Hi All,
My husband & I are really excited at the prospect of owning +cf properties and I have been doing a lot of research. The only problem I have is that my numbers just don’t add up… Can someone help?
EXAMPLE
I have found a property for $45,000 that is already leased for $100 per week. At first glance (using the 11 Second Solution) this seems exactly what I’m looking for as a first purchase. But when I do my figures I come up with the following:Purchase Price $45,000.00
Initial Cash Down
Deposit $9,000.00
Closing Costs $2,250.00
Loan Establishment $600.00Total Cash Needed $11,850.00
Cash Inflows
Rent $5,200.00Cash Outflows
Loan Repayment (princ & int) $3,334.20
Management Costs (approx) $338.00
Rates (approx) $800.00
Insurance (approx) $350.00
Repairs Budget $260.00Total Cash Outflows $5,082.20
Cash on Cash Return
Cash Inflows $5,200.00
Cash Outflows $5,082.20
Net Cashflow $117.80
Initial Cash Down $11,850.00Cash on Cash Return 0.99%
Am I doing something wrong, because when I look at it this way, I can make a better return from an ordinary savings account.
HELP????? [
]Lisa72,
What is the loan amount. I have calculated for;Loan $36,000
P&I repayment 7.07%
Repayment $241.20
Yearly repayments $2,894.20I thought the rates amount is quite high for $45,000. Even the closing costs might be a touch high as well.
James
Or you change your philosophy. Let’s assume the return is COCR is 0%. It’s still not costing you anything and you have the potential for capital gains.
A few % CG on $45K is more substantial than you’ll get on a savings account.
Thanks guys,
I was being a little cautious, calculating at 8% over 25 years.
And I didn’t look at it that way, that I own a property and it is costing me nothing and appreciating (if only slightly), in value.
Lisa
Lisa
Consider wrapping the property and that will make the figures look a bit different.
Cheers Richard
richard at fhog.com.au
http://www.fhog.com.auThere is no such thing as a problem.
Just a solution waiting to be foundRichard Taylor | Australia's leading private lender
you havent added depreciation to your income, i know that its only an added bonus, but depending on how old the IP is, it will make your numbers look better.
hope this helps
shaunLead, Follow or get out of the bloody way
One option i always try for is getting the deposit included int he deal. 45k house, get them to put the contract at 50k with a 10 percent deposit marked in with a note in the contract if the sale does not go through the seller keeps the deposit. Some people are interested some arent. You can always put the rent up as well, that can help.
Good luck
Kev
Oh yeah i forgot to add, i dont know how other people do it, but stuff principal and interest, it is an investment, you dont get tax advantages on principal, whereas interest you can claim on. Just get the loan interest only!
Kev
You have to realise you get tax and depreciation (if applicable )benefits
For a $45k house i’d be paying P&I..and aiming to reduce the loan,you’re aiming for ca$h flow here remeber, not tax savings..
To those that spend $1 ‘just’ to save 50c in Tax..
send your dollar$ to me and i’ll give you 60c back !!
10% more [}][:o)]REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Hi Lisa,
I am with Redwing on this.
PAy P & I so that you are guaranteed of releasing equity and increasing cashflow at the same time.
The difference on a loan the size you are considering is negligible.
Derek
Based on your numbers. I converted it to the way i do it based on the BuyerBeware template. And the results show that i think you got the numbers right.
I regard this as DEAD, because your not loosing money or making cashflow money, well not mutch $2.75 a week. but that’s if things run perfect. There has been no consideration for any rent vacancy thru the year(s).
I am only just learning about wrap strategies in another thread. This can bunt your cashflow up a little to make it worthwhile.
Alternatively you can put your creative cap on and think of ways so that you get the rent that would make it worthwhile in a CF+ senario. Maybee you can furnish for minimal amount and get the rent up to $110 (maybee after a year or when the current tenant moves out).
