Hi There,
I’m just wondering if anyone would be kind enough to share some current examples (detailed numbers) of +ve cashflow deals?
I am in the process of working out some long term projections for an investment group I am part of (several guys all looking to invest in property together). In order to set our direction we need to run some numbers so would appreciate if someone might share their real life examples for us to use as the basis for our own investment activity moving foward.
We are looking at starting in Australia, considering overseas deals later on….
Thanks in advance for anyone who shares,
QL
Hi QL
Pretty broad question and the answers are just as many based on straight mortgage, wraps, finance solutions, etc.
If we just stick to the basics:-
1. Calculate the cost of finance (eg standard mortgage loan might be around 7%).
2. Compare this with a simple rental yield calculation:
(Rent pw x No. of weeks occupancy)/Purchase Price = x%
As you can see there are three ways to increase x%. Raise the rent. Improve the occupancy up to 52 weeks. Negotiate the purchase price down (and maybe buy below market value).
3. We then need the rental yield calculation to be greater than the cost of finance.
Some people will argue that such a simple comparison fails to take into account the running costs for property (ie rates, body corporate, repairs, etc.).
4. To overcome this assumption, you could look at it a different way. The argument is only relevant in my opinion if the mortgage is 100% finance. On the other hand if you were financed at 80% IO, and assuming running costs were 5% of the property value, then you could argue the simple comparison is a valid one.
5. In summary, assuming no more than 85% finance, simply compare the mortgage/finance interest rate vs the rental yield calculation. You could add a couple of percentage points onto the mortgage/finance interest rate to account for shifts in interest rates.
Or buy “Property Millionaire-The Boardgame” first [exhappy]and get some experience by roadtesting a few strategies before you make the big dollar decisions. it might be interesting in the ‘heat of simulated competition’ to learn how you & your friends think and make decisions under financial and investment pressure and whether a JV together will be all you hope it is.
Gary [aacool]
Author of “Property Millionaire: The Guidebook to Having Great Australian Dreams”
Creator of “Property Millionaire – The Boardgame”
http://www.888abundanceHere is a simple one we did this week
purchase price $145,000
(valuation at $170,000)
Rent with option to purchase at $208,000
weekly income $350 per week with ~40% towards purchase in 2 years.
(market rent without option is ~150 per week)Xenia Ioannou-Mena
Property Manager &
Property Sales Consultant
E: [email protected]
M. 0412 437 582Hi Xenia,
Where on earth do you get people stupid enough to take a ‘deal’ on those terms? Do you advertise or do they come to you? Is there a list somewhere? Can I have a copy? I’ve got a whole bunch of ‘Magic Cheese Powder’ Link I’m having trouble shifting and these sound like the sort of people who would be interested…
F.[cowboy2]G’day QL,
Bought a crappy bunch of old rusty sheds on a decent block of land, and these are the figures for the deal.
Capital
Purchased for 780K
Total Acquisition Costs were 40K
Borrowed from the bank 820K (105.1%)Income
Loan Costs 59K p.a. (fixed for 5 years)
Total Outgoings 11K p.a. (paid by tenants)
Rent first year is 80K p.a. nett
Rent in the fifth year is 93K p.a. nett (escalates at 4% p.a.)On a 105% loan, (nothing in), the prop produces 21K p.a. cashflow in year one, escalating to 34K p.a. in year 5…..for a grand total cashflow of 137K in the first 5 years.
Tenant has signed up for 15 years. We get the property back in 2021. By then, the free cashflow would have completely paid off the property. Job sorted, moving onto the next one.
Trick is to find the right