Our second investment property (IP) has officially been sold 🎉👏
I say second because we first sold IP1 back in 2018, but this IP was actually the third property we bought and I’ve always referred to it as IP3 on this site so it can be a bit confusing.
Selling IP3 continues 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 now we are looking to exit all our positions in direct real estate except for our PPoR which we bought in 2021.
We still have one IP left (IP2) which hopefully will be sold at the end of 2021.
What Was The Return?
Following the theme from the IP1 sale article, I’ll get straight to the point.
We turned $65,313 into $126,298 over 6 years which works out to be an annualized after-tax return of 11.62%.
If you’re interested in all the finer details of how we arrived at that figure please read on.
The Numbers
IP3 was bought in SE Queensland for $250K in 2015.
Buying expenses
| $1,000.00 | Initial deposit |
| $400.00 | Building and Pest inspection |
| $11,500.00 | More of the deposit |
| $37,900.25 | Rest of Deposit |
| $2,078.83 | Legal and conveyancing fees |
| $200.00 | Settlement Fee |
| $728.40 | Land Titles Office |
| $9,900.00 | Buyer’s agent fee |
- Stamp duty was added to the loan for this IP instead of paying it upfront.
- I paid a 20% deposit to avoid LMI
- I used a buyer’s agent because back in 2015 I was very time poor. I didn’t have the time or desire to go up to Queensland to scope out the place and really do my due diligence so I out sourced it.
Actual money spent so far: $63,707
Cash Flow/Holding Costs
| Cash flow | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| Rent – Expenses | $1,679 | -$118 | -$1,976 | $711 | -$1,285 | -$1,989 |
| Depreciation | $6,911 | $4,117 | $3,375 | $2,872 | $2,529 | $2,293 |
| Tax Refund | $1,935 | $1,567 | $1,979 | $799 | $1,411 | $1,584 |
| Total | $3,615 | $1,448 | $3 | $1,510 | $126 | -$404 |
Total cash flow over the 6 years = $6,298
Notes:
- I had a lot of repairs that needed to be taken care of before I sold the property in year 6 which was the most expensive year. Year 3 and 5 also had some pretty hefty R&M jobs too.
- I’ve included depreciation and a tax refund even though this property was held in a trust and not in my name. This means that the taxable income of the trust was lowered but my personal income was not affected. It’s hard to measure the full effect of the depreciation so I just used a refund amount based on the 37c tax bracket as I did for IP1.
- I used the diminishing value method for depreciation.
Actual money spent so far: $57,409
Selling Costs
- $599 – Conveyancing
- $7,305 – Went through a traditional agent for the sale because the property was located in Queensland and I wasn’t in a position to go up there and host open days
Total Selling Costs: $7,904
Total money committed to this investment over 6 years: $65,313
The IP was sold in June for $320,000
I invested $65,313 of my own money and received $126,298 6 years later giving me an annualised return of 11.62%.
Return on Investment (ROI) and Tax
I used this website to calculate my return on investment for IP3. The formula was the following:
Annualized Return = ((Ending value of investment / Beginning value of investment) ^ (1 / Number years held)) – 1
And just like I explained in my IP1 Sold article, I’m only calculating how much of my money was spent, and how much cash I got back after I sold. Because that’s all that really matters IMO, it’s all about the cash on cash returns.
I know people like to crunch the numbers based on purchase and sold prices without factoring in leverage, but I just can’t see how this gives an accurate depiction of the investment when 99.99% of property investors use leverage when investing. It’s the only way real estate makes sense IMO.
The tax bill for this investment was washed through the trust and most of the gains actually went to my self-funded retiree parents. So just like IP1, we didn’t actually have to pay any tax for IP3.
I need to write another trust article that highlights our strategy when it comes to trust distributions because the trust is actually shaping up to be an enormous tax minimisation vehicle especially combined with debt recycling which will also be doing once our new home settles this month.
Why Did I Sell?
In a nutshell, selling our investment properties is part of our current investment strategy. We want to pump more $$$ into our index style share portfolio to create a passive income stream that will free us from the 9 to 5 grind.
Conclusion
IP3 wasn’t that much of a headache tbh. But it was still way more work than our share portfolio. I know hindsight is 20/20, but the share market would have actually made us more money in the same period of time with 0 work involved… 😑
But this is easy to say now in 2021 after a huge bull market. I’m still happy with the returns but it further illustrates to me that you really need to add value or solve a problem with real estate to make bank.
