Investment Property 2 – 12 Months On
I bought my second IP in Australia approximately 12 months ago now and in this post, I want to go through a breakdown of all the expenses and income it has generated over that time.
One of the features of this property that most interested me was the dual income potential, as it is a house with a granny flat. The option to being able to rent out each structure separately dramatically increases the yield return of the property.
It has been a fairly steady ride so far with no major expenses being incurred, however I have recently been informed that I will need to spend a fair bit of money repairing the roof the property. This will be the biggest expense I have incurred since owning it, but it will not occur within the first 12 months.
Property Details
Purchase Date – 13th August 2020
Purchase Price – $417,000.00
Deposit Size – $134,000.00
Loan Amount – $283,000.00
Stamp Duty – $14,120.00
Conveyancer Fees – $2,000.00
Building Inspection – $795.00
Property Insurance – $1,350.00
Initial Repairs – $1,000.00
The total amount I was out of pocket after purchasing the property was $153,625.00
It is important to note that I had an LVR of around 68%, which is significantly lower than the 80.00% that people would aim for to be able to avoid LMI. This was because while I had a lot of savings, my serviceability was relatively low, so the bank would only allow me to borrow $283,000.00. This meant I needed to increase my deposit accordingly. Slightly frustrating as I prefer to not be out of pocket as much, but it does reduce the loan repayments at least.
Loan Details
Loan amount of $283,000.00 at 2.79% P + I Fixed for 2 Years. It is not the lowest home loan available, but again it should be noted that a lot of the lowest fees that are seen (under 2.00%) are typically for owner occupied loans, for an investment property loans the interest rates are typically a bit higher.
Monthly Repayments of $1,163.63.
Income/Expenses
I was fortunate that I was able to find tenants relatively quickly. After closing on the sale on 13th August 2020, I spent a couple of weekends carrying out some repairs that needed to be carried out prior to leasing. And I was able to find quality tenants for each structure as per the following:
House: Tenanted from 23/9/2020 – $330 per week
Granny Flat: Tenanted from 24/9/2020 – $260 per week
Combined Rental Income of $590 per week.
Income Summary
Total Rent Collected: $24,526.40
Expense Summary
Management Fee: $1,890.11
Pest Control: $682.00
Advertising: $346.00
Repairs: $1,012.20
Water Rates: $1,025.44
Council Rates: $1,395.24
Total Expenses: $6,350.99
Mortgage Costs
Total Interest Repayments: $7,725.46
Total Net Profit = $24,526.40 – $6,350.99 – $7,725.46 = $10,449.95
Return on Investment
Without including capital gains, the return on investment would be $10,449.95 / $153,625.00 = 6.8%
That is a pretty decent return, and definitely nothing to be scoffed at, especially from an income perspective.
I will mention however that it is not as impressive as the stock market has been over the same 12 month period (somewhere around 20%!, but I do not think that is too likely to be an ongoing return each year).
If I wanted to include any capital gains associated, I would also need to take into account selling fees as they would need to be paid if I was to realise any increase in the property value.
Currently the property is valued at $450,000.00 and I will assume selling fees of 2.00%. This would give me an effective valuation of $441,000.00.
Capital gains would then be $24,000.00 over the past 12 months. I should mention that this is a relatively rural area, so I am not expecting any significant capital gains while I do own the property and bought it mainly for the cash flow.
If I was to add on the capital gain of $24,000 to the return, the Return on Investment would now be $34,449.95 / $153,000.00 = 22.5%.
That sort of return really does surpass all expectations to be honest, I am not expecting the capital gains to increase too significantly, but if I am still able to obtain a net return around $10,000 per year then I believe it will be a pretty handsome investment for me.
Conclusion
I sometimes think if I made the right decision to invest in the property, or if I should have just invested in shares instead. At the time I did not know too much about ETFs or index investing (I have learnt A LOT over the past 12 months) and went with the typical Australian way of property investing. I do not think I have made a BAD choice by any stretch of the imagination, so far, the return has been impressive and if it continues over time I will be pretty happy.
I do think however, that I may have been better off if I had invested in all within the share market. If there was an option to potentially move into the house one day as my PPOR then that would have changed my opinion, but I do not believe that is a likelihood as I am not the biggest fan of the area in terms of living there myself.
So, while it was potentially a sub-optimal investment option, it was still better than having the money sitting in the bank. When I do come time to sell the property, I am pretty confident I would have made a decent profit. I will continue to track it and keep an eye on it as I am always curious about the long term returns and I feel it is important to look at the real numbers associated with any investment.