Quick money

Go to any investing seminar, read any book and hear the common message – property investing is about buy and hold as this is where you can get the best possible growth. Being able to hold a property portfolio for the longest time possible will indeed deliver the best returns, smoothing out short-term fluctuations and setting you up for a more comfortable retirement.

But what of shorter time frames? Is it worth considering entering the market if your investing time frame is any less than, say 10 years? Let’s take a look at three separate time periods and consider whether a property can indeed perform and deliver any sort of return in these periods.

 One to three years

An investment into property carries considerable expense. The initial costs of buying property can run to around 5 – 6% of the purchase price. These costs include stamp duties, legal costs and bank fees, and essentially add to your original buy price. While you can get a tax deduction when you sell, which comes in the form of a discount to the cost base for calculating Capital Gains Tax, it still must be paid up front and it carries the lost opportunity of investing the money elsewhere.

In addition to this, while it is highly possible to get a positive cash flow from day one, especially during these times of low interest rates, many properties may not become positive cash flow for up to two years (and more) after its purchase. In that case the average property may cost around $50 a week after tax, which will add $5,000 to your input into the investment (plus the opportunity cost).

Lastly you will have both selling costs and capital gains tax when you exit. These will further reduce your gain.

Short-term case study

Let’s consider an example:

Property Purchase price: $300,000

Loan value: $240,000

Cash input: $60,000 plus $15,000 stamp duties and costs

Total cash input $75,000

Total cost of investment: $315,000

Add $5,000 for holding cost shortfall: $320,000

Assume 7% growth pa

AFTER ONE YEAR:

Sale price: $321,000

Sale costs: $9,000 (agent’s fees and legal)

Funds received: $313,000

Debt to repay: $240,000

Cash in hand: $73,000

There will be no CGT, since the adjusted cost base and sale price means that no gain was made (in fact there will be a capital loss, but this can only be offset against future gains so has no immediate cash value).

The investor has lost $2,000 plus the $5,000 in holding costs. Add the opportunity costs of not investing elsewhere at, say, a possible 6% return and the actual loss is $16,000.

AFTER TWO YEARS:

Sale price: $343,500

Sale costs: $9,500

Funds received: 334,000

Debt to repay: $240,000

Cash in hand: $94,000

CGT on the adjusted costs base will be levied on a gain of $19,000. This is halved to $9,500 and at the 30% tax rate will be $2850 for a gain of $16,150.

After holding costs of $5,000 and opportunity costs of $9,000, this investor will see a net gain of $2150.

AFTER THREE YEARS:

Sale price: $367,500

Sale costs: $10,000

Funds received: 357,500

Debt to repay: $240,000

Cash in hand: $117,500

CGT on the adjusted costs base will be levied on a gain of $42,000, This is halved to $21,000 and at the 30% tax rate will be $6,300 for a gain of $35,700.

After holding costs of $5,000 and opportunity costs of $9,000, this investor will see a net gain of $21,700.

This is a return on equity of 47.6% (av 15.8% pa) before opportunity cost, and 28.9% (av 9.6% pa) after opportunity cost.

From these above examples it can be seen that given average growth rates and a cash input from the investor, three years is the minimum hold period to begin seeing a real return on property as an investment. In the event that the investor uses pure property equity to leverage against, then the first two years still do not return any benefit (since there is no true gain) and the third year becomes quite profitable.

Longer Terms

When you have longer periods to invest, the prospect of multiple property portfolios begins to apply. Where property equity is low, it takes time to build up enough equity through growth and debt repayment to leverage again. Even where an investor has cash, they are unlikely to have the capacity to save enough in deposits over short periods of time.

Where an investor has between four and nine years to invest, a lot more can occur.  An average couple with one full time and one part time income, a home worth $400,000 and using existing property equity could, after five years, accrue:

• A net worth including their family home, of $1,568,000

• A potential monthly income from this net worth (after the value of the family home is deducted) of $4,306.

 This potential income is assessed as being 5% of the net worth of all income producing assets. This could be achieved as rent return (which averages 5%) or as return on the liquidated assets invested elsewhere at 5%.

After a further 5 years, assuming a 6% per annum growth rate, their position would be:

• Their total property is worth $5,228,500

• Their own home is worth $716, 340

• Their investment portfolio is worth $4,512,160

• Their debt, assuming they made no further principal reductions, stands at $2,339,000

•The net worth of their investments is $2,173,160

•Potential monthly income at 5% return is $9,054.

It could also be said that one of the advantages of property is that, even if your time frame is short, as long as you do not have to liquidate, your position will keep on improving. You may retire at 55 with, say $1 million in net assets which provides an income to you of $50,000 per annum. If you held this a further 10 years without even adding to the portfolio, a 6% per annum growth rate would increase the value to almost $1.8m providing a yearly income of $90,000.

Property is a medium to long term proposition. Periods of less than 5 years are not usually long enough to achieve any significant outcome and if you have a short investing time frame, it is advisable to consider other, more liquid assets. Strategies such as renovating for instant profit or flipping properties quickly are high risk and in this current market are unlikely to achieve any good outcome. Remember though, that if you are not investing at all then buying property for a short term, as long as it is greater than two years, is most often better than not buying it at all and for those who may be able to then hold what they have purchased for a longer period (without adding more), property is an asset which will continue to grow in value over time.