A week ago we posted a Deal Or No Deal pop quiz on our Facebook page.
Auckland CBD freehold apartment selling at $300,000 with an assessed market rent of $400 p.w. Body corp fee of $2,800 p.a. and rates of 850 p.a. Assume 2 weeks vacancy which is when you will be carrying out major repairs and maintenance (budgeted at $800 p.a.). Fully financed at today’s ANZ New Zealand floating rate of 5.74% p.a. minus your APIA home loan discount. Assume no further costs.
What is the actual return as a percentage? Will this apartment give you a positive or negative cashflow? Finally, tell me, Deal Or No Deal?
Well, the answers are in, and we are pleased to announce the winner – Q.J. Lee who correctly stated: 5.18%, negative compared to the interest rate 5.49% you get. (-0.31%), no deal.
Working on the return on investment is a skill all investors should know inside out. By analysing the deal before you jump in, you strip away the emotion and look answer the very basic question: Should I or shouldn’t I invest.
A while ago we talked about how to work out your return. For this particular example:
The net return being 5.18% compared to the interest rate of 5.74% means that this particular investment will give you a negative cashflow and would mostly likely be a dud for many investors.*
Back when we were young and carefree, we posted a video explaining how to work out investment return. Have you seen it yet?
*Note that we are assuming that there are no improvements to the property value, no insurance costs and no property management costs. In real life this will most likely not be the case but we do hope this quiz serves as a good example for how to work out your return.