Results Summary

Expand Chart What is my Rental Yield?

Rental Yield is a measure of return on investment. MID calculates rental yield as a percentage of rent to the original property value and should increase over time as rent increases.

Rental Yield is also often used as a quick measure to determine if property is cashflow positive especially if the rental yield is several percentage points above the interest rate on the mortgage. Many Smart Investors with a positive gearing strategy (See "Positive or Negative gearing?") attempt to generate the highest Rental Yield possible. 1

2010201620202030
Rental Yield0.43%6.1%6.86%9.22%
Total
Average Rental Yield6.75%
Final Interest Rate6%
Rental Yield Average (%)6.75%
Initial Annual Rental Yield (%)5.11%

Expand Chart Positive or negative gearing?

The Tax Gearing Profile below illustrates the tax effect of an investment property and is an important element when choosing a property investment gearing strategy – positive or negative gearing. An investment property’s depreciation, interest and other tax-deductible outgoings will all significantly influence the Tax Gearing Profile.

If a Smart Investor adopts a negative gearing strategy they are aware of the cashflow risk invovled, and compare the risks to the tax benefits (See "What does my loan profile look like and what are my loan payments?") .

If a Smart Investor adopts a positive gearing strategy they are aware of the tax obligations (See “What are my cashflows?” and “What is my Total Return on Deposit?”).2

Total
Total Tax Benefit$2,688.00
Total Tax Payment$-103,259.66
Years of Taxable Loss3
Years of Taxable Income18
Average Annual Tax Profile$-4,789.13
Overall positive or negatively geared?Positively Geared
Average Annual Tax Cashflow$-4,789.13
Overall positive or negatively geared?Positively Geared

Expand Chart What are my cashflows?

Forecasting and understanding the cash inflows and outflows from a property investment is critical to any Smart Investment Decision. A Smart Investor monitors the before and after-tax Cash Profit or Loss (or Cashflow) of a property investment to understand the annual cash in bank generated from the property investment.

MID calculates Cash Profit or Loss as rental income less all operating and interest expenses but before mortgage principle repayment and capital gains. A Cash Loss can be acceptable if the Investor has set aside extra cash to subsidise the property or receives tax benefits to offset the Cash Loss.

A Cash Profit often reflects a positive gearing strategy and a Cash Loss reflects a negative gearing strategy (See "Positive or Negative Gearing?"). Cash Profit also needs to be considered in light of the potential capital gains obtainable from the sale of the property investment (See “What is my expected Capital Gain?”) and the Total Return on Deposit (See “What is my Total Return on Deposit?”).3 4

2010201620202030
Cashflow before tax ($)$-710.09$-4,906.77$-2,217.72$8,060.07
Total
Loss making no. years before tax14
Loss making no. years after tax20
Profit making no. years before tax7
Profit making no. years after tax1
Average Cashflow before tax ($)$-1,456.90
Average Cashflow after tax ($)$-6,246.02
Average Cashflow before tax ($)$-1,456.90
Average Cashflow after tax ($)$-6,246.02

Expand Chart What does my loan profile look like and what are my loan payments?

A Loan Profile helps Smart Investors determine whether a loan is affordable. The Loan Profile chart below displays the trends of interest and principal repayments of a mortgage. A larger mortgage will increase an Investor’s risk but may also increase potential returns.

A Smart Investor ensures a mortgage is affordable by balancing an investment property’s forecast returns against the interest and principle repayments of the mortgage.5 6 7 8

2010201620202030
Loan Interest$1,750.00$17,423.03$13,996.72$809.86
Loan Principal$757.51$12,667.08$16,093.38$26,772.74
Total Loan Payment$2,507.51$30,090.10$30,090.10$27,582.60
Total
Loan TypeVariable
Regular Loan Payment$30,090
Average Loan payment p.a$28,657.24

Expand Chart What is my expected Capital Gain?

Capital Gain is another measure of return on investment. The Capital Gain Profile shows the expected increase in the value of your property over the original price you paid for the property.

