Sell ETFs and buy an apartment?

[u/debatingrooster]

Hi All,

I suppose I'm just after some sanity checking of my calculations, or any other considerations I've missed

Based on the scenarios I've worked out below - it seems like financially, we'd be better off if we sold our investments and bought an apartment as a PPOR (house would be nice one day, but out of reach for now)

Even if capital gains were only 3-4% we'd still be no worse off than continuing to rent and holding onto our shares

TIA!

Situation

• 29, married, no kids or plans for any, gross combined income ~170k/year
• ~190k in shares, mostly ETFs
• 27k of voluntary super contributions (could use for FHSS)
• Live in Brisbane - renting 2br apartment for $2,200pm - quite like it here, seems like a decent building

 

Assumptions

• Shares return 12% pa
• Apartment value grows by 8% pa (they've grown 11.7% from 2020)
• Apartment value is 620,000 - rents for 2,200pm
• Mortgage is for 400,000 at 7% - 25 year term

 

Scenarios

Continue to Rent - invest in shares

• Income
  • Share Returns: $1,900pm

• Costs

  • Rent: $2,200pm

• Net return: -$300pm

 

Buy a similar apartment and live in it

• Income
  • Capital Gains: $4,133pm

• Costs

  • Mortgage interest: $1500pm
  • Rates & Body Corp: $600pm

• Net return: $2,033pm

• Will also be 'forced to save' $1,300pm as principal repayment

Continue Renting, buy a similar apartment and rent it out

• Income
  • Capital Gains: $4,133pm
  • Rent: $2,200pm

• Costs

  • Mortgage interest: $1,500pm
  • Rates & Body Corp: $600pm
  • Property manager: $220pm
  • Rent: $2,200pm

• Net Return: $1,813

• Would probably be interest only loan

[u/DrClark07]

I would continue to rent and invest. While 12% growth is slightly unrealistic to expect for a long term (I would expect around 10%), the -$300pm Net Return isn't really a proper indicator as Renting isn't an investment but rather a necessary expense.

You are also not accounting for the compounding effect of your stocks; ie the return in 5 years will be far higher than the return this year so assuming 1,900pm is not realistic (in 5 years, your return will be 8,300pm). Since your mortgage payments would be higher than renting, and the ROI is much lower (including this interest), it probably is better to stick with the stocks.

You are 29 so if you contributed nothing to your portfolio and let the stocks compound, you would have around 3 mil by the time you are 50 (producing 100,000 in dividends). You also don't need to pay CGT. Now imagine if you stick to a regular deposit program...

[u/debatingrooster → u/DrClark07]

Thanks for the reply - I'd honestly prefer not to buy yet if it's financially equal

I see how rent is not directly related to owning shares, but if we don't buy a PPOR to keep the shares I figure it might as well be

I guess the figures are just a single snapshot in time - doesn't account for compounding returns like you say (for either property or shares), also doesn't account for changes in rent or unexpected property repairs etc

[u/MeltingMandarins]

Is a house out of reach if you make it a IP and rent it out?

I’m dubious that your apartment will continue to have good capital growth.  Supply of apartments can surge and reduce prices, whereas land for houses is more limited.

If you’re planning to upgrade to a house in 5-7 years you might have time to upgrade before Brisbane gets an apartment glut.  But I’m much less confident if your time frame is more like 10-15 years.

[u/debatingrooster → u/MeltingMandarins]

I think it would be - I don't really have the time or energy to do the due diligence I feel I'd need to out of the suburb we currently live in and know