Property analysis #6 - lower income investor

Wow, analysis number 6 already! I’ve certainly looked at some very interesting ways our usual hypothetical investor could create some impressive positive cashflow over the past couple of months, but I reckon it’s time to see what an investor on a lower income (say, taxable of $40k) could achieve in the property market.

As before, we're going to assume that our investor has some equity to play with to cover the deposit and other purchasing costs. We're also assuming that our investor is single, and has a good credit history. And, of course, wants to buy something that isn't going to restrict their cashflow.

I’m looking at a duplex at 2 Serpentine Avenue in Wodonga, VIC, and I like what I see. With a purchase price of $350k ($175k each) for the two units, and rental returns totalling $700 a week, gives a gross yield of around 9.9%. Whoa.

Ok, so one of these units is renting for over twice the return of the other one, yet they're more or less identical. Something doesn't add up, so we called the agent and asked a few questions. One of the two units is currently rented for $500pw to the Department of Housing. Interesting. This is both good news, and bad.

The good comes from a higher return, paid regularly, and a guarantee that the property will be returned as per the condition report upon termination of the lease. The negative comes from a lack of security; both from (with all due respect) a potentially scummy tenant and from the Department only taking short-term leases with no surety of continuity. This means that the higher return could disappear very quickly, leaving our investor with a collection of used furniture to dispose of, and an empty unit to re-let at standard market rates.

The combined purchase price of $350,000 should be ok from a finance point of view, according to our friends at Verix Finance. This also assumed that the lenders will also only use $200pw for servicing calculations on both units, ignoring the higher rent.

Now, property management fees will be slightly higher as we’ll be dealing with two properties, and a few other rental expenses will be almost doubled, but after all these deductions our less experienced, lower income investor can still achieve a net yield of over 7%. That’s around $90 positive cashflow every week for that first year so long as the Department remains on board as a tenant.

If the Department chooses to let the tenancy lapse, then we would expect that cashflow might drop to perhaps $45 a week negative after tax.

Another healthy benefit to this deal is that Wodonga has been identified as a growth area. The expanding city is essentially the gateway from Melbourne to Sydney and vice versa. It’s definitely one to keep an eye on.

This just shows that even with a lower income, lower borrowing power, or lower cash deposit available, investors can still find and acquire positively geared properties. This one would require further due diligence beyond the number crunching above, but it shows what might be possible. So enough excuses, get searching!

Tax office system upgrades are now in progress

You might remember me writing about the planned upgrades that the tax office were making to their computer systems this year. Those are now already in progress and so their processing times are slowing down beyond the usual times. Unfortunately there isn't too much that we can do to speed that up other than encouraging you all to return signed documents to us quickly.

Hopefully they will be finished within a week or two and their processing times will be back to normal.

On another note, since we've been working so hard already this year, we’ll be closed on both Monday and Tuesday for the Australia Day long weekend. So if you need to get in contact with us, just shoot me an email and I’ll get back to you first thing Wednesday morning. Have a great weekend!

Simple share trading calculator

I have recently created a simple share trading calculator which was created to help traders with making the decision of whether to proceed with a trade or not. It is quick and easy to use and I myself like to use it before proceeding with a trade to calculate whether or not I can make a decent profit out of it.

The spreadsheet is divided into 3 parts: the simple trade, dollar cost averaging and a hold or sell comparative analysis.

The first simply works out the proposed profit in dollar and percentage terms if you were to proceed with a trade. This way you can see whether your expectations make the trade worthwhile or if you need to raise your sights instead.

The second part is designed for the times in which a share you have purchased has dropped in price, and you wish to determine whether or not to use DCA based on your short-term expectations. It will tell you the proposed profit in dollar and percentage terms after you have entered in the new purchase price of the shares.

The third part is the hold/sell comparative analysis. This part is designed to reduce the amount of lost opportunities. Let’s say you buy 400 EXT shares at $8.50 each. Unfortunately they fall to your stop loss of $8.40, and you spot that STO shares are looking like a good buy at the moment sitting at $13.80. Your initial goal had been to sell EXT at $8.90 for a profit of $100.1 (2.89%) after brokerage. You are currently sitting at a loss of $99.9 (-2.89%) given the current market value. You can then use this spreadsheet to put the above figures in. Now let’s say you would expect to sell STO at $15.00 if you bought it. That is a $229.3 (6.63%) improved position from the EXT fall. If you were to ignore the stop loss, hold on to EXT and eventually sell at say $8.90 then that would be an improved position $200 (5.78%) after brokerage. If your expectations were correct then clearly in this case you would be better off selling EXT and buying STO.

