be paid down by a combination of tenants, government rebates and your savings.
Yes it doesn’t make sense and rent paid elsewhere shouldn’t be included in the calculation.
You could make the same incorrect arguement about buying shares. Because I used the money to buy shares instead of a house to live in, I now have to rent somewhere else, hence the cost of rent has to be deducted from the value of the shares.
Or alternatively, on the basis that you can only ever physically live in one house, using the same logic you would deduct cost of rent from your first property, because you could have lived in it, but not from any subsequent properties because you can’t also live in them. So your first investment property always under performs other investment properties.
If you believe that the “Rent-Investing” strategy is rational, than Kelso’s suggestion that you include foregone rent savings of owning a home to live in rather than renting to a tenant and having to pay rent to a landlord is valid.
Don’t forget as a tenant, the A$170K a year rental on waterfront residential property would be only a 1% yield on a A$17M property. As an owner occupier paying 4% interest on your loan to the bank, you would be shelling out A$680K p.a. in bank interest before any expenses.
So if you can earn a steady 7% p.a. on your A$17M via the Vanguard ETF or a Thornhill LIC, you would be receiving a A$1.19M p.a. dividend yield which would make the A$170K in annual rent living in the house of your dreams incidental to growing your wealth!
The math doesn’t lie, your conclusion that residential investment properties are a terrible investment towards achieving FIRE is because most residential property buyers are not rational and overpay and overleverage to their eventual financial demise!
“your conclusion that residential investment properties are a terrible investment towards achieving FIRE”
Woah woah woah. Hold up just one second.
Residential investment properties have horrible cash flow. But they can be a fantastic tool to generate wealth for the right investor. Shares provide that passive income better than property that’s for sure.
I think both asset classes have their pros and cons. Neither one or the other are ‘terrible’ investments towards achieving FIRE. They are just different.
There are Old pilots and there are bold pilots, but very few old and bold pilots.
Residential Property speculation is a game for the young in a time of falling interest rates.
Gearing up to 100% using LMI, paying fixed interest only investment loan for 3 years is a race between funding the negative gearing gap long enough to cash out before you go bust from rising costs overwhelm your total cashflow.
If you can draw on a well paid job, family money or an liquidity event windfall to fund this negative cashflow gap, you can last long enough to reap fantastic gains from demographic growth and gentrification driving up residential property prices.
Winners like yourself who rolled the dice and got out before the downturn are rare and deserve to be rewarded.
Without that safety net, one lost job, rental vacancy, loan foreclosure could Lose you your investment and leave you with a financial loss and bitter experience for your efforts.
Even Robert Kiyosaki warns against extreme leverage now despite owning hundreds of geared property over decades.
The young have time to rebuild, but their goal of achieving FIRE has gone up in flames as the extreme heat of uncontrolled debt destroys their financial future.
Hi Aussie Firebug, congrats and well done mate. I’m definitely with you and do not believe that the best returns are in property. I own two of them – 1 fully paid off and 1 about 40-50% paid off. I can tell you from my experience, I would’ve done better putting in all the money in shares instead. One is in Sydney – held since 2005 and the other in regional NSW only bought last year.
Having said that, like Kelso, I agree that the rent you paid became an expense on your PPOR/IP1 after you moved out because it was money that you could of saved in the investment itself. In my view, I would also consider your return to be less than you think. We all need to live somewhere.
I’m not sure how you came to the conclusion that I think the best returns are not in property…? My viewpoint is and has always been that property has shithouse cash flow and isn’t something that you would want to be using to fund your retirement (shares are better IMO). But for building wealth, I have always believed that property can be a fantastic tool for the right investor.
Your two examples of under performing IPs tell me more about you as a property investor than they do about property as an investment class. For one, you’re not using leverage in one of your properties. An investment property without leverage makes no sense IMO. You have held a property in Sydney since 2005 and it has apparently under performed the stock market? That’s actually incredible since Sydney has gone through one of the biggest property booms in history with falling interest rates. The stock market however went through it’s second biggest crash.
