A Few Rules Of Thumb..
Purchase costs: 5%
Generally speaking purchase costs such as stamp duty, legals etc are factored at around 5% of the purchase price.
Selling Costs: 3 to 4%
These include the agents commission and advertising costs. These will vary per agent etc.
Holding Costs: 1.5% to 2.0%
These costs do not cover mortgage or loan repayments. They cover things like insurance, property management fees, rates & property taxes, and maintenance.
CGT is 32% @ 48c OR 23% @ 37c
So if I wanted to make 200K after CGT, I’d need to make 264K. Basically its 48 cents in the dollar on 50% of the profit. So 50% of 264 is 132, and 132 – 48% = 68. Thus our final figure is 68 + 132 which is 200, our target. Note: This assumes a single tax payer. If this was split across 2 or more owners, the rate may drop to 37 cents in the dollar, which becomes 23% (ie for 200 we would need to make 246).
Rule of 72
Divisors are: 72:100% (double your money), 58:75% return, 43:50% return, 23:25% return
Divisor/Interest rate = Period
Example:
I want to double my money with 8% annual yield thus: 72/8 = 9 Years
I want to make 25% on my money at 8% annual yield thus 23/8 = 2.8 Years
Maximum Spend: Usable Equity * 4
Take the equity you can access and multiply by four to come up with the total you can spend on a new property.
Imagine your home is worth 400K. The bank will lend you 80% or 320K. As you still owe 220K, you can leverage 100K equity. Thus you can purchase a property worth 400K.. although leveraging all your accessible equity like that isn’t wise.
But why multiply by four and not 5 ?
You need to factor the 5% purchasing cost as well. The bank will lend you 80% of the 400K property you wish to buy (320K). That leaves an 80K gap (deposit). But because there are 5% in purchase costs (20K), you have 80K+20K=100K.. thus 100K multiplied by four is 400K, the price of the property you wish to buy.
DSR (monthly Debt to Service Ratio): 30 to 35% of total income
The DSR is monthly debt expenses as a proportion of monthly income. This is considered a key indicator in loan serviceability. Income is your wages, earnings etc – but the banks will factor things like expenses etc as well. Rental income for example is factored at 75% rather than 100% because of the additional costs associated with property management. Debts are considered as well, such as credit cards and LOC etc. All credit facilities are treated as though they are extended to their limits (because it can happen at any time) thus credit cards are factored at around 2.5 to 3% repayments required per month (ie a 5K CC credit limit assumes a monthly repayment of $150) while a 200K LOC is assumed to be fully drawn.
Then there’s the bank’s Assessment and Buffer Rates – with Assessment rate presently around 5%+ for most big banks, and their buffer, or sensitivity rate which is around 2.5% higher than their current variable rate. Whichever is higher is the one thy’ll use. This is to ensure you can service repayments when the interest rate goes up. This is used to calculate both existing and future repayments.
Its all about the limits, thus keep the limits as low as you can, throw away the unused credit cards etc.
The following are not so much rules of thumb as they are actual formulas, but they are frequently used, so I’ve decided to include them here..
Compound Growth Rate (CAGR Compound Annual Growth Rate)
What growth rate is required to achieve 720K over 6 years, starting with 420K ?
A = 100 * (F/P)^(n/t)-1
A = Answer
P = Starting Amnt
F = Final Amnt
n = compound periods per year
t = number of years
Example: 100* (720/420)^(1/6)-1: 9.39%
Alternatively: (1.7142 ^ .1666) – 1 = 0.0939 * 100 = 9.39% growth per annum
Compound Value over time
How much will I have if my investment of 420K grows at 7% over 6 years compounding every year ?
A = P(1+r/n)(nt)
A = Answer
P = Starting Amnt
r = Interest rate as decimal (ie 5% = 0.05)
n = compound periods per year
t = number of years
Example: $420K * (1+.07/1)^(1*6) = $630,306