This transcript was generated automatically and may contain small errors.
Buying property in your SMSF has never been so popular, with some people achieving incredible results. But a question on so many people's mind, to buy and hold for the long term, or are we better off flipping once we see a profit in our SMSF? There's a lot to understand about SMSF and property investing. As we always say, this is not financial advice. Not only should you seek independent professional advice, but with SMSF and property investing, you legally have to.
In this episode, I'm going to unpack some of the pros and cons of holding versus selling down, as well as some of the details you need to understand about buying properties in your SMSF. I'm Joma, Senior Research Analyst at InvestorKit. Now let's get into it. To find out the difference or the pros and cons of a buy and hold versus buy and sell, an easy way to do it is to build models and compare the two scenarios. This is what I'm doing in this episode.
Here, I'm building two models. One is modeling a buy and sell strategy from 2017 to 2026, with two properties bought and sold one after the other. And the second scenario would be modeling a buy and hold strategy, buying the same properties at the same time, but without selling. In the end, we'll see how different the total cash gain would be and the total net cash flow would be. So first, I'm going to give you an introduction of the two models.
Model number one. In 2017, we buy a property in Ballarat for $292,000 with a loan of 75% LVR and 3% interest rate, interest only. In the year of 2022, when the market was peaking, we sell it for $546,000. These numbers are based on the median price of Ballarat in 2017 and 2022. From the selling, we get a $196,500 net capital gain with the total cash gain minus cost of purchase, cost of selling, and capital gains tax.
With that capital gain, we're buying a median priced house in Townsville, which would be $379,000. With our capital gain, the new LVR would just be 55%. Interest rate would be 5%. As the LVR is low, our interest rate would be lower than normal as well. Over the years of holding from 2022 to 2026, the average interest rate would be 5%.
And in 2026, we sell this Townsville property for $640,000. After deducting the cost of purchase, cost of selling, and the capital gains tax, our net capital growth on this property would be $194,585. I'm saying capital growth instead of net capital gain is because this is calculated based on the difference between the property value in 2026 and the property value back in 2022. We were not accounting in the extra capital gain we contributed to this property from the previous property. So to sum up the capital growth net from both of these properties, our total realized capital gain would be $391,034.
And in terms of cash flow, our total net cash flow would be $79,581. That number is the gross cash flow adjusted for inflation minus the total interest paid as well as maintenance costs. And now model number two, the buy and hold strategy. Similarly, in 2017, we buy the first house in Ballarat for $292,000. And in 2022, as the market peaked and also interest rates were about to go up, we refinance it to get a new loan with a much lower LVR.
Because of the value growth over the past five years, now our LVR is just 50%. This is where one of the major differences is between buying properties under your own name and in an SMSF. When you refinance a property in SMSF, you cannot extract the equity to be used in buying other properties. Instead, you can only reduce the LVR and achieve a lower interest rate. So after refinancing, our interest rate would become 4.
5% on average over the four years from 2022 to 2026. Then at the same time, we would like to buy a property in Townsville. Again, the LVR of this new loan would be 75%. And for the rest 25% deposit, instead of using the equity or capital gain from the previous property, we have to inject around $97,750 from our savings into the purchase. And fast forward to 2026, the property value has grown to $640,000.
So our net equity gain from this property would be $238,260. Note that this number still includes the extra cash we injected back when we were buying it. To summarize, now in our SMSF, the total property value is around $1. 2 million. Total debt would be $557,250.
The total unrealized equity gain is now $487,322. That is the total value growth minus our extra cash injection in 2022. And in terms of cash flow, our total net cash flow would be $82,113. But at this stage, we cannot compare the two scenarios yet. Because in scenario one, or model one, we're looking at realized gains.
And in model two, we're looking at equity gains or unrealized gains. So if we want to be more accurate, we would want to sell both of these properties and see how much capital gain we can actually realize. So after selling both of the properties, deducting the capital gains tax and all the selling costs, the total realized capital gain in this model would be $402,530. Now we can compare the two models. Model two actually has won in both realized capital gain and total net cash flow, but by a very limited amount.
In terms of realized capital gain, there's only around $11,000 difference across nine years. And in terms of total rental income difference, it's around $5,000 across nine years. So at first glance, it seems that buy and hold is a better strategy, not just because in the medium term, for example, nine years, it is providing slightly higher capital gains and slightly higher rental income, but also in the longer term, when you're retired, you end up with several properties generating passive income for you. But one thing is crucial. In scenario one, when we're buying the second property with the capital gains from selling the first property, we didn't need to contribute anything.
The SMSF, the fund is sustaining the purchase itself. But in the model number two, when we want to hold the first property and buy an extra property, we can't be using the value gain from property number one. We need to contribute extra cash in the purchase. So that is extra burden financially for you. That 97,000 extra cash in five years would be around 20,000 per year of extra saving, which is around 400 per week.
That is a considerable amount of money if your cash flow isn't really strong. So in the end, if we look at the two models, the two strategies, it actually depends on your financial situation. If you would like to have your SMSF to sustain itself without you contributing more cash when buying more properties, it's better to consider the buy and sell strategy. On the other hand, if your cash flow is strong and you don't mind contributing extra savings when buying extra properties, then buy and hold could be a better way. If you're going to adopt the first strategy, buy and sell, one thing to keep in mind is that it's not recommended to buy and sell really frequently because that could attract scrutiny from the ATO.
Property investment in SMSF is supposed to be providing retirement benefits instead of a speculative investment. It's usually considered safe if you're selling your property after five years of holding. I talked to a broker some time ago and his suggestion is to sell after six to seven hours after you have enjoyed the whole growth cycle of a market and maximize your capital gain from this property. But as I mentioned before, this is not financial advice. So you have to talk to a financial advisor and get finance advice and legal advice before SMSF property investment.
If you have any questions, anything to discuss, please leave your comments below. Otherwise, I'm Junge, the Senior Research Analyst at InvestorKit. I'll see you next time.