Yet your properties still under performed 🤔🤔🤔.
FYI when I moved out of IP1 I moved back into my parents where I lived rent free (lucky I know). Does this now changed the return for IP1 (extremely strange if your answer is yes)?
Hi Aussie Firebug, Thanks for clarifying your stance.
To be clear about my own position – the Sydney property is my owner occupied property and I’m quite happy owning that one outright – been living in it since it was bought. After it was paid off, I did actually leverage it a few years ago into more shares which dramatically outperformed even the Sydney property market during the same period. I invested it in well researched and picked individuals rather than an index. You would be aware that certain companies have increased in value by thousands of times even though the index has done very little by comparison. I also hold a portion in the index strictly for insurance. Having said that, my OO home was never intended for an investment.
My regional IP also is not for investment – I have bought it for my future retirement. I hate calling it an “investment property”. It is an investment in lifestyle only. I couldn’t be bothered what either of them could be sold for because the vast bulk of my money is in shares and from a moral and ethical point of view I can’t buy property for a strictly financial gain because I personally believe it is detrimental to all of us as a country. I also stand by my declaration that despite the raging Sydney property bull market, I believe I would financially been better off putting that extra money in shares and I can validate that by saying that I have actually been investing in shares long before I even bought my first home in 2005 and have full history of my share investments and the “performance” of my Sydney home.
The fact that you lived rent free after moving out of your first property means that you don’t have to deduct the rent you paid – because there was none. You wouldn’t normally deduct personal rent from any other property investment, but the reason you would for your initial PPOR is because you are claiming the special tax free status of it, which you can’t for any other IP. That makes your first property special from a tax point of view and had you paid personal rent after you moved out – it would rightly be considered a reduction in the return of the tax free property. You are pretty switched on and should understand that there are no free lunches in investing!
What I’m trying to say is that you can’t claim the tax free status of IP1 as part of your gain and not consider your personal rent as an expense, because by choosing to pay part of your salary to a different land lord means that you effectively paid out some of the tax savings yourself. You wouldn’t have lost any of your salary at all had you just stayed in it, but you would’ve lost the deductions.
Not trying to talk your result down, and you certainly have done well, but like others here, I think you’re above return is inflated because of the above factor.
I don’t know how I can be more transparent with my numbers. I think you are over complicated this way too much.
I put in $41,746 and got back $197,697. That works out to be an annualized return of 36.48% after tax.
If you want to talk about the numbers being inflated, a much better argument would be about inflation (which I have not factored in) and the physical work required which I have not accounted for. Lowering the return for an investment of any sort, using expenses accrued elsewhere seems like you’re reaching tbh.
When I eventually sell IP2 and IP3 do I deduct my rent expenses on them too? I’ve never seen this method used anywhere. Does your method have a formula I could use? Genuinely interested in how things are calculated when you have multiple properties. Seems over complicated.
If you stayed free at your parents house then nope, you don’t deduct anything from your IP portfolio
You just deduct rent paid elsewhere against any profit you make, but only once.
100% right about including work and time done on your first property as well as inflation as a possible reduction in return. You did however get great benefit in bonding time with your parents – which is worth far more than money in my opinion.
“For your first property only”, see my reply above about deducting personal rent paid during your ownership of it – you wouldn’t do it for your other properties because they are not treated special from a tax point of view. Your PPOR is a special case and should be treated as such.
Perhaps I’m rubbing you up the wrong way and I was not aware that you lived rent-free with your parents. Unfortunately, in my eyes only – it has now diminished what your brand of FIRE movement is about for me personally. I view FIRE as working hard and independently without any free hand-outs along the way. This is something we should all aspire to be. This fact for me has taken the shine off your blog because there are many of us (including me) that didn’t choose or can’t have help from our parents. This blog is not “anyone can FIRE and I’ll show you how I’m doing it”. It is more a blog from just another overly confident millennial, making assumptions above about my own financial position and refusing to believe that somebody could make more money off their share investments than off their own property. I mean after all, google says the index hasn’t performed as well – that means nobody made much money from shares. The blog for me has turned into “taking what he can get from anybody/thing just to make a buck”. We are not all like that and I am not like that. As I said above, property for monetary gain only, in my view is not good for our countrymen/women. You might understand how that view makes me quite unpopular at times. Property is Australia’s number one religion/hobby/pastime.
