Monday, June 29, 2009

Guest Post : Property as Passive Income

This is a guest post by Boon Ping. He is showing how one can turn property investment into long term passive income generator. This is actually a very common methods used in Australia, one of the world best property investment country. Altough recent down turn did affect Australia as well, but nevertheless still an area very active in this respect.

Do raise questions if you have any doubts in the comments area.

When we start in 2009, we put in $100K, buying an investment property at $500K with rental $25K per annum with loan amount $400K. Every year, we top up the loan based on its new market value to release equity(look at the Equity Released column on how much we get each year). We use the equity to cover any shorfall in mortgage repayment and also fund our income lifestyle. You see the equity balance keep increasing even though we keep spending.

You put in $100K, after 10 years you got $637K, 6x ROI. Remember this equity is tax free. What will you get after 10 years if you put in $100K into mutual fund? How much is left after tax?

Even we don't top up the loan each year, means the loan remain at $400K, the increase in rental is still sufficient to cover everything at the end, but this is not the strategy but just as worst case scenario.

This is with 1 property, what if you have 5, 10, etc.....

Basically the summary is in the excel file, noted that it's really a brief summary.

1) You start investing in a property worth $500K in 2009
2) Average annual capital growth = 10%
3) Average interest rate = 8.25%
4) Average inflation = 3%
5) Loan amount = 80% of market => Starting cost = $100K

Columns Definition:
Year => You know what it means
Value => Market value at that particular year
Original Loan => Loan amount when you first purchased the investment in 2009
Interest => Interest payable per annum based on ORIGINAL loan amount, ie loan amount x interest rate
Surplus => Rental - Interest - Maintenance
Equity => Different between current market value with ORIGINAL loan amount
New Loan => Loan amount based on 80% of the current market value
Equity Released => Different between current market value with NEW loan amount
Interest on New Loan = Interest payable per annum based on NEW loan amount
Maintenance => How much normally it need for maintenaning the property, eg council rates, management fee, repair, etc, 1% normally
Rental => Normally it's average 5% of the market value
Shortfall => How much you need to come out of own pocket money to pay for interest, maintenance after rental
Income => This is the passive income I am taking about, the income you need for living, spend, etc, increase each year
Total Spent Equity => How much equity that you spent
Equity Balance => Different between equity released and spent

I believe you sure got questions, feel free to fire back.