So feel free to check it out and use it yourself if you find it useful. Happy trading!

Medicare surcharges and rebate to change

Back in last year's Federal Budget (remember how exciting that was?), one of the proposals announced was a change to the private health insurance scheme. Things will stay as they are for this current 2010 financial year; ie, singles earning over $73,000 and couples earning over $146,000 together (and add a little more for any dependants) will need private health insurance or risk paying an extra 1.5% in tax.

From 1st July onwards, there will be a new three-tiered system for taxpayers who don't hold private health insurance with a minimum of hospital cover:

  • Individuals earning over $120,000 will then be subject to 1.5% in extra tax
  • Individuals earning between $90,000 and $125,000 will then only pay an extra 1.25% extra tax
  • Individuals earning between $75,000 and $90,000 will still only pay an extra 1% extra tax
  • Individuals earning under $75,000 will not have to pay the Medicare surcharge at all.

The thresholds for couples are double the individual rate; so, a wife earning $100,000 and a husband earning $40,000 will still fall under the threshold and both will avoid the extra tax. Dependants may also raise your threshold slightly.

There are also tweaks to the private health insurance rebates offered when you take out and renew the insurance. For most people earning over $75,000, these have been reduced and so you can expect your net premium to be higher next year.

So, if you were thinking about getting cover, you should probably do so before July ticks around again (and we both know that it will be here before you know it!). These changes aren't breaking news, per se, but the legislation was finally approved late last week along with setting those thresholds in stone. So, it *will* definitely be happening now; and as always, just shout if you're not quite sure where this will leave you standing.

Time to get a move on!

Hiya Guys!

Holidays weren’t long enough but it’s good to be back working with you all again. If you still haven’t organised your 2009 returns, you better get a move on! Just contact us if you'd like to book a time to come in or just shoot your information across whenever you're ready

On a different note, James has gone and done the unthinkable, signed up for this year’s “Shave For A Cure” with the Leukaemia Foundation. All of James’ hair will be gone soon, so come on guys lets all support this fantastic fundraiser and give a small donation. Everyone here has Funds go directly to the charity and are used to help research bone marrow cancer and provide support for those suffering. It is an excellent cause, and you know it’s tax deductible.

So to get on board, please follow this link to make a donation or ask us how to donate in person next time you're in the office.

By the way, the blog now has a search button that you can use to look for information across all of the posts that we've made so far. We’ve also tagged what we think were the Top 5 Posts For 2009 - these are really interesting and informative and you should definitely check them out.

Ciao guys!

Property analysis #5 - commercial property

Alright, let's take a break from residential properties for now. Time to move out of my comfort zone and check out some commercial real estate.

There’s an impressive retail suite going for $1.4M at an undisclosed location in the Brisbane CBD, Queensland. It's a slightly higher purchase price than we’re used to, but it’s to be expected for what appears to be a quality commercial property. The agents suggests a sense of urgency so it may be possible to pick it up for less than asking price, but for fairness of this analysis we'll assume that our investor pays as requested.

Investing in commercial property is a whole different game, and admittedly a lot of investors will steer clear of it completely due to the complexity and knowledge of contractual law required. However, there are definitely some capital gains to be made, and even more impressive cashflow to be earned. Interestingly, on that note, the capital gains are generally tied to the cashflow for this style of investment.

One benefit of commercial property is that when there is a tenant in place, we're not too likely to have regular vacancy periods and so we have assumed zero vacancy rate for the annual figures. However, the viability of the investment is often directly related to the viability of the tenant's business, and so if they go under... there may be no income at all for an extended period whilst you look for another. Likewise if they choose not to extend the lease. This property is a little over six months into a five year contract with an option to extend for another five.

Higher return, yes, but also a higher risk. Our investor should also check out the lease terms very carefully to ensure that all is above board and satisfactory there, too.

So straight up we’re looking at a decent gross yield of about 9.3%.  That won’t be damaged too much by ordinary rental expenses, either. The other massive benefit to commercial investments; the tenant pays most of the outgoings.
After the expenses that the hypothetical investor does have to pay, such as higher property management fees and insurance, this property should still have a net yield of at least 8% before interest. That leaves our investor pocketing just a bit over $14,000 in positive cashflow in the first year alone. These figures are getting me excited!

Now something important to note is that the investor will need to register for GST, as the revenue earned exceeds $75k. This means 1/11 of all revenue and expenses will need to be excluded (which we have done). It also means a quarterly BAS will have to be lodged (and you know who can help you out with that), and the difference paid to the ATO every three months. In this case, the GST will clear out approx $10k per year... but our investor should also talk to us about being eligible to receive a GST refund on the entire purchase price in the first quarter of ownership.