Firebug, being a super confident millennial (they all are), I’d be surprised if you couldn’t appreciate my stance – nothing personal – maaaate…
Christopher, a lot of what you say is true. I appreciate that you have moral views about property investing and can see that the religion of property investing is killing the economy of this country. Welcome to the 1% that understand that.
However, don’t be too hard on Firebug. He is heading in the right direction.
The FIRE movement is or should be about people helping each other out. I also have no family to help with anything at all and when I landed on the street with my children and wife could not even get a rental and in huge debt after a medical episode and I saw first hand then how cruel and narcissistic the general population is.
My eyes are wide open now.
It’s quite easy to understand.
Bruce went to work on a banana farm in Queensland for a month. He made $4000 dollars.
While picking bananas he met a girl called Sheila from Coffs harbour who he fell madly in love with. Bruce then found a job picking strawberries in Coffs Harbour for $4000 a month, he rented an apartment for $2000 a month and sent her text asking her to move in.
But Sheila calls him and says she found a job picking pineapples for both of them in Noosa for $4000 a month each and informs him with a text that she has rented a $4000 a month apartment with a hot tub and ocean view and sends him a photo of herself in the tub, sipping champagne and holding up a sign which reads, “where the bloody hell are you? $2000 rent and I also love cooking and cleaning”
So BRUCE calls his mate Wazza and tells him about the strawberries job in Coffs and will he take over his lease. Wazza says sure but he can only pay $1000 a month for the rent as he has a debt on his Ute. Bruce gets another picture text from Sheila with a picture that nearly caused him to faint from loss of blood supply to his brain, and hurriedly agrees to Wazzas terms and gets into his car and floors it to Noosa.
When he leaves Wazza he has paid $2000 for the Coffs apartment, gets $1000 from Wazza and spends $1000 on fuel to get to Noosa and start living, he pays his $2000 rent for Noosa apartment and now has no money in the bank.
Had he stayed in Coffs he would have still had $2000 in the bank. His costs of moving into another apartment plus his second rent is loss
How much return did you get per annum?
12.98 or 39.48?
Which is the accurate figure; I am confused?
Also, in all of this investing, where do you actually live? If it is with your parents, then you are not really living financially independent? Just wondering.
We had an after-tax annualized return of 36.48% (not factoring in inflation and hours dedicated to the investment).
The 12.98% is an example of how the property would have performed without leverage.
I have been out of home for the last 2 years but the majority of the time I was still at my parents. I have definitely not reached financial independence yet and tried to take advantage of every opportunity that came my way at an early age. Living at home in our early/ mid-20s enabled us to save a tonne of money and is one of the biggest reasons we are in the position we are in today.
We all have different opportunities in life, I would recommend it to anyone who has it available to them to stay at home as long as possible and save as much money as you can. It’s a great move financially but there are social sacrifices that come with this decision (can’t exactly take a girl back to your parent’s house).
But as they say, ‘nothing worth doing is ever easy’.
Great article and congratulations. One thing however, you talk about leverage as if it’s unique to property. You can in theory use leverage to buy shares -via a margin loan – it’s just that most people, myself included are reluctant to do it.
So I don’t think it’s strictly correct to say leverage makes buying a house more profitable, because you can do the same with shares and if the market goes up you get the same result.
So it’s more accurate to say leverage magnifies gains overall (plus of course losses!)
There are some unique features of Australian property over shares, such as the FIrst home owners bonus, no capital gains on a primary residence, and the fact that you can use your own sweat and time to increase the value of the asset. These are unique to property, but leverage actually isnt, it’s just that we are more comfortable using leverage on property vs shares.
