As a newbie, please forgive me for asking this question if it has already been answered somewhere else on the forum. Please direct me to the answer.
Otherwise your views and comments on the following scenario would be appreciated.
Firstly big thanks to Jaffasoft for his calculator which I used to start this scenario and now I am very puzzled and concerned. The scenario specifically excludes the following non cash tax deduction expenses and tax losses. My reason for this is to evaluate the scenario based on a cash flow only. The first table is the extract from Jaffasoft for Year 1 and the second table sets out a 7 year picture.
Funding for the scenario is 80% LVR on IP with the balance of the Purchase/Closing Costs being borrowed against existing equity in PPOR ( i.e. the 20% deposit plus other costs)
The Cash on Cash return is not negative (but this assumes existing cash to fund Purchase/Closing costs as the cost of these do not appear in the Jaffasoft solution) but over the 7 year period while the property is increasing in value there is a continuous negative cash flow.
Many thanks in advance I dont seem to be able to see the wood for the trees !
Table 1 “Jaffasoft Calculationsâ€
11 Second Solution:
Rent = 591
Occupancy rate ‘1 Week’ = 98.08 Percent
Solution = $289825.00
Asking price = $350000Closing costs:
Deposit 20 Percent = $70000.00
Legal fees = $800
Stamp duty = $11240.00
Mortgage app fees = $475
Mortgage insurance = $0
Valuation fees = $0
Other borrowing costs = $400
Clean up costs = $0
Inspection costs = $300
Other costs = $0
Total closing costs = $83215.00Mortgage details:
Loan Principle and Interest = $280000.00
Interest rate = 7.32 Percent
Term = 25 Years
Weekly mortgage repayments = $394.15
Total repayments for life of loan = $512400.00Annual costs:
Management fees 7 Percent = $2109.93
Letting and advertising = $0
Body corp fees = $0
Rates = $800
Utility rates and fees = $0
Insurance = $350
Miscellaneous costs = $0
Land tax = $4860
Maintenance 5 Percent = $1507.09
Other ownership costs = $0
Total annual costs = $9627.02Summary:
Total annual rent = $30141.80
Total annual mortgage = $20496.00
Total annual costs = $9627.02
Total annual cashflow = $18.78
Total funded costs = $83215.00
Risk free return = $4576.83 Bank interest rate of 5.5 Percent.
Annual Cash On Cash Return = 0.02 Percent
Cashflow Positive Weekly = $0.36Table 2 – 7 year picture
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Rent Increase (CPI) 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
Interest 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32%
Running Costs (CPI +10%) 3.85% 3.85% 3.85% 3.85% 3.85% 3.85%Net Property Growth 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Property Price $350,000 $367,500 $385,875 $405,169 $425,427 $446,699 $469,033
Loan $280,000 $280,000 $280,000 $280,000 $280,000 $280,000 $280,000
Purchase Costs $83,215 $83,215 $83,215 $83,215 $83,215 $83,215 $83,215
Equity ($13,215) $4,285 $22,660 $41,954 $62,212 $83,484 $105,818
Rents $30,142 $31,197 $32,289 $33,419 $34,588 $35,799 $37,052
Interest ($20,496) ($20,496) ($20,496) ($20,496) ($20,496) ($20,496) ($20,496)
Running Costs ($9,627) ($9,998) ($10,383) ($10,782) ($11,197) ($11,629) ($12,076)
Interest on Purchase Costs ($6,091) ($6,091) ($6,091) ($6,091) ($6,091) ($6,091) ($6,091)Annual Cash Flow ($6,073) ($5,388) ($4,681) ($3,951) ($3,196) ($2,417) ($1,612)
Cumulative Cash Flow ($6,073) ($11,461) ($16,142) ($20,093) ($23,289) ($25,706) ($27,318)
Cash on Cash 0.13%
aquila
“Dare to be Different – earn, spend and then pay tax – control without ownership “
Aquila,
My reason for this is to evaluate the scenario based on a cash flow only.From my recollection, the cashflow is not huge. Are there other mitigating factors that might be worthwhile? (Like Capital Growth?)
Based on a “cashflow only quote” (your words) I’d say “Go find something else”. To me, I’d want a fair bit more than a 0.13% return (or maybe I’ve read that wrong).
I see you’ve spent a lot of time on presenting your data – so it seems you are quite diligent. If so, rather than just saying “find something else” I’d be wanting to know more about this investment, like what else do see about this investment, good infrastructure, likely future growth (above the norm perhaps)
What more can you add here?
Benny
G’day aquila,
Well, you asked for any flaws in your logic….OK.
It’s good that you’ve popped on your accounting / scientist hat and crunched the numbers.
Managing to squeeze out 5 cents a day is better than a loss – right.
The flaw I see is that maintenance figure you’ve taken at 5%. If you have estimated incorrectly, by even a smidge, and I’m talking about 5.01%, there goes your profit.
If you’ve been grossly inaccurate with your estimate and the true maintenance expense turns out to be 5.02%, you’re heading out the back door. Not much room for error you’d agree.
On the other hand, to be positive, if the maintenance comes in at 4.99%, you’ve just doubled your profit to 10c per day !!!!!!
First thing I’d do is take my accountant’s / scientists hat off, and pop on my managers hat. What are the ways to increase value / rents / reduce costs / improve the title etc to extract more value from the prop.
At 5c per day, you’re gonna be at this game for a while.
Can you find something a little more cashflow positive ??
Good luck aquila.
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