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Ben Kingsley Blog post by Ben Kingsley

How to Calculate Profit from Property Investment

You have heard me say this before, Property Investing is not easy.  It involves large amounts of money and carries risks, from picking a good property to managing cash flows and ongoing costs of holding the property, to poor tenants, to legislative changes, to interest rate rises, the list could go on and on.  But what’s really interesting is when you do the math on just what sort of return you will need for your property to firstly break even and then profit from property, the argument that residential property as an investment is a good one!

So how do you calculate the returns needed to profit from property investment?

Fortunately there is a simple calculation that will help you to determine in a rudimentary way your break-even point and it is made up of the following inputs:

  • Property Purchase Price: $
  • Purchase Costs:  A rough guide is 5% of the purchase price
  • Loan Amount: $
  • Anticipated Rental Income: $
  • Loan Interest Rate: %
  • Ongoing Holding Costs:  % (In our business we use 1.5% of the purchase price as our guide)

Calculate the Gross (Profit/Loss). Then Factor in your PAYG Tax Margin: % (i.e 30%) and Calculate your Post Tax Position.

At this point you Divide the (Profit or Loss) by the Purchase Price to establish your percentage gain you need to achieve to break even.

Let’s look at an example to better illustrate this:

 

BK-Capital-growth-formula

 

This example tells us this property needs to appreciate in value by only 1.82% for it to be a break even investment.  So effectively, any increase in value over this percentage will result in a gain to the investor.

What’s so attractive about doing this calculation is when you work out the real value of property investment. Melbourne property prices as an example have increase by over 8% p/a for the past 34 years.  Effectively this is saying if the value of your property went up 8% this year your overall return would be 8% – 1.82% = 6.18%.  As the compounding value of the property continue to grow over time, your overall returns would also continue to grow at a greater percentage, further improving your total returns. This should provide you with some confidence in residential property offering you the potential of a ‘good’ or ‘great’ investment, depending on how good your property selection is.

So in recapping, there are risks in property investment and it’s not easy otherwise everyone would do it and they would all make money out of it, which is certainly not the case.  However as long as you ensure you get professional advice in firstly planning your investment strategy and secondly in the selection and implementation of it over the long term, you will make money and hopefully a lot of it.

 

SPECIAL OFFER:  Empower Wealth has developed a FREE Capital Growth Break Even Calculator to help you do this calculation correctly. You can download the Calculator by filling in your name and email below and an email with the Calculator attached will be sent directly to your inbox:

 

Remember, knowledge is empowering if you act on it.

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