Property Market – Property Holding Costs Continue to Plummet

  February 2009 Update

Investment property holding costs fall as interest rates reduce a further 1% and rents rise.  Excerpts taken from our Priority Investors Update in February 2009.  Subsrcribe now to receive the latest market updates


In early Dec 2008, we sent out an email which highlighted holding costs relative to interest rates (click here to see an excerpt of that email) .  As interest rates have again decreased, (they have now come down by a further 1% since that email and are expected to drop further in March), we thought it fitting that we updated some of the figures from the previous email and added some further information that many investors will find of interest, as regards income tax on rental income.

As far as projected holding costs, here is the bottom line!

Based on a property of $415,000 (see below for the assumptions etc):

As a resident Australian Investor, borrowing 100% (assuming that you have some existing equity) of the property price, the projected year 1 net cost per week has dropped from $278 to a positive $3 per week.  This includes a projected tax saving of over $7,570 in year one.

That’s right, cash flow positive on current interest rates, rents etc!!

As a non resident investor, borrowing 80% of the property price, the projected year 1 net cost per week has dropped from $297 to $58.  A very significant saving, a total cost now of around $3,036 per annum rather than $15,500.  That’s a reduction in holding costs of over 80%, since Sept 08!!!!!

Our assumptions:
We have based the figures on a $415,000 2 bedroom Oak Apartment (one of our current Melbourne  projects, due to complete in 2010, see further details below) renting at $390 per week, which is the current rental projection (we have actually negotiated  a 6 month rental guarantee at $400 per week).  We  have looked at the bottom line after taking in to account rent in, costs out (including depreciation) and have compared the costs on an interest only loan, previously at 9% and now at 5.25%.  

For local investors we have assumed a tax bracket of 41.5% (this  is the tax bracket for those currently earning between $80,000 & $180,000 per annum) with an actual income of $95,000  and have allowed for the subsequent tax refund in the net cost used.  We have assumed local investors have borrowed 100% of the property price and have paid cash for the purchase costs (ie stamp duty, loan costs, legal costs etc) assume $4,000 in total upfront purchase costs.  Plus if local investors exchange contracts on a deposit bond rather than a 10% cash deposit, there would also be the initial cost of the deposit bond.

In year One:
Cash IN:   Rent                                   $19.874
Cash Out: Property Expenses:                 $5,481
               Interest:                              $21,788
Pre-tax cash flow                                  -$7,394
Tax credit:                                            $7,570
After tax, cash flow                                 +$176 per annum in year one.

Note: Investors can apply to the taxation office so that tax savings are paid throughout the year, rather than waiting until the end of the year for a tax refund.

For non resident investors we have assumed that the rental income from this property is your only Australian income and therefore have based the figures on the lower tax bracket of 29% (for those earning a net taxable income up to $34,000).  We have assumed non resident  investors have borrowed 80% of the property price and have paid cash for the other 20% ($83,000) plus purchase costs (ie stamp duty, loan costs, legal costs etc assume $4,000) giving total upfront costs of $87,000.  10% of the purchase price ($41,500) is payable at contract exchange, the remainder of the $87,000 is payable at settlement, projected for March 2010 in this example.

In year One:
Cash IN:         Rent                           $19.874
Cash Out:       Property Expenses:        $5,481
                     Interest:                     $17,430
Pre-tax cash flow                               -$3,036
Tax credit:                                               $0
After tax, cash flow                            -$3,036 per annum in year one. 

If you’re a local investor and you’re in the lower tax bracket (earning between $34,000 to $80,000pa) assuming you are earning say $55,000 then on the above figures, your projected net cost to hold the apartment would now be $25 per week, just $1,324 per annum, still a fairly attractive proposition!

In year One:
Cash IN:         Rent                           $19.874
Cash Out:       Property Expenses:        $5,481
                     Interest:                     $21,788
Pre-tax cash flow                               -$7,394
Tax credit:                                         $6,070
After tax, cash flow                            -$1,324 per annum in year one.

