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Should you buy a property now or wait until interest rates come down? That sounds like a simple question, but the answer might surprise you. And in this episode, we're making a model with two scenarios. Buying a property now, bearing negative cash flow, or buying a property in two years when interest rates are expected to come down, when cash flow would still be negative but much better than it is today. And then we compare the wealth built five years from now.
The results may actually surprise you. But before we go any further, I would like to acknowledge something. Not everyone is ready to buy now. Some investors may simply do not have the borrowing capacity or the deposit to make an immediate purchase. So this episode is not to convince you that you have to buy immediately.
It is to help investors who are ready, who have the borrowing capacity, who have the deposit now to get clarity whether it is a better idea to enter the market now or buy until two years later when interest rates are lower or wondering whether there are other options to enter the market sooner. But if at the moment you are ready to take your next step, InvestorKit offers a 15-minute free discovery call, so find the info below. Now let's look at the two scenario model. Scenario one, we buy today. Assuming that we've got $130,000 cash as deposit and we're ready to take a 80% LVR loan, that gives us a budget of $650,000.
With that budget, we can afford a house in a regional Victorian city such as Ballarat, Bendigo or Shepparton. These are just examples. It's not necessarily a Victorian city. Interest rates now would be at 7%. In a year's time, it might drop to 6.
5% and moving forward, after another year, it might be dropping to 5. 5% and we assume that for the last three years of holding this property, the interest rates would fix at 5. 5%. For rental yield, we assume 4%. That is a relatively conservative assumption for a Victorian city.
For holding costs, we assume the property management fee would be 7. 7% of your total rental income and maintenance costs, council fees and insurance would be in total $5,000 now and that will increase by 3% per year in the coming five years. So based on all the above assumptions and also your loan repayment would be interest only instead of principal and interest. So now based on all the above assumptions, the annual cash flow for the first year would be a negative $17,400 and the second year would be somewhere around $13,700. I'm going to put a table on the screen so you can pause and check the numbers yourself.
And in the years after that, the cash flow would become better and better because of the rental growth and the interest rate drops. For property value growth, now that we're looking at a typical Victorian regional city, we're expecting an average of 8% per year growth in the coming five years. That is just for simplicity. In reality, in the first one to three years, growth might be much higher than eight. It could be double digits easily and then slow down in the fourth and fifth years.
With that growth in the fifth year, which is July 2031, the property value would become $955,000, a $305,000 increase from today's value. And if we sum up the cash we've lost over the five years, that would be around $57,000. Deducting that from the equity we've gained and our net wealth increase would be $247,700, which is around 1. 9 times of the initial cash we had, which was $130,000. In scenario two, we assume that everything, all assumptions stay the same.
The only difference are two things. One is that we push our purchase back to mid-2028 when the interest rates come down to 5. 5%. And two, instead of lose $20,000 and $15,000 in cash in the first two years, we save the amount. And over the two years, we would be saving $35,600.
That's a lot of money. And then in the third year, in 2028, we contribute that amount to deposit so that we can afford a more expensive property. With that extra saving, we now have $165,600 deposit. If we're using still 80% LVR loan, we can now afford a property worth $828,000. When prices go higher, the typical yield would come down.
So for this price point, we are assuming a yield of around 3. 6%. Assuming that the property grows at the same rate as our scenario one property, by 2031, the property value would become $1,043,000. That is much higher than the scenario one, but it is just giving us a $215,000 equity gain. Then cash flow would be better than in scenario one.
In the first year, the negative cash flow would be just $6,900, less than $7,000. Again, it'll shrink year by year. In the three years of holding this property, the total cash flow loss would be around $18,200. That is much smaller than what we had in scenario one. But when we deduct that amount from the equity gain we've made, the net wealth increase in this scenario would be just $197,000.
That is more than $50,000 less than what we've made in scenario one. If we compare it with the initial deposit or cash we had, it's actually just 1. 5 times of our $130,000 cash back in 2026. So in the two scenarios, all assumptions stay the same. Macro environment stays the same.
By waiting for two years before buying, we're actually losing $50,000 of wealth increase. Looking back at the two scenarios, the macro environment is the same. Market conditions stay the same. By choosing not to lose too much on cash flow today or in the coming two years, we're actually losing more in value growth in the medium term to long term. That again proves the saying that we all know, time in the market almost always beats timing the market.
Now, many investors might say that their borrowing capacity has declined a lot and they cannot borrow enough to afford a house in the ideal market right now. In that situation, the question shouldn't be whether I should buy an ideal house now or wait until I can afford it. It actually should be how I can adjust my strategy to be able to enter the market sooner to get more exposure to value growth. The environment is consistently changing. As informed investors, we can adapt to it.
For example, now that we cannot afford the house in our ideal market, we may want to consider a more affordable market, moving from a capital city to a regional city or a larger city to a smaller town, as long as the local economy stays strong and resilient and market conditions are favorable for growth. Or we can even consider a different asset. Townhouses have been quite popular in these years as interest rates stay high. In the long term, their capital growth potential may not be as high as houses, but as now they are growing fast and more affordable, they can be a good stepping stone for active investors to get into the market before upgrading to houses in the future. I've actually tweaked the model a bit to see whether buying a townhouse now would make sense.
In this scenario, instead of buying a house immediately, we have a smaller amount of deposit and we buy a carefully selected townhouse immediately. Deposit we have now is $111,000, slightly lower than before. The property we're looking at, the budget we're having, assuming 80% LVR loan again, would be $550,000. Because of that lower price point, yield is typically higher. Here we're assuming 4.
8%, which is a typical townhouse yield for many Victorian cities. In terms of holding costs, because we're looking at a smaller dwelling, strata, council fees, and other maintenance costs would be $4,000 instead of the $5,000 with the house scenario. In terms of value growth, in the first two years when interest rates are high and townhouses usually perform well or even better than houses, we are being conservative and assume 8% per year growth, just in line with the house market. And then after the two years, we make it 7%, which is 1% lower on average compared to the houses. Other assumptions, including rental growth, stay the same.
And now in five years, the property value would grow from $550,000 to $771,000, giving us a $221,000 equity growth. Cash flow loss in total would be $54,000, slightly lower than the house scenario. And then our net wealth increase would be $167,000. That is 1. 52 times of our initial deposit we have.
Now, what if we push the purchase back to two years later? Deposit would be $110,000 plus the cash flow loss we've saved, which would be $37,000. And now that gives us a $143,000, making the budget $718,000, with which we can finally afford a house and expect higher value growth in the three years we're holding it. Now, when it comes to 2031, after three years of holding, the property value would increase to $904,600. Total cash flow loss would be around $26,000, giving us a net wealth increase of $160,000.
That is very close to the scenario where we buy a townhouse immediately. You might say that if the two scenarios do give us very similar results, now that the two scenarios are giving us very similar results in wealth growth, why should we bother buying that townhouse immediately? It might be easier if we wait till two years later and buy that house.
