Smart Money Weekly; How to start investing, does property still make money with rate rises, wealth building in your 40’s

Ben Nash


Happy Monday.

Welcome to 2023! This year is shaping up to be an interesting one for the money, but with challenges comes opportunity, and as the old saying goes – downturns make millionaires.

When you look back over time at the people that have a lot of money, most of them have made the bulk of their money during periods of market uncertainty and recession. This means that if you’re smart about how you tackle things, 2023 could be the year you set up your future. But in downturns, risk levels run higher than usual, which means it’s more important than ever that you cover your bases and plan smart.

If you want some help to get on the front with your money in 2023, you can book a ten-minute chat with us here.

Smart Money upside #98
Here we unpack the numbers from a recent client we helped, what they were doing with their money when they came to see us, what they chose to do as a result of going through the financial planning process, and the financial impact and upside we helped them achieve. To chat about how to get these sorts of results, you can book an intro chat with us here.

Individual, early 40’s; household income ~ $110k; total assets ~ $280k; saving ~ $10k annually.

Funds only sit in cash not doing anything, and the fear of making a mistake and having no idea where to start.

What they wanted from us / the advice process
A plan to build a larger investment portfolio and a detailed look into super.

What success looks like for them
A solid investment portfolio, managing debts, being stress-free and more confident with money, having an emergency buffer in place and being on track to retire early.

What money strategy they were following before we went through the planning process
Surplus cash was being directed towards paying off debt.

What money strategy they chose to pursue from our planning work
Buying an investment property, additional super contributions and building a new share portfolio.

Key benefits of going through the process
Clear advice and plan around buying a property, clear and easy-to-follow banking structure that makes it easy to track and save, access to a diversified investment portfolio that will generate passive income in the future, switching to a low cost superfund and more confidence knowing when they could retire.

Value of advice after all advice fees year one: $20k
Year 20 upside after advice fees: $1.5m

If this story resonates you can book an intro call with us here.

Video of the week
My top tips to get started investing for beginners and building wealth with confidence. In this video I cover how to choose investments that will perform well, which investment accounts work best, whether to buy shares, ETFs or micro-investing, and how to get started. Check out the video here.

Podcast drop
Learn the tips, hacks, and strategies to help you level up your money game. Pods released last week:

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Blog of the week: How to make $42k p.a. from property when rates are 5%
A while back I posted on the cost of owning a $1m investment property vs how much money it would make you and found that at the time you’d be better off by $54k a year owning a $1m property.

But since then, we’ve seen the fastest rate of interest rate increase since 1994, and the repayments on a $1m mortgage increased by over $1,500 per month.

So does own an investment property still make sense? And is it a smart move to buy property today while half of Australia (or so it seems) is freaking out about the potential for a property market crash, and the other half are struggling to figure out how they’re going to pay their mortgage?

How much does it cost to own an investment property today?
I’m going to jump into the numbers, but before I do there are a few things to refresh you on.

Initial costs of buying a property
When buying a property you’ll need to pay some initial costs like stamp duty, building inspections, and legal costs. These costs on average equate to around 5% of the property value, which equates to $50,000 on a $1m property.

Ongoing property expenses
When you own a property you need to pay costs like strata fees or council rates, insurance, property management fees, and cover maintenance costs, which average out to around 1% of the value of a property, so around $10,000 annually on a $1m property.

Mortgage costs
According to data from at the time of writing the average variable mortgage interest rate in Australia is 5.20%, which based on a mortgage of $1,050,000 (purchase price + costs) your annual mortgage interest is $54,600.

Here I’ve used the average interest rate but wanted to call out that by shopping around you could get a lower interest rate closer to the current sharpest variable mortgage interest rates (currently 4.04%).

For this example, I’ve assumed the full property price + costs have been borrowed, which is only possible if you’re borrowing against another property or using a family guarantee, but I’ve done this to show the full cost of a property purchase entirely funded through borrowing. If you purchase a property with a cash deposit it will mean your loan is smaller and mortgage repayments will be less than the figures above.

Property expenses are tax deductible
If your investment property expenses are more than the rental income you receive, you can claim the difference as a tax deduction.

Based on Australian marginal tax rates, if your taxable income is above $45,000, your marginal tax rate + Medicare levy is 34.5%. This means that for every dollar your investment property costs you, you’ll receive a tax refund of $0.345. If your income and tax rate is higher, you’ll receive even more back at tax time.

Property rental income and growth
When you own an investment property, you receive an income return through the rent paid by your tenants, and a growth return from the increase in the value of your property over time.

According to Corelogic data, the average gross (headline before expenses) rental income on property in Australian capital cities as at October 2022 was 3.36%, and as outlined above the long-term growth rate on property is 6.3%.

Bringing it all together

Purchase costs

●  Property value: $1,000,000
●  Purchase costs @5%: $50,000
●  Total funds needed: $1,050,000
Ongoing income:
●  Gross rental income @3.36%: $33,600 p.a.
Ongoing expenses:
●  Ongoing property expenses @1%: -$10,000
●  Mortgage interest: -$54,600
●  Total costs: -$64,600
●  Cashflow cost/net income: -$31,000
●  Tax refund at 34.5%: +$10,695
●  Net holding costs after tax: $20,305
Property growth
Based on the long-term property growth rate of 6.3% the expected growth on a $1m investment property should average out around $63k p.a.So does buying a property still make sense?
Based on the figures above, you can see annual property holding costs of $20,305 p.a. and annual growth of $63,000, meaning the average net annual benefit sums to $42,695 p.a.

The numbers are in your favour – if you’re paying ~$20k for a $63k benefit, you’re ahead by over $42k every single year.

Worth noting these figures are based on some assumptions, and what happened in the past doesn’t necessarily predict what will happen in the future – but you can see from these numbers that even if things don’t play out exactly as outlined here, there’s plenty of room for you to still end up way ahead.

Managing your risk is crucial at any time when you buy property, and in the current environment, it’s even more important. If you don’t manage your risk effectively and plan your property purchase well, you can get caught out and suffer financial setbacks and momentum-killing mistakes.

If you’re looking to invest through the property and want it to be a success, the key to managing your risk is being clear on your property numbers. You want to make sure your property purchase fits with the other things going on with your money today and will continue to work for you into the future. This way you’ll be confident you can hold your property for the long term, so you can achieve solid long-term outcomes.

The wrap
Buying property can be scary. Particularly in the world, we’re in today, there’s a lot of fear out there from people wondering how things are going to play out. Risk levels are higher than we’ve seen over the last few years, which means you need to tread carefully when it comes to property and manage your risk well.

That being said, the numbers are compelling, and buying a good property that you can comfortably hold for the long term will help you grow your assets, build investments, and create serious wealth.

To your success,


PS: Pivot Wealth exists to help people invest smarter to create a life not limited by money. If you want help to make your next steps easier, you can book a 10 minute, no BS chat with us here.


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