17/02/2025
I often discuss investment properties with clients, so I thought I’d share a simple analogy to explain the holding costs involved in buying one.
Let’s say the current interest rate for an investment loan is 6.5%.
If you borrow $1 million to purchase a property, the annual interest cost would be 6.5% of that amount, which is $65,000 per year.
Now, imagine you buy an investment unit in Sydney.
A typical property might offer a gross rental yield of 3.5%. After accounting for expenses, the net yield might drop to around 2.5%.
When you compare this yield to the loan interest, you’re left with a shortfall. The loan costs you 6.5%, while the property earns 2.5%, leaving a gap of 4%.
For every $1 million you borrow, this 4% shortfall amounts to $40,000 per year.
However, if you’re on the top marginal tax rate, you could receive tax benefits equivalent to roughly half of that amount, reducing your out-of-pocket cost to $20,000 annually.
Here’s where it gets interesting. If you buy a quality investment property for $1 million, and it appreciates at an average rate of 7% per year, it could double in value over a typical 10-year property cycle.
This means your $1 million property could grow to $2 million, resulting in a $1 million profit. Subtract the $200,000 in holding costs over those 10 years, and you’re left with a net profit of $800,000.
Of course, there may be capital gains tax if you decide to sell, but this will depend on your broader retirement and financial strategy.
In my opinion, this is why property is such a strong investment.
The potential for long-term growth far outweighs the holding costs, especially when structured as part of a comprehensive financial plan.
I encourage everyone to consider including investment property in their overall strategy—it’s a smart way to build wealth over time.
