Anthony Albanese is selling one of his investment properties.
Those who are regular readers of my blog will know that consider myself as an optimist.
In that vein, I would like to acknowledge Mr Albanese for leading by example. Australians are advised to take note and follow his lead.
Albo is selling is a three-bedroom home on a 150 sq m block of land in Dulwich Hill, roughly seven kilometres from Sydney’s CBD.
He paid $1.175 million for the home in 2015 and is chasing a sale price of $1.9 million today. A tidy profit in nine years; roughly in line with the performance of the median house price in Sydney during that time.
Now, my default position on selling real estate is don’t do it. By the time you factor in the costs of getting in and out of real estate, it’s not worth it when prices and values compound over time.
Having said that, I think it makes sense to sell if the property has become a bit of a cash flow burden.
I’m making a few assumptions here, but I think Albo’s selling this property because it’s exactly that – a cash flow drain.
If we assume the PM borrowed the whole purchase price (i.e. used equity from another property as his deposit and costs, rather than paying cash), he would owe $1.125 million on the property (again, I’m assuming he hasn’t paid down any of the debt).
The property would rent for $1,025 per week, according to CoreLogic.
When you factor in holding costs and interest, this property would be costing Albo $39,650 per year to hold.
Now, the PM is just like all of us, he must pay his taxes, and benefits from negative gearing. In fact, Albo would pay $235,000 in tax annually were it not for any tax deductions he manages to deduct from investments.
As a result, he gets part of this pre-tax cost back as a tax refund. Nevertheless, the property still costs him $19,108 to hold each year.
This is where I think Albo is making the right decision – that would be the right thing for his country and the right thing for his finances.
By selling this one older property – likely to an owner-occupier struggling to break into the market in sought-after Dulwich Hill – he can then recycle the funds into two more affordable rental properties in those parts of the country crying out for more housing.
He not only generates housing for three additional families (the one who buys his Dulwich Hill home, and the two who will rent his new rental properties), he will also get a much better tax deduction and cash flow outcome.
Albo’s net proceeds after the sale of Dulwich Hill would come to $472,000 after capital gains tax – more than enough for a 20% deposit and costs on two affordable homes at say $750,000 each.
Rather than costing him $39,650 before tax and $19,108 after tax, these two homes will cost him $27,300 before tax and $615 after tax to hold.
His tax refund would jump from $20,543 to $26,685.
This is because he is getting a better rent return (4.5 per cent versus 2.63 per cent on Dulwich Hill) and the new homes provide better depreciation benefits than Dulwich Hill, which is more than 10 years old.
I’m making a bunch of assumptions, obviously. Regardless, Albo is creating a true win-win.
Good on you Albo! Now to the election.