This may surprise some of you but I bought, managed and sold IP3 without ever actually seeing it in person 😅.
I paid someone a very high amount to do all the due diligence work for me so I was confident that the property was legit (I was still nervous until I received my first rent check lol). I also never improved the value of the property which is one of the biggest advantages I’ve always said property has over shares… the ability to physically add value. I seriously just bought it, dealt with a few tenant issues here and there and sold it 6 years later.
IP1 was very different because I put in the work (sweat equity) and physically improved the value of the home which was reflected in the sale price.
And now we only have IP2 left which we will be putting on the market later this year 🙂
Congrats!
We bought two investment properties that we want to eventually get out of too but I don’t feel like it’s the right time for us to get out yet.
But overall we agree with you that we eventually want to no longer hold any properties.
Thanks for the update! Looking forward to the article on the trust. Thanks for sharing all your knowledge
Cheers Mungbean
Congrats on your sale. Will you be doing an article on debt recycling? We have a PPOR with mortgage and due to current markets probably around 200k equity we could use for recycling. The trouble is I just can’t get my head around it!
Absolutely! Big debt recycling article will be published by the end of the year. I still need to get my own ducks in a row.
Was it a brand new property? Might not have been as good as the share market but an 11ish% return is still a nice collect. Also, bit painful but annualised doesnt have a Z in it
I get the rationale for using a buyer’s agent but it’s a decent chunk of change isn’t it – at more than the selling agent’s commission six years later! Congratulations on the sale – must feel good to be moving ever closer to the end strategy you want to have in place.
I have always looked at this a little differently. If you see the buyers agent as someone who can increase your ROI, especially over a 20-30 year period of time, the buyers agent fee pays itself back in spades. Also a lot of buyers agents also provide a review component (of the portfolio) as well which increases the value add. We used one for our last IP in the Moreton Bay region. Purchased at $340K in September 2018 and just valued by the bank at $420K. No improvements have been made and just general maintenance. Property is cash flow positive (pre-tax) circa $4000 per year. We won’t achieve those capital growth gains every year (and some years it will be flat and may go backwards) but even if for arguments sake you make 8% pa on average over 30 years compared to 7%, then the buyers agent fee of $11K is worth its weight in gold.
Good points Leigh. I would definitely need them to convince me that the value they were going to deliver was worth it though.
Good competent BAs may worth the money, but there are many who aren’t. Sold 2 dud non-performing IPs to BAs.
💯
It’s a massive amount of money tbh. And it impacts the return so much because it’s cold hard cash. The more you can borrow the better with real estate IMO. All about those cash on cash returns.
I can’t wait until we are 100% passive so I can focus all my time and energy on other endeavours.
Hi
Awesome work on turning a tidy profit on the sale. The annualised return is impressive for the property world.
I reside in se qld and am wondering how you scored a house for 250k (even in 2015), was it a townshouse by any chance? Now that the house is gone are you able to give us the suburb/localised area where the house was?
Going off recent sales here I’m also assuming the house sold fairly quickly?
Thanks Ococ.
You’re spot on, it was a townhouse on the outer skirts of the Gold Coast. The house sold in 2 days 👏
Are you able to provide feedback on the type of property and location? I don’t mean the exact address but more like what region , house/unit etc..
I use a BA myself which charge similar even a little higher than your figure and would say my ROI hits similar figures to yours in a little over 2 years and that’s on a recent conservative bank valuation.
That’s with a 3 bedroom House in the Morton bay region
Upper Caboolture – 4 bed/2 bathroom. About 10 years old. Great tenants.
Townhouse near the Gold Coast mate.
I have mixed feelings about the BA. They did all the work and ultimately I’m happy with the return even factoring in their enormous fee. But I don’t think I’d bother going through that whole process again. I’m just so much more suited to be a passive investor and focus my time and energy growing my business atm.
Everyone’s different though.
I’m actually doing the opposite. My portfolio isn’t as big as most people’s (as I’m only 21 years old), but I’ve been focusing on moving funds out of the share market (except for super – which I invest in direct shares through ING Living Super) and into property.
I have just found property to be more attractively priced and have a greater potential for both cash flow and capital gains. That being said I am sticking to regional areas since it is hard to find houses/units that have the potential to be cash flow positive in the capital cities. So far in just over a year my 1st investment property in Geelong, Vic has gone up around 70-80% – due in part to the area going up and in part due to renovations.
