Originally Posted by
Kelonguni
Bro cbsh38584, you have a good strategy. I am keen to find out more about bonds before I commit, because based on stocks, 8% per annum is quite easily achieved for me.
But property buyers of specific types also have a comparable strategy.
Let's use your 1-2BR at 600K for example.
Right now we are experiencing very strong downward resistance plus upward resistance due to financing regulations, so let's assume in this scenario prices stay at 600K for 18 years (no upside, no downside).
Assuming a buyer who buys into this for rental puts in 25% downpayment for an almost TOP unit. Inclusive of Buyer Stamp Duty and miscellaneous fees, he puts in $168,000. Let's say he also furnishes it up with $5,000 furnishings, making the total sum paid $173,000.
Let me just place your numbers down for certainty. Please correct me if wrong. If I place $240,000 in a bond with 5.125%, I should collect $221,400 interests (non-compounded) or $362,552 (compounded) over 18 years. Which rate should I refer to for bonds?
Now assuming the buyer manages to rent out in a poor market $1,800 per month, and 2 months are used for all kinds of property payments, giving an annual net receipt of $18,000. Based on a 1.7% interest rate currently on a 30 year loan, in the first year (taking the 6th month payment), $965 goes into repaying his principal and $630 is for interest payment to the bank (monthly mortgage of $1595). Inclusive of maintenance fees ($200pm), the buyer puts in a further first year "loss" of $3600. In this context, the first year "gain" via the property mortgage paid is $11,580, while the net investment is $176,600. The % gain based on first year rental is 6.5%.
Assuming rents do not increase in 18 years by 2034 (a very unrealistic scenario), and interest rates do not increase (another unrealistic scenario), in the 210th month in the 18th year, the "gain" that is paid into his mortgage is $1290 versus an interest of $307. The "gain" on the 18th year will be roughly $15,480 based on his input of $237,800 ($173,000+$3600 loss every for 18 years), again 6.5%. Total rent deposited into the property mortgage is roughly $240,000 in 18 years with a mortgage half paid (remaining loan of $208,000), and total money out of pocket (paid by instalment) is $240,000. Part of the rent collected used to pay expenses.
Note that if interest rates do increase, I am of the belief that inflation will increase and capital prices will also gain as well. But it is too complicated to calculate in my simplistic model.
A compounded steady bond will perhaps gain more than a property in 18 years, but a non-compounded one will not beat a laggish 18 years of property. There is also the probability of non-payment or losses of bonds that is beyond a buyer's control. There is also the potential for significant capital growth of property which might not be evident these few years. Lastly, if the buyer manages to pay up his mortgage in 30 years, his net position will be a fully paid condo with lease ranging from 60 years to FH, and a continued $18,000 annually (by today's prices).
My calculations are purely based on the amount out of pocket every month. Now I understand what Arcachon means by fixed savings plan.