11 Second Solution:
Rent = 100
Occupancy rate = 100%
Solution = $50000.00
Asking price = $45000.00
Deposit 20% = $9000.00
Other closing costs = $2850.00Morgage details:
Loan = $36000.00
Interest rate = 8%
Term = 25 Years
Weekly loan repayments = $64.12
Total repayments for life of loan = $83355.00Summary:
Total annual rent = $5200.00
Total annual morgage = $3334.37
Total annual costs = $1748.00
Total annual cashflow = $117.63
Total funded costs = $11850.00
Risk free return = $474.00 bank interest rate of 4%.
Annual Cash On Cash Return = 0.99 %
Cashflow Positive Weekly = $2.26************************************
This seems to be about demographic arrangements.We tend to disagree with the p&i theory.Just because you have an IO loan does not mean you cannot pay down the principle. It just gives you a choice if you have a flexible mortgage that allows extra repayments.
If you have a PPOR perhaps use the surplus cashflow from the IP to pay down your PPOR first(non tax-deductible debt), then work on the principle of the IP’s?
We feel the the P&I feature of any loan is too inflexible therefore always recommend IO.
Another reason to keep the loan IO is that it establishes a limit that you can redraw back up to(presuming you had this feature) and even increase with capital growth and new vals. With P&I your limit decreases over time.
Another point, at 90%($40500 lend) your LMI would only be about $900. Why not spend that to put in $4500 less on a deposit? IO on a $40500 lend at 7% int rate is about $235 a month.
Just my 2 cents
Brendon
Acute Mortgage Reductions
‘Better Finance for More Homes Sooner’So if the weekly positive CF is 2.26 weekly, is that before tax? Would the figure then be reduced to about $1 after one pays taxes on it, presuming one is in the highest tax bracket? Or is this 2.26 figure pre-deduction?
Given a return of 2.26… one would really have to wonder what all the fuss about CF pozz is. What if you need to rewire this place? Reroof it? Restump it? Then the return of $100 annually would be eaten up.
kay henry
Hi Lisa72
I would suggest that you firm up your figures, because estimates can make or break a deal. So be clear first.
Then I ran your number making a couple of changes first make your term 30 years and calculate using your current interest rate because you can fix the term as long as you like and the get out on that amount if you ever need to is low.
Also ask your bank for a better loan app fee.
Cheers
Leigh K[]Carve your own path and lead the way.
Originally posted by kay henry:So if the weekly positive CF is 2.26 weekly, is that before tax? Would the figure then be reduced to about $1 after one pays taxes on it, presuming one is in the highest tax bracket? Or is this 2.26 figure pre-deduction?
Given a return of 2.26… one would really have to wonder what all the fuss about CF pozz is. What if you need to rewire this place? Reroof it? Restump it? Then the return of $100 annually would be eaten up.
kay henry
Why so negative about +ve cash flow? $2.26 per week is better than nothing even $1 per week. it does not mean that it going to be like this forever. If you’re a bit creative then you alway be able to increase that property value, hence increase rent like put in a new carport if there is not any, a/c, blind/curtain, and many other aspects.
Think creatively before jump straight to conclusion. If one don’t like it then there’re alway other does.
Good luck with your investig journey.
Warm Regards
ChanDollars
[Keep going, you’re on your way to Frolic Freedom!]Hi Chan$,
For me earning around $100/year from an asset ‘worth’ $45000 is too little when you have put in equity or cash of up to $12000.
At this rate it is going to take an exceedingly long time to make money out of this investment – and that is without any repairs in excess of $260/annum.
Lending institutions primarily use an equity and serviceability test when lending money this shapes up to be a millstone around Lisa’s neck without a major increase in rental returns, or significant capital growth (which may be unlikely in a small town in a normal property market – whatever that may be)
Given a number of rural communities have had a growth flow on benefit from the property investment boom I am not sure this recent growth of the past two/three years will be sustained in the long or short term in these towns.
Sure, growth is not a sure bet but the basic laws of supply and demand really drives the property market and as such a larger city/town, or growing city/town has less risk involved.
Didn’t want to rain on the parade – sometimes I enjoy being contrarian.