You’re young Tony! I think property is more suited for active investors who are prepared to put in the work. Good luck with it all mate 👍
Capital gains Tax drops the return even further
Already factored in Tony
Bought $250k, sold $320k, 6 years, worth the time & effort ?
Ultimately yes. It returned above average results and wasn’t that much work.
Yeah and for me, I actually enjoy being a landlord, solving problems and working with property managers. I see it as a side hussle, business on the side. Have 4 IP’s and a PPR and looking to purchase 2 more IP’s and that will be enough.
If you hadn’t structured it as a trust, like most IP owners I’d imagine, would have CGT significantly reduced its performance? Thanks.
Potentially yes.
We had 2x IPs and even with property managers they can be a pain in the arse! We had both of ours in WA and didn’t get any capital appreciation. I sleep easier at night with my diversified index funds 😁
What about the cost of debt in your cash flow? Is the rent net of this? Well done by the way!
Interest repayments are already factored in. The cash flow is the rent minus 100% of the expenses.
Congratulations on the sale mate! Pretty decent profit there for you!
By the sounds of things the proceeds of the sale are going straight into shares? Gotta love the low maintance aspect there, as someone once said to me you never get a call in the middle of your holiday that the hot water system for your shares has blown up!
So true 😂. Yeah the profits are going into the share portfolio mate
Hey mate. Have you included cap gains tax on the sale? You may have taken the tax refunds as a gain but not the tax on the capital gain
Good point. No cap gains were paid because the trust distributed the profit to my self-funded retiree parents. But I have also included the tax refund in the calcs which isn’t really fair… I could remove those numbers and re-do the return which would make it lower
Thanks for the great info! I’m looking forward to hearing more about the trust structure.
We have 2 IP brought in 2006 & 2007. Both rented thru a social housing co-op that pay the rent on behalf of the tenant. One owned outright as i inherited 50% and the other owning $75K.
We are also thinking of selling as the property market is booming here in the Mid north coast of NSW and both houses are built in the early 80’s and will need $$’s spent to upgrade. Thinking EFT’s might be easier than the long term upkeep, plus rates & insurance both eating into the bottom line.
It’d be interesting to see the cost of the trust vs CGT benefits saved as a result in this scenario if you had those numbers?
I’ve got an upcoming article/pod on trusts with a really good guest. I’d like to model a few different scenarios in that one I think.
Really looking forward to the pod on trust’s AFB , thank you for all the detail on this one , very informative.
Congrats mate! Great result!
I live in Brisbane and am blown away with how hot the market is right now. Million dollar plus tear downs 10km from the city. 🤯
I’m very happy with our reasonably priced, cozy townhouse thank you very much.
Madness mate
That’s it! Great fool theory. No thanks.
Thanks for the detailed update! Would love a detailed article on how you use your trust, and your upcoming debt recycling article!
It’s coming boss 🙂
Congrats on the sale. It’s incredible that you did all that without seeing the property. That’s very Tim Ferris of you 🙂
Interesting update. I saw the mention of it being a townhouse. I wonder if you would have had better returns with a house? My personal opinion is houses are the only way to go when investing in property – I see the value in the land. And long term performance tends to support this. But well done on the 11% return – still a very good number.
I agree with that. I tend to focus my property investing on houses, simply because in most areas, there can be almost an infinite supply of new units/apartments/townhouses by knocking down old houses, which drags down the return substantially. The obvious exception to this rule would be in inner city areas where there is no (or very few) houses that are suitable to be sub-divided (this tends to only be within a 2-4KM radius of the CBD in Melbourne, not too sure about other states), but that doesn’t overly affect me as I prefer areas that are much further out as they are the only ones that can be profitable (and occasionally even cash-flow positive) from the day it is rented out.
Yeah a house would have done better looking back at it. The townhouse had very good cash flow though… something houses can sometimes lack.
A question from a fellow personal finance blogger! Have you ever experienced any negativity with sharing your net worth / investments online? Keep up the good work, great post.
Nope! It’s been one of the best decisions I’ve ever made in my life.
And thanks for the kinds words 🙂
Great to see your advance, mate – I am also in a similar journey trying to reach financial independence. Inspired by you and other people in the FIRE community, I just started my blog to detail what my pathway to financial freedom as well – hope we can keep in touch! Cheers.