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:
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.
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
shaun
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.
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!
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).
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.
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.
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!]
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?
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.
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?
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!]
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.