Example of returns from apartments

[byastian]

This is a property I’ve inspected & almost bought in 2018. I thought it was a good example of an apartment that can experience capital gains. Many people put down apartments (and in general they have been having lower capital returns) they can be great investments. For nice areas like Lane Cove on Sydney North Shore they can be the only property type accessible for many.

Sold History

Jan 2014 = $991k (off the plan)

Aug 2018 = $1.25m

Sep 2021 = $1.43m

Return is circa 4.9% p.a. since it was built and 4.5% p.a. since it sold 3 years ago.

It’s also been rented in the past at $845 p/w which is a gross yield of 3% on current price, 3.5% on 2018 price or 4.4% on 2014 price. Net yield (I think strata about $1.3k pq) 2.7%, 3% on 2018 price or 3.9% on 2014 price.

So the investment in 2014 would have yielded circa 8.8% p.a. in capital gains and net rental. This is before leverage!

With leverage, let’s just assume for simplicity that net rental yield of 3.9% covered interest costs at 80% LVR. Then your returns are simply the capital gains of 4.4% p.a. or 33% over 7.5yrs.

Your capital gain is approx: $1,430k - $991k - $40k stamp duty - $30k agent fees = $369k gain

Investment was $$238k (20% + stamp duty)

That’s a cash-on-cash return on equity of $369/$238k = 155% over the 7.5yrs.

Now before you start, there are probably plenty of things that can be improved on the above calculations. It’s simplistic for a reason. Just a basic example that apartments are not all a bad investment.

This post is to show, for people who can’t afford houses in these areas, that apartments are a viable option. This one in particular is a 3br penthouse level apartment with great outlook on Sydney’s North Shore.

Not all apartments are created equal.

302a/5 Centennial Ave, Lane Cove North

 

[everly]

@byastian Here's mine.

Bought in Brisbane in fortitude valley for 550k 7 years ago and it's worth 500k now.

 

[resjudicata]

@everly Buying an apartment in Brisbane is financial suicide 90% of the time. I don’t think I’ve heard of one example where the value didn’t stay the same or decrease

 

[everly]

@resjudicata Times are changing and from a macro point of view, Corelogic is showing mass net migration from other states to QLD. I might be having a whine but I'll be staying in the market for a few more full cycles, there's absolutely no rush and property is always the long game.

 

[resjudicata]

@everly Fair enough, I wish you the best and hope your property goes up in value. If you bought a couple of years though, you would be losing money now if you sold.

 

[iwontstay]

@resjudicata Ours has increased, but mostly because the floor plan lent itself to a second legal bedroom. We don't expect major gains beyond that, it's an income asset.

 

[resjudicata]

@everly Own in Brisbane (Moorooka) but live interstate - I'll give you that capital growth has been disappointing, but damn has it been a reliable rental. The longest it has ever stayed listed between leases is 24 hours. Most recent listing (January this year) - had 6 parties inspect within 12 hours of listing, with 200+ views on realestate.com.au (ad was taken down 48 hours after initial listing).

Madness.

Edit: It's a 2-2-1 apartment

 

[redcyc]

@resjudicata This. Where apartments lack potential capital growth, as investments you can expect high and consistent rental yields. I'd go as far as suggesting in an environment where continuous growth isn't certain and low interest rates, an apartment can be a good investment. You could drop the 20% deposit and have it neutrally gear over 20 to 25 years. Essentially, get someone else to pay the mortgage. It doesn't matter if the price even decreases because at the end you'll have a 500k apartment that someone else paid for.

 

[resjudicata]

@redcyc Facts. It's prudent to remember that you also only realise positive or negative capital growth at the point of asset disposal. Until then - your losses are on paper only. What is tangible however are the year on year tax benefits that help offset CGT from other investment classes. Feels good making money and getting a refund come EOFY.

 

[3revan]

@redcyc 100% this, especially with a paradigm shift in growth assets being somewhat unjustifiable by valuation, why not take the 6-8% yield and positively gear a free unit with massive tax benefits?

 

[resjudicata]

@3revan Main hesitation for many people is,. Most have massive structural issues (unless your buying 10-20 yr old 3-6 story walk ups).

Source: I've worked on most of the high rises that have had major issues in some capacity. Never touch people trust me.

 

[3revan]

@resjudicata

Main hesitation for many people is,. Most have massive structural issues

A few have structural issues, predominantly in Sydney, due to high profit margins there on new builds and tons of inexperienced phoenix builders. In other cities, this tends to not be that much of an issue, especially if you did research on the developer / builder.

 

[resjudicata]

@3revan Agreed this is Sydney based assessment. Devs are scum overall.

 

[resjudicata]

@everly Think about it this way: if all you’ve invested is the 20% up front and it’s been rented out fully the whole time at what I’m assuming is a positive yield on principal and interest (since it’s an apartment) you pay that bad boy off and even if you haven’t had capital growth you’ve still “5xed” your investment- you could probably do the same in an index fund in that time frame, but still you’ve managed to turn $110k into $500k without adding any extra yourself.

Again this is assuming it’s positive yield..

 

[resjudicata]

This.

Friendly reminder that 90% of r/AusFinance doesn't even own a PPoR, let alone understand the economics of property investment

 

[everly]

@resjudicata It's almost positively geared, I put in around $200 a month which is fine. If anything, the passive income is in itself fantastic.

 

[redcyc]

@everly $200 a month to end up with $500k equity seems like a great deal!

 

[everly]

@redcyc I bought when loaning was quite tight so always did P+I and started with 20% so at current I'm half way through the loan.

 

[resjudicata]

@everly Yeah nice - so assuming you continue the same trajectory (ie 7 years to get halfway through repaying the loan and continuing to pay $200 a month ($2400 a year) you’ve injected the $110k plus anywhere between $24K - $50k, meaning even if it was to sell at $500k or less you are still very far ahead of your total cost of ownership (even throwing in agent fees to sell, any stamp duty you paid, etc)

 

[valshantal]

@everly So just to clarify, with P&I mortgage repayments, and you just chipping in an extra $200 a month to cover the shortfall in mortgage repayments, you’re almost positively geared? And your mortgage principal repayments are included in your calculation for negative/positive nearing?

I’m asking because it sounds like you are almost positively geared cash-wise but tax-wise(where principal repayments are not included as expenses), you are definitely positively geared so you have to pay extra income tax on the rent?