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Assessing the True Holding Cost of Your Investment Property

Written by Ivan Fletcher

With the sharp rise in interest rates last year and possibly further increase this year, it has a lot of people reassessing their investment properties due to increase cash flow cost.  Often we get negatively focused on costs such as body corporate or interest costs when making decisions on holding versus selling on our existing investments.

It is important that if looking  at these decisions that we look at the TRUE COST (in after tax terms) of holding the property each year.   This information is available in your tax return each year and thus provide an easy way for you to assess.

Your tax return will have a schedule for an investment Property which has all the information there for you.  It will look something like this.

How to calculate the True cost of holding this property in the last year?

1.  Identify Cash Flow Cost (before Tax)
Convert the above ‘Tax Income/loss’ to a ‘Cash flow income/loss’ by adding back the non-cash items of depreciation and capital works/write off.   In the above example by adding back $3,800 and $4,500 to the tax loss of $20,760 provides a genuine cash flow cost (Before Tax) of $12,460.

2.  Calculate the tax refund based on your marginal tax bracket. Assuming a taxable

income of  $150,000 means the tax refund is based on 39.0% MTR (inclusive of Medicare levy).   The refund based on the property gearing is the Tax Loss ($20,760) x MTR (39%) = $8,096.

3.  The true after-tax cost (out of your pocket) is then the cash flow cost ($12,460) less

the tax refund ($8,096) = $4,364 Loss

Now that you know the true cost of holding the property it is easier to evaluate the
effectiveness of the investment.   If this property was worth $500,000 at the start of the year,
you would need capital growth of $4,364 to break even (approx 0.9% increase on market
value).  Any growth above 0.9% would be considered profit.

Forecasting the Next Year with Updated Assumptions

Most items can be assumed to be fairly consistent from one year to the next, with the exception of major repairs/maintenance or significant change in rental.  For this year the biggest change of course is INTEREST RATES.  So if you wish to assess the true holding cost for a property moving forward, you will need to change the assumption regarding interest cost by applying your own assumption for the next 12 months (eg 500,000 loan x 6% interest cost is $30,000).

This analysis can be particularly helpful if you are waiting for an investment market or cycle  to pick up.  By assessing the true cost of holding the investment for another year or two, you at least know how much growth you need for such a decision to payoff.

Note : this reflects an Interest Only loan and therefore does not include the cash flow impact of any Principal repayments on an investment loan.


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