Aussie Firebug

Financial Independence Retire Early

Our second investment property (IP) has officially been sold πŸŽ‰πŸ‘

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%.Β 

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 $65,313Β 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… πŸ˜‘

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 πŸ˜….

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 πŸ™‚

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