An interesting analysis (not that I’m suggesting you do it!) would be to see what return the same capita plus margin loan invested in shares on the same date as your house purchase and sold and repaid on the same date as your house sale would be compared to the house.
You’re 100% right that leverage is available to other asset classes. But I would argue that the type of leverage is not the same and property is unique because of the high LVR available with a cheap interest rate and no margin calls. You can leverage shares, but it will be at a higher interest rate, lower LVR and you have the downside of margin calls.
The truth of the matter is that I would have never been approved for a $319,815 loan to buy shares with a $9,000 deposit.
If a lender was to lend me that money at the same lower rate, without doing the research, I’m pretty confident in saying that I would have made more in shares during the same time without all the hassle of everything I went through (that would have been nice). Shares generally outperform property on a like for like basis. But when you factor in the cheap leverage at a high LVR, property can outperform.
Can you do something on hybrids and bonds?
Great work on the profits. I sold my IP in Melbourne end of 2017 and very happy with the timing and profits too.
I’m not quite convinced about the paying no CGT part. You said that because you “never bought another house to live” therefore no CGT. However, this is not what the ATO states. The rule is that you cannot “treat” another dwelling as your main residence. If you were staying at your parent’s or friend’s house for all this time then that would very much be treating their place as your main residence.
Please correct me if I’m wrong, but it seems like you’re up for a tax bill.
I’m not an expert in tax, this was advised my accountant gave me so I’m sticking with it… from the research I did (stated above), no CGT was the conclusion I also came up with.
Can you flick me the page where the ATO says what you’re saying mate? I’ll read up on it.
Sure. It’s the same link you used.
The second point: “can’t treat any other dwelling as your main residence for that period”.
Ahh I see what you’re talking about. Everything quoted is only talking about when you actually own something.
A renter cannot rent somewhere and claim a PPOR because they don’t own it. The owner of the IP is the only one who can have this entitlement for that propety in the eyes of the ATO.
If I owned the unit we rented and claimed that wasn’t our PPOR for tax purposes the ATO would come knocking.
Well done, firebug. Im glad you pointed out leverage. I couldn’t have made it to 20 cashflow positive IPs without that. The analysis you presented was clear. Thank you.
Well done Firebug. I have made a similar finding with regards to property investment in that there is no cash flow to be made as the mandatory expenses eg rates, insurance, land tax etc plus the maintenance and loan costs soon swallow your income and more. Well done for taking the step to get a house in the first place and for being so well organised. It is not easy and it can be soul destroying and certainly character building. I have purchased several properties but I think l need to change now and sell up and try something else. There are some benefits to having property but you have to be prepared to work hard physically as well as working smart. I have found that the maintenance is ongoing and to be successful you need to vet your property managers very carefully to ensure they are not just looking after themselves financially. I have been badly burnt by inexperienced property managers who often make incorrect decisions and are not willing to ensure your interests are well taken care of. There can be lots of hidden costs in a management agreement and having to give 30 days notice to remove them can send you broke so best to be careful in the first place- that has been my biggest lesson. My other lesson was in regards to maintenance- make sure you obtain firm quotes and query any changes to those quotes made while the tradie is on site- you may not know until you get your monthly statements that there has been a change. Thanks again- your blogs are very inspirational and hats off to you for sharing. Thank you.
Thanks Julie 🙂
Property can certainly propel you towards financial independence. But as you’ve mentioned, it’s a lot of work. Closer to being a second job than passive income IMO.
Love it. I too have “been there, done that” with real estate and I left those stresses behind in my 20’s. Like you, many lessons were learned and I wouldn’t change much.
Once I got to the point and experience of mutual funds that return an average of 10% return a year, I was able to say no to the long weekends of work, concreting on hot days and getting phone calls to fix an oven.
I honestly couldn’t say I would buy another property anytime soon 🙂