For many Smart Investors, capital gain is a primary source of value from investing in property although the value cannot be realised until the property is sold. Capital Gain should be considered in conjunction with the Rental Yield (See “What is my Rental Yield?”) and Equity Value (See “What is the value of my equity?).9

2010201620202030
Property Value ($)499,000884,0091,294,2773,357,022
Capital Gain ($)0385,009795,2772,858,022
Total
Total Capital Gain over investment period$2,858,022.47
Payment of the remainder of debt$0.00
Capital Gains Tax$522,364.05
Net Cash from Capital Gain$2,335,658.43
Net Cash from Capital Gain$2,335,658.43

Expand Chart What is my Total Return on Deposit?

Total Return on Deposit is another measure of return on investment. MID calculates Total Return on Deposit as total return (cash profit plus capital gains) over the initial deposit paid to support the mortgage.

For many Smart Investors, Return on Deposit is a meaningful way of measuring the ultimate return on upfront investment. Investors should consider mortgage affordability (see What does my loan profile look like and what are my loan payments? and Will the cashflow from the property cover the interest payments on the mortgage?) and Risk Exposure (See What is my Risk Exposure?) when attempting to maximise Return on Deposit.10

2010201620202030
Total Return on Deposit0.72%49.19%74.53%201.93%
Total
Average Total Return on Deposit87.15%
Average Total Return on Deposit87.15%

Expand Chart What is the value of my equity?

Equity can be used as collateral to support the next smart property investment decision and is unlocked from capital gains and by paying off the mortgage. Equity is the amount of the property that is owned by the Investor and not the Bank.

Many Smart Investors borrow a mortgage to purchase a property. This means that the equity or claim to the property is limited to the initial deposit, cash returns (after tax and interest repayments), principal repayments (reducing the principle in the mortgage decreases the bank's claim to the investment and therefore increases the equity) and any subsequent capital gains.

By understanding a property’s equity value, a Smart Investor will be able to estimate the additional funds required from the bank to purchase the next investment property and build a profitable investment property portfolio.11

2010201620202030
Equity Value$152,757.51$603,549.19$1,072,795.73$3,360,022.47
Additional Borrowing based on Loan to Value ratio of 80%$414,545.05$2,734,286.17$5,139,496.88$16,800,112.37
Total
Total Equity at the end of Investment$3,360,022.47
Total Equity$3,360,022.47

Expand Chart Will the cashflow from the property cover the interest payments on the mortgage?

Interest Coverage Profile also helps Smart Investors determine whether a mortgage is affordable. The Interest Coverage graph below illustrates a property’s ability to pay for interest payments without additional cash subsidies from the Investor.  MID calculates interest coverage as cashflow available after all expenses before interest and principle repayments divided by interest expense.12

2010201620202030
Cashflow available for Interest and Principal$1,797.42$25,183.34$27,872.38$35,642.67
Interest Expense$1,750.00$17,423.03$13,996.72$809.86
Interest Coverage Ratio1.031.451.9944.01
Average Interest Coverage Ratio2.93
Minimum Interest Coverage Ratio1.03

Expand Chart What is my risk exposure?

A Smart Investor does not ignore the risks and clearly sets Maximum Cash Outflow Tolerance levels for how much cash an investor is willing to reinvest into the property in the event of adverse circumstances.

The below chart illustrates if the Cash Subsidy an investor is required to make to a property investment is higher than the Maximum Cash Outflow Tolerance an investor is willing to reinvest into the property.

Understanding the below chart will help Smart Investors determine whether a property investment is costing more than an Investor can manage.13

2010201620202030
Weekly Subsidy$0.00$136.10$127.12$82.90
Total
Cashflow Tolerance Level500
Breach of Risk ToleranceNot Breached
Breach of Risk Tolerance?Not Breached

© My Investment Decision Pty Ltd 2010. Innovation Patent no. 2010101397. Trademark. Powered by Sanscode. Hosted by Crucial.