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Why an investment property may not be the answer to your retirement needs
With residential property prices booming in Sydney and Melbourne, you could be forgiven for thinking an investment property is all you need to be set for retirement.
Every day we talk to people seeking confirmation their plan to buy an investment property is a good idea and for those able to negative gear to buy a house on a piece of land within 10km of Melbourne or Sydney, evidence suggests this has been a good strategy, though maybe not so good in Perth!
But as median house prices continue to rise, the median in Melbourne is now over $770,000 and over $1.4m in the inner city, many people don't have the capacity to buy a house as an investment. Instead they consider apartments - often off-the-plan - and this is when the investment fundamentals can stop adding up.
Following recent media reports of investor losses from off-the-plan apartments, we reviewed the sales history from four large Melbourne developments - some high quality, some less so. We first prepared a simple breakeven assessment of the number of years before the sale price exceeded the purchase price.
In all developments, the apartments were sold below purchase price for years after completion - and that's before costs such as stamp duty or interest were considered. In simple terms, this confirms the media reports that many off-the-plan apartments may not be worth their purchase price.
But doesn't a tax deduction from negative gearing and the rent earned make it a good investment?
Unfortunately, sometimes the answer is no. We modelled a one-bedroom apartment in South Yarra using actual sales and rental data to see how the numbers stacked up.*
The investment was cashflow neutral (great) but the apartment was sold at a loss of $48,000 (after 6 years!). To make matters worse, as a tax deduction was taken from depreciation along the way, the cost base of the property was reduced, so even though it was sold at a loss, there was a small Capital Gains Tax bill to pay (ouch).
Clearly some apartments are better buys than others and we haven't even touched on the different issues first home buyers face, but if you are considering an off-the-plan purchase talk to us first. FMD has access to a wide range of property data and modelling that show the real cost of any potential investments. We can also offer advice about alternative investment strategies to build wealth and reduce risk.