PS How many of these properties would Lisa need to own to earn $50K/annum gross? How much would the total borrowings be?
My brain hurts trying to work those out.
Derek
Thanks Derek,
I too have tried to work out how many of these I would need to earn approx that figure and I too get a headache.
Don’t get me wrong, I am still keen on getting into the market and am hopefull that we will be able to find decent cf+ properties, but I am not going to jump in unless I am a little more positive about the outcome.
We are keeping our eye on a couple of towns that have had excellent growth over the last year, but have probably reached beyond their peak. Hopefully (if we have picked correctly), prices will fall back to a reasonable level, and become a little more attractive.
I am also interested in learning more about the NZ market too.
Lisa
The gap will always be too large if you don’t at least try to make the jump.
Hey Lisa,
My brain has an answer.
Assuming all the properties were identical and bought today. A bit simplistic but you get the drift.
you would need 500 properties
you would have put in around $6m for deposits
have total borrowings of $18mAll for $50K/annum.
Assume you held property to the value of $1m and it grew by 5%.
5% of $1m = $50K.
And if it were neutrally geared all at no cost.
Just me being contrarian[:p]
Derek
Originally posted by Derek:Hi Chan$,
For me earning around $100/year from an asset ‘worth’ $45000 is too little when you have put in equity or cash of up to $12000.
At this rate it is going to take an exceedingly long time to make money out of this investment – and that is without any repairs in excess of $260/annum.
Lending institutions primarily use an equity and serviceability test when lending money this shapes up to be a millstone around Lisa’s neck without a major increase in rental returns, or significant capital growth (which may be unlikely in a small town in a normal property market – whatever that may be)
Given a number of rural communities have had a growth flow on benefit from the property investment boom I am not sure this recent growth of the past two/three years will be sustained in the long or short term in these towns.
Sure, growth is not a sure bet but the basic laws of supply and demand really drives the property market and as such a larger city/town, or growing city/town has less risk involved.
Didn’t want to rain on the parade – sometimes I enjoy being contrarian.
PS How many of these properties would Lisa need to own to earn $50K/annum gross? How much would the total borrowings be?
My brain hurts trying to work those out.
Derek
Derek,
Sorry to take so long to reply…was busy.
I know what you are saying, but not all property that earning $1-$2 per week has no capital grow. If you are smart enough then you still be able to find property which positive in cash flow as well as capital grow. Of course capital grow is not a sure thing but if there is investment there are alway risk involve if you prepare to take that risk is up to individual.
Why would people to out there buy negative cash flow property? is it because of capital grow? and how do they know? prediction and what is the consequence?
Risk…..
Warm Regards
ChanDollars
[Keep going, you’re on your way to Frolic Freedom!]Hi Chan,
I appreciate that it is possible to buy a cashflow property and have growth – and the recent market of the last 3ish years clearly demonstrate that.
However in the main the recent growth in prices has largely been driven by people seeking cashflow positive properties and who are prepared to ‘go to the end of the earth’ to find them. To me it is no good looking at three years, or less, and believe this growth will continue over the following years.
My comments are based on 18 years living in many parts of country WA and seeing property prices remain ‘cheap’ throughout that time.
Compounding the problem, as I see it, is that Australia, by and large, has a very centralised population and the drift has been towards the city and/or coastal communities.
Sure an experienced and very well researched investor will get these properties but I don’t see them falling out of trees in the long run.
Growth is not guaranteed anywhere, that is true. But I base my investment decisions on long term trends over the last 10+ years and by investing in areas that have shown significant, and sustained, population growth my risks are minimised.
I wonder how many people do their ‘sums’ and do not factor in an extended vacancy rate – I am of the opinion country towns as such are more prone to this issue than a ‘city’ type investment where the potential pool of tenants is much larger.
But you are right it is about managing the risks and doing whta suits you – I like being a little contrarian when surrounded by cashflow investors [
].I am buying growth focussed investments which are neutrally geared as such I am not out of pocket – one of which is now almost positively geared with some addition of furnture and a suitable increase in rent.
Derek
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