Note: Investors can apply to the taxation office so that tax savings are paid throughout the year, rather than waiting until the end of the year for a tax refund.

If you would like all the details on the assumptions made etc, please send me an email and I’ll send you a generic cash flow report on this particular property.

Income & cost  projections will vary on each project, but these figures are fairly typical for a new Melbourne apartment, around the $400,000 price mark, given current market rents, interest rates, costs etc.

Please note that the above projections are hypothetical information for illustrative purposes only and must not be taken to be in any way to be a guarantee of the future circumstances that will apply in connection with an Investment or the benefits to be derived from it by an investor.

Is it worth the cost? 
Let’s be really conservative and project  that the property will have an average capital growth of just 6% per annum.  According to the Sept 2008 Matusik Report, units have had an annual growth of 12.8%pa over the last 10 years.  Matusik was recently quoted (Feb 15th 09) from his address to the Urban Development Institute of Australia as suggesting that: “Property prices would climb 5% in 2009 & 10% to 12% in 2010”.  But we will just stick with an average 6%pa growth.

So after just 5 years, the $415,000 property is worth $555,000, a gain of $140,000. 

After 10 years it’s a total gain of $321,000.

Not a bad return given your projected per annum holding costs!

How the income tax works:
As a general overview:
For resident investors: 
Rental income is taxable but most of the rental expenses, including any interest on loans and including depreciation (which is particularly relevant on new properties) are tax deductible.  So in the case of our example above, the net result is that the new tax deductions by far outweigh the new taxable income, so you are then in a position of negative gearing, leading to a significant tax deduction (compared to the tax that you currently pay) and in the above example this tax deduction along with the rental income from your tenant actually fully funds the projected holding costs of the property.  Let me know if you would like more details and I will send you a generic cash flow report on this particular property.

For non resident investors: 
Rental income is taxable but most of the rental expenses, including any interest on loans and including depreciation (which is particularly relevant on new properties) are tax deductible.  You have the same rental deductions as local investors, but as you are not already paying income tax in Australia, you have no existing income to draw deductions against, so the tax benefits are not as great.  However, the tax benefits do ensure that you will not be having to pay any income tax for many years, on the above example.  You do still need to lodge an annual tax return though and we work with accountants who can assist our clients in this regard .  Let me know if you would like more details and I will send you a generic cash flow report on this particular property.

Is it wise to invest now?
As you can see, the drop in interest rates continues to make a significant difference to the bottom line for the holding costs of a property.  Remembering that rates are expected to continue to decrease, rents are expected to continue to increase, population growth is at an all time high, we have a housing shortage and developers are finding it difficult to fund projects, so the shortage will be with us for the foreseeable future.  Whilst developers are finding funding difficult, individual investors are not, Australian banks are well capitalised and they are currently enjoying a surge in lending due to investors and first home buyers re-entering the market.  Taking these fundamentals in to account, is now the right time to invest, we think so.  We had a very productive end to 2008 and enquiries throughout early 2009 have been at record levels, indicating that those investors who do have funds and a secure job, are looking to move to the property market.

We are particularly mindful of the lack of new properties that are being released, many many projects that were planned to release cannot obtain funding.  Bad for those developers and bad for those investors who cannot find a property.   But great for investors who can get in to the market on a good project, as there will not be too many of them around and this scarcity will put further pressure on rents and capital growth in the medium to long term.

Please let me know if you would like any further details. 

Hope the above is helpful.

Regards

John Faulkner
Managing Director & Licenced Real Estate Agent

(The above article was part of a Priority Investors Update which was emailed to our Priority Investors in Feb 2008)

Subscribe to our Priority Investor Updates & Receive Full Information:

If you would like to receive our market and project updates direct via email and would like full access to all of our property details, why not become one of our Priority Investors.  We often launch projects prior to their public release and we often negotiate rental guarantees for our clients (which we cannot display details of on our public sites), so why not become a Priority Investors and receive all the details, just click here and complete your details .

Go back to the Property Market Section
Go back to the Investors Room section