Love Me Two Times, Baby
Hi Barefoot,
My fiancé and I live in a large regional centre. We have a family home on a 30-year loan which we are on track to own in 12 years. We are now thinking of purchasing an investment property in an improving area -- a two-bedroom unit for around $120k returning $170 p.w. The thing is that in our town the real estate market does not grow quickly, so there are slow capital gains, though rental properties can yield 6% to 7% returns. Thoughts?
Tom and Rach
Hey guys,
That ‘6% to 7%’ is the gross return; let’s look at the net.
If your property is rented, say, 48 weeks per year (unlikely for a two-bedroom unit), you’ll bring in $8,160 in rent.
From that, deduct your loan repayments, agent’s fees, rates, land tax, maintenance, body corporate fees, depreciation, accountant fees … need I go on?
In a good year, you might break even.
In a bad year -- when the hot water cylinder blows up and your tenants go AWOL -- you’ll lose money.
If you lose money, you’re relying on capital growth (selling your house for more than you paid), which, as you say, doesn’t happen quickly in your area. And if interest rates rise, can you put the rent up? Probably not.
If you’re on track to own your family home in 12 years, you could probably bring that down to eight by concentrating on that, not being a landlord. When you don’t have a mortgage payment, you can really build wealth.
Scott