Hi Guys,
Am about to take the plunge on my first IP (I hope) Thought some of you old hands might take a peek at my figures and let me know if you can see any glaring problems I might be missing.
The property is a hotel style unit (no kitchen) in the Brisbane CBD. It is currently rented to a long term tennant at $200/wk which appears to be the norm with other units in the complex.
Here is my projected cash flow profile.Purchase Price $82,000.00
Closing Costs 5% $4,100.00
Deposit $16,400.00
Cash Needed $20,500.00Loan amount $65,600.00
Weekly loan repay $88.83 (interest only at 6.5%)
Loan Payments P.A $4,619.16Weekly Rent $200.00
Rent P.A $10,400.00Repairs Budget $4,000.00 (including body corp and rates)
Positive Cash Flow $1,780.84
weekly return $34.25CoCR 8.69%
Hope I haven’t missed anything.. any feedback welcomed from this newb.
Cheers Tanya
There is no turning back.
http://www.foilbiz.comI’m new to all this (first post here and all), and haven’t quite gotten my head around everything yet… but there are a couple of possible red flags that I can see.
First of all, I notice you made your calculations on it being rented the full 52 weeks a year – you might be lucky, but 49 or 50 weeks would be better for due dilligence purposes (best to be conservative before you spend your money).
Secondly – what’s your adversity to risk? it could be a concern that you only have an IO loan. Reducing debt is a great strategy for offsetting risk… interest rates only need to go up 1.5% for this cash flow positive property to become cash flow negative – factor in a couple of weeks a year with no tenant, even unexpected repairs and it needs an even lower rise in interest rates to reach this.
Basically – how much negative gearing can you handle/afford… maybe interest rates won’t reach those heights for a couple of years, but then again plenty of people are predicting they could be there within 6-12 months.
I don’t want to put you off it or anything, just want to put these questions out there (you might have already considered them and are happy with the risk, but the margin is pretty fine)… I’d be interested in hearing what other people here would do in this situation – I’m in a similar position – thinking about my first IP, and I’m not yet sure that I’d know my answers to those questions at this stage.
The other thing to consider is possible capital gain – if it is likely, then that would certainly offset the risk of possible negative cash flows, provided you could maintain it (haven’t had a close look at Brisbane CBD appartments, but they do seem a bit over supplied like other cities at the moment).
Hope that helps… like I said, I’ve only just started researching the whole positive cashflow property thingy, so there are no doubt people with a lot more experience here that may have answers (or further questions) – but these are the main issues that I’m trying to come to grips with at the moment… nothing that can’t be overcome by propper exit strategies and risk minimisation I would think (hope)
I think you may have missed management fees – assuming you are planning to use an agent. This is usually 7.5 – 8.5%.
Repairs are impossible to predict so as previous poster mentioned your positive cashflow could easily turn negative.
Another point I discovered in analysing my own investments…
Buying units under $100K makes it harder to achieve +ve cashflow since your rates and body corporate fees are fairly fixed and not in proportion to your rental income.thanks for the feedback, just what I hoped for. I will manage myself (have always done so with my -ve IP’s.) so don’t have to calculate management fees.
Have also looked at splitting the loan so a portion is principal as well (risk management)and still maintain +ve cashflow. Very slim margin I am aware but area has maintained good capital growth and I have no reason to expect this to change as property is well situated, walking distance to arts centres and southbank etc.
Would like a bigger return but……those great deals are rare as hens teeth.
Finally, there is a 2 year lease and tennant unchanged for 3 years…safe as it gets I guess.
Just waiting on sinking fund info to see if it sinks the deal !There is no turning back.
http://www.foilbiz.comHi,
Thanks for your post – it would be good if more people could post the numbers on potential deals so we can analyse them and learn.
I’d add the following comments:
1. Just because the property is currently rnted does npot mean that it is rented to a good tenant. It’s important that you seek independent confirmation that the tenant is indeed a future (rather than a historical) long-term tenant by looking at how much of the lease is left to go, rather than how much of the lease has expired.
Simply ask to see the lease and also ask the tenant how long they intend to stay in the property.
2. It’s not what you can see that will hurt you the most. You have done a good job of checking out the numbers, but the gaps are that you need to be more specific rather than just have a $4k budget.
The two points raised re: vacancy and also mngt fees are well made and will decrease your cocr.
However, what I’d also like to see you do is ensure that the $200 p/week is a fair market rent (ie. not inflated). You can do this by seeing what the other apartments rent for or by calling local agents and asking them.
3. Finance… it might be wise to make your offer ‘subject to finance’ just in case the bank will lend you <80%.
4. Think about your exit strategy too. At what point (c/flow and cap. gains) will you sell? Furthermore, also have a plan for how you’ll use the weekly cashflow.
OK – that should keep you going for a while.
Generally, the deal looks interesting and deserves more attention.
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
In Melbourne, a rule of thumb return, net, is considered reliably to be 80% of your gross rental. The lost 20% covers outgoings and is about right over time in my experience.
Don’t forget Landlord Insurance, it’s your defence against “tenants from hell” and is worth every cent.
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