Clearly commercial property is something worth looking into, if these figures are any indication. I may well do more commercial analyses in the future, so make sure you keep reading. Next fortnight though, we'll be taking a new hypothetical investor and seeing what someone on a low income could achieve.

And if you’ve noticed any interesting commercial investment opportunities, please let me know! I’m very curious to see what else the market has to offer.

Shave for a cure

Ok, something a little different today. And I still can't believe that I'm doing this.

No doubt, by now, you've heard something about the World's Greatest Shave, run each year to raise money for the Leukaemia Foundation. These funds are then used for research into treatment and cures for bone marrow cancer, and to care for those suffering. It's a great cause.

Clearly, the heat has gotten to me over the last few days, and I went and signed up for it this year. By March 13th, I'll be completely bald.

If you'd like to make a donation - and you know that it's tax deductible! - please click through and do so here. The funds go directly to the Foundation and they'll email you a receipt immediately.


Back to work!

Just a quick one, holidays are just about over so no more sleeping in, we will be back in the office on Monday 11th of January. We will be in the office during the usual times this year, 9am-5pm Monday to Friday.

So if you haven't already, now is the time to get your records together and get things moving. We're all recharged and refreshed for a big year ahead.

Bring it on!

Property analysis #4 - dual income

If you’ve read my last blog on student accommodation, you will have seen the power of multiple incomes from the one property towards getting positive cashflow. For this analysis, I thought I’d stick with that theme and check out this dual-income property at 7 Cook Street in St Marys, NSW.

The agent suggests that this property is undervalued. Maybe. Asking price is $359,950. What makes this property jump out at me, though, is the granny flat hiding around back. The power of dual income allows our hypothetical investor, described here in my first post, to receive an existing combined rental income of $640 a week. Take out the average expenses (such as insurance, maintenance, etc), and we’re still sitting pretty with some decent positive cashflow.

We probably won’t get much out of depreciation, as the building looks fairly old and dated. Even the extension looks a little old, but we’ll still use a rough figure in using our favourite depreciation calculator. This property won't give us much there. And, unfortunately, the assumed age of this building will also result in higher repairs and maintenance costs. The other expense I’m expecting to be higher than usual is property management fees, as it might require a little extra effort to manage the dual-income situation. More advertising, letting fees, etc. Even so, after these assumptions, our hypothetical investor (I’m beginning to think we need to give him a name! Suggestions?) can enjoy a net yield before interest of almost dead on 7%.

Can’t complain, I’m sure.  More or less neutral for the first year, after tax and all other expenses. With all the usual assumptions over time (and again, these are assumptions, not expectations), after ten years we could have the investor sitting on a property earning almost $6k in positive cashflow per annum, with around $270k equity. Nice.

By the way, if you think that I’m doing some pretty interesting stuff with these analyses, and are hoping to either get into the property market or expand your existing portfolio, you might be interested to know that one of the many services we offer is around in-depth property analysis and strategy. Just give us a shout if you think we could help you out.

Cooling off period

Last week, I wrote about how the pest and building inspection clauses can be used to renegotiate or exit a contract, provided that they were worded correctly.

I'd like to briefly touch on another way of doing this, and that's via the cooling off period. Please note that this information is specific to Victoria so you should probably run such things by your legal team if you are buying  in another state.

Here, the rules governing the cooling off provisions are outlined in Section 31 of the Sale of Land Act. In short, it means that if you change your mind about a purchase, for any reason, you may be able to escape the contract within three business days of signing it. That's your signature, not the vendors, and the clock starts ticking as soon as you put ink to paper (regardless of when the contract might be signed by the other party).

When cooling off, you'll lose 0.2% of the purchase price (which is $1,000 on a $500k purchase) or a flat $100, whichever is higher.

However, you can only use these provisions if you can answer 'no' to all of the following questions;

  • Did you buy the property at a publicly advertised auction?
  • Did you buy the property within three business days either side of such an auction?
  • Have you previously entered on contract for the same property on similar terms with the same vendor?
  • Are you a licensed estate agent?
  • Are you buying the property through a corporate entity?
  • Did you receive independent legal advice on the contract prior to signing?

Just to touch on the corporate entity point. This means that if you are buying through a company or trust, as I know many of you do, then you are not able to use the cooling off rules if you need to back out of the deal for any reason. However, buying as an individual 'and/or nominee' will still enable you to cool off, if you have not yet nominated a corporate entity as the eventual purchaser.

Hopefully, you would ever need to use the cooling off provisions as you will have done the right amount of due diligence first. But, it always helps to know the rules so that you've got something up your sleeve if ever you really need it...