What a $500,000 investment property can look like in 15 years!
Today we are talking about what a $500,000 investment property can look like in 15 years’ time. Yes 15 years’ time because property isn’t a short term play it is always long term. You won’t get financially free overnight.
Now let’s say that today we purchase an investment property for $500,000 and that property is rented out achieving a 5% gross rental yield.
This would be $480 a week on the $500,000 asset when purchased.
Now let’s say that the rental income increased on average 3% each year for the 15-year period.
Let’s say also that the 15 years has passed, and the property has achieved just 4% capital growth on average per year for the 15 years.
That $500,000 purchase is now valued at $900,472. The rental income that the property is now generating per week is $748.
What would that look like in terms of the cashflow? Well let’s break this down as well.
Rates in the 1970’s averaged 7.54%, 2020 they averaged 3.11%. Let’s assume an average interest rate of 5%, and let’s assume that the property was purchased with a 20% deposit. The debt on this purchase being $400,000.
Repayments per month would be $1,667. $20,004 annually. $400,000 @ 5% interest only.
Now remember the weekly rental amount increased 3% on average per year. The annual rental income after the 15 years is $38,896 ($748 a week).
All of a sudden, your yearly rental income is $18,892 above your minimum repayments. Considering other annual costs/maintenance etc you would still be left at least $10,000 in passive income per year.
We haven’t even factored paying any of the debt off. With the debt remaining at the $400,000 and the property now worth $900,472 we have still affectively lowered the Loan to Valuation ratio to 44%. With a LVR of 44% you are going to have discounts on your interest rate due to the low-risk position to the banks.
As an investor discipline is a huge asset! Discipline as an investor result in good cash management. If you were able to save the additional cashflow in an offset account, you would effectively still manage to pay down the debt if you made the minimum interest only payments on the $400,000.
Once you become a sophisticated investor and you can get multiple purchases like this under your belt you may purchase a property or two knowing full well, you’ll hold them for 15 years and sell them to help pay down remaining debt on your foundational properties within your portfolio. You’ll have selling costs and capital gains payable but that’s a topic for another day.
If you break property down like this, it is not as scary as the mainstream media make it out to be that’s for sure! It’s also super important to note that these numbers are conservative.
We have seen huge growth in the last 12 months from a capital growth point of view and rental income growth point of view. 30% growth per year is not sustainable long term for capital growth and 20-30% growth in the last 12 months for rental income growth is also not sustainable.
If you can get time in the market though these results will ensure you have growth above these conservative figures. Your data, research and due diligence when selecting a property is crucial, using a Buyer’s Agent to make sure you get it right is just as an important investment as the investment property itself.
Buy well, hold property long term and there are massive rewards at the end of a 15-year period!
If you would like to be one of the select few clients that our Buyer’s Agency Taylored Property Wealth work with each month please email us at info@tayloredpropertywealth.com.au.
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