Over the past few weeks I’ve been talking to many of you regarding beginning or growing your investment portfolio. There’s a couple of common themes that I’ve picked up on, which I would like to explore with you in this email:

  • Do you think investing in property is risky?
  • Are you waiting for the market to fall before you buy in?
  • Are you just not sure that you can afford to do anything now and so your waiting until you think you can?
  • Have you thought about what it is actually costing you to do nothing?

It could be costing you a lot! It is certainly far riskier to do nothing than it is to invest now for your future. And it might not cost as much as you think. Let’s take a look at a real example of what it might be costing you right now to sit on the sidelines.

I’ve explored the opportunity cost of NOT buying an investment property with a purchase price of $350,000.

Assume the scenario where you own your own home and it is valued at $450,000. You have a mortgage on your home of $240,000, which means you have equity of $210,000.

We will make the assumption that your income is sufficient and you can release some of your existing equity. Also, without complicating our example with mortgage insurance (which is not necessarily a bad thing as I explore later), we will maintain leverage of 80% on your existing property. Your available equity release would look like this:

(Property value x 80%) – existing debt
= ($450,000 x 80%) – $240,000
= $120,000 available funds

In this example, you have $120,000 that is currently not being used. Let’s now look at what it is costing you to NOT use this available money.

This $120,000 credit can be used as a deposit on your investment property, purchase costs and also as a buffer if need be.

This $120,000 credit can be used as a deposit on your investment property, purchase costs and also as a buffer if need be.

After funding your $70,000 deposit, you then have an available $50,000 that can be used for your purchase costs and also as a buffer for any adverse changes in your future.

Your purchase costs will include stamp duty which, if purchasing an existing $350,000 property, would add around $16,500 in stamp duty cost (in VIC). However a turnkey, off-the-plan $350,000 property will incur stamp duty of just $4,000. That is a saving of $12,500. When combined with conveyancing and loan set-up costs, your total purchase costs are around $7,000. (Note: Buy Property Direct clients receive a $600 rebate on their conveyancing costs.)

That leaves a massive $43,000 ($120,000 – $70,000 – $7,000) left for your buffer. That could equate to years of loan repayments, or the start of your next deposit, but for the moment is best left untouched and ideally as an offset against your place of residence home loan.

You now purchase your $350,000 investment property by using $77,000 from your equity release and by taking out a new separate, bank loan for this investment.

Now let’s see how much it can make you!

Our extensively researched properties are in selective high growth municipalities and suburbs, and must show a consistent history of growth. With price values forecast in these areas, waiting for prices to come down could leave you out of the market indefinitely! So let’s take a very realistic average annual return of 6%.

We also only invest in areas with strong rental demand and extremely low vacancy rates, so let’s take a very achievable rental return of 4.8% (or $320pw in our example).

With interest rates the lowest they have been in decades, let’s assume an interest rate from the banks of 5%pa, despite the fact we have been achieving rates well below this for our clients, through our relationship with YBR Frankston.

Our last assumption will be that this investment property is purchased by a couple who are both earning $45,000pa (combined taxable income of $90,000pa). This is the nice part where our clients are saving thousands of dollars in tax each year by maximising depreciation and buying brand new, off-the-plan investments. And to top it off, we even give you a bonus professional tax depreciation schedule valued at $715!
So, where do we end up?

Paying interest only on your 100% financed investment property (20% equity from your home and a new investment loan for the remaining 80%), your after tax cost per week to hold this property is $5. That’s right, it will only cost you $5 per week, that’s $260 per year!

Do you think you could afford that?

But what does it earn you? At our 6%pa return, and paying only the interest on the loan, you will have an incredible $262,000 in equity after only 10 years. If we subtract our $5 per week holding cost over ten years, then you are left with a profit of approximately $260,000.

Let’s recap and answer our original question. What is the opportunity cost of sitting on the sidelines and doing nothing? Well in this very achievable example, the direct cost to you is $26,000 per year. Would you still rather do nothing? Or for as little as $5 per week, would you rather add $26,200 a year to your income and start building your financial future now.

Think about the above example with a 7, 8 or 9%p.a. growth rate and with 3, 5 or ten investment properties all working within your portfolio!

If you want to get off the sidelines and start building your financial future today, then reply to this email to book your no cost, no obligation appointment and take advantage of our property investment services today.

I am currently achieving these kinds of results for many of my clients. I can teach you more of the investment concepts and we can start mapping out a plan of attack for your own personal situation.

Author: Joel White