Despite the downturn in residential property prices in Sydney and Melbourne, buyer behaviour indicates that many Australians still believe that an investment property is all you need to be set for retirement.
Every day we talk to people seeking confirmation that 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 even as median house prices flatten, the median in Melbourne is now around $880,000 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).
Staying ahead in the property market
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.
Take the next step with your retirement
Data used for modelling South Yarra one-bedroom apartment investment * 1. Purchase Price (2010): $399,000; 2.Sale Price (2016): $380,000 - less selling costs, agent fees and legal fees of $10,000); 3.Stamp Duty: $3,000; 4. Interest Rate: 5% - Interest only loan, borrowing 100%; 5. Rent per week: $380; 6. Property Management Fees: 5%; 7. Body Corporate annual fee: $2,500; 8. Marginal Tax Rate: 45%
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.