Purchase Price: Rental Income Ratio

Hey susiemac

By the sounds of it, you’ve found a positive cashflow investment, good on ya, I’m still looking for one.

I use a basic calculation to see whether a property rental is +ive cashflow or not. This is simple and I hope someone can elaborate on this so I may use a more precise formula.

Weekly rental ($190) minus property managing fees (usually 8.5%) multiply by 52 weeks, then divided by the interest rate (interest only loan at, lets say 6.5%) then finally divided by 106%. I choose 106% because I usually borrow this much of the purchase price to include settlement fees and the like.

$190 / 108.5% x 52 / 6.5 / 106% = $132,162.42

This is the figure I try to purchase at or below to create a cashflow +ive property. But it isn’t easy to find these (in my experience)

If someone could elaborate on my comment, please do as this calculation I came up with has come from a few different sources, and I’d like to know a better quicker or easier formula.

Always set your goals further than you can reach
– Then stretch that little bit further

Hey all,
I am looking at the numbers and wondering if they stack up.

Here is how I look at a deal.
My assumptions here are that you are borrowing the whole amount from the way you talk about valuations.

Using Susie’s numbers

Purchase Price – $125000

Interest rate – 6.0 %

Rates – $1500/year – 28.85/week

Costs

Interest/week on interest only basis. – $144.59
Rates – $28.85
Mgt Costs – $17.10

Total – $ 190.54

Now this allows no excess of before we even consider maintenance, Settlement costs, and insurances.
I also allow 2-3 weeks vacant depending on location.

So on your numbers Susie here is what I would like/need to do the deal.

If my costs are roughly $186/week.
I allow $10/week maintneance
Insurances are roughly $10/week.

Allowing say 2 weeks vacancy here are the yearly numbers.

Rent – $9500
Costs – $190 + 10 + 10 = 210* 52 = $10920
So on rough numbers you would be losing $1400/year without any really big unexpected goodies.

While you may get a deduction on the loss I still struggle to see how the deal can be positive.

The simplest bench mark I try and get close to is the 11 second solution. rent *1000 /2 is purchase price. eg. 190*1000 /2 = $95000.

Now I won’t deny my numbers are tough but I want to keep buying more and more and doing it this way enables me to buy lots of properties as long as I have a deposit. Susie et al please don’t feel that I am snubbing your numbers as I am just showing you how I look at things.

I have actually bought houses outside the rule on occasion because they offer something else.
For example I bought a house that was rented for $160/week and it cost me $85000. The reason I was happy to do that deal was because the property was well under valued and not 1 month later I got a revalue of $100K and now 7 months on it would be sold for around $130K. Another property I bought for $73K which would be lucky to rent for $130/week I spent 30K(ish) on a reno and I would have rented for $200/week but instead I sold it for $152K.

I always use the 11 second solution for my guide but am willing to look outside the square if a different exit strategy presents itself. I hope this helps and I would love to hear others opinions.

Enjoy
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“Carpe diem, quam minimum credula postero.”
Lat., “Seize the day, put no trust in tomorrow.”
-Horace, Odes