Looking into this property at the moment… Would love to hear some thoughts as new to PI…
Purchase Price $85,000 Deposit $8500
Rental Return $130 p/wk (currently tenanted)
Finance 90% at current interest rateThis is a little 3 bedroom house in SA near the water with good capital growth potential I believe…
Does this sound like a good PI??? So far this is one of the best little buys I have found??? Still to do some homework on this one…
$130 * 5200 / $85000 = 7.95% Is this the best way to calculate approx return??? This would be my gross return I take it….
Sarah
Hiya Sarah,
Haven’t done one of these for a while, but I’ll have a crack at it for you, with 5 minutes to spare.
Gross Rent………$ 130 p.w. = $ 6,760 p.a.
Gross Yield = 6.76 / 85 = 7.95%Cost to Hold
Shire rates……..600
Water rates…….500
Land Tax………..800 (single ownership)
Insurance………300
Maintenance…..500 ($ 10 a week ain’t much)
Prop Man………..800 (all up with all of their poxy fees)
Total……………..3,500Net yield………..6,760 – 3,500 = 3260 = 3.8%
Compare the nett yield against the interest rate you are paying…probably around 7%.
This place you describe is definitely cashflow negative.
Your interest figure alone is going to be 0.07*0.9*85K = 5.4K
You’ll be needing to dip into your savings pot to the tune of about $ 2,200 per year (5.4K – 3.2K).
For the place to be +CF, you’ve only got 1.3K left for all of your holding costs after interest is taken out. I can never imagine a scenario when all of those residential Owner property costs listed above combined would be less than 1,300 for a house.
Residential outgoings almost always kill the cashflow golden goose. No point trying to palm these off to your prospective tenants, ‘cos # 1 it’s against the law, and # 2 (does there need to be a # 2 ??) the ressy tenants will run a mile before being lumbered with any of those. They rent so they don’t have to pay any of those costs. To pay them, would defeat the purpose of renting, especially when the rent money is coming out of their after tax nett pay.
Good luck with your choices.
Thank you Dazzliing for taking the time to respond…
Cost of Holding the property definately needs to be worked into the equation, to be honest didn’t really take that into account. (Learning very quickly using these forums).
All starting to make some sense to me now… So for the property to be CF+ their would need to be $$$$ left over after interest and yearly holding costs were paid????
Cheers
Sarah
Dazzling… On fire as usual!
Are the six costs you mentioned generally speaking the big six which would need to be considered when evaluating any CF+ deal? I don’t mean the figures themselves, they will obviously vary with location, but the actual type of cost…
Yes, the property is negatively geard but the return is above the average for SA (anything above 5% is high for SA).
What area is it in and how are you basing your growth calculations?
Buying positive cash flow properties is not the ONLY way to invest, infact, if there has been no growth in the area, you are left exposed to debt with no incease in equity to offset it, it is high risk!!
Negatively geared properties are also higher risk because sooner or later (5 properties for most people) will leave you with servicability problems when it comes to finance, that means slow growth in your portfolio and you are at the mercy of capital appreciation.
Factoring in depreciation and tax benefits may increase your returns, its a method used by some investors (not me personally [biggrin]) but it may suit your investment style.
In SA, you could consider some creative investing techniques such as offering it back for sale on vendor financing as a method to increase cash flow that you can use to service other properties, allows your portfolio to grow at a faster rate than negative gearing, while not leaving you exposed to dept as in buying properties just for positive cash flow.
Hope I haven’t confused people with all the jargon, I can understand what I’m talking about [biggrin]
Investment Property Management
http://www.adprop.com.auHi Sarah,
As others have added so far, that would definately verge on a negative geared property. Will it rent for more than $130 per week if you got a new tenant in.
I’m 22 and own many true cash flow properties you may be able to compare your deals with.
For example, I purchased a property for $48 000 which rents for $130 per week at a 7% interest rate.
Another one purchased for $75 000 and rents for $200 per week.
You can vaguely gauge if a property will be positive by first looking at it, but take into management fees, insurance and rates and it could easily become negative.
Make sure you crunch numbers before commiting to anything.
Feel free to drop me a line if you need help with anything
Crysta [email protected]
Dazling could I ask you a quick question, or anyone else who could answer this for me. I was trying to follow your calculations to fnd the Net Yield of Sarahs potantial prop. I couldn’t figure out how you came to get 3.8%. I understood all the rest, just the part to get from $3,260 net yeild to the 3.8% figure. My maths isen’t so good.
Net yield………..6,760 – 3,500 = 3260 = 3.8%
Thanks
Crystal,
$3260 divided by $85000 multiplied by 100% = approx 3.8% [happy3]
Aaaha yes. Embarressingly easy answer, but one I had to ask! Thanks 3056
Wow usi.
If the quick calculations I did on the 2 properties you mentioned were correct, you had an approx 13% Gross yield on both IP’s. I don’t own any investment property as yet and I’m still very much just a beginner but that sounds great to me.
When were these properties purchased if you don’t mind me asking?
You must be logged in to reply to this topic. If you don't have an account, you can register here.
