Rental Gains not all they Seem
Rental property is sometimes an excellent investment. There, I've said it, for all those who reckon I'm anti-rentals!
Often, though, rentals are not quite as good as people think - and not just because the tax breaks are over-rated, as I said in my last column.
Following that column, a reader wrote: "there are other reasons which I believe are largely positive in running a rental property or two."
He gave the following example: "I purchased a two-unit rental house in 1980, borrowing the entire purchase price of $35,000, using my family home as collateral.
"Yes, during the first few years I did have to put in cash out of my salary to pay interest and running expenses, but the tenants paid most of the mortgage. And although I had to pay some tax, when I sold in 1999, the capital gain of $125,000 (selling price) made it worthwhile."
But how good was that? Over the 19 years, the gain was about 7 per cent a year.
That doesn't sound too bad, until we realise that for most of that period you could earn more on 6-month term deposits. Indeed, in the high-inflation early 1980s to early 90s, term deposits usually earned more than 10 per cent, and sometimes close to 18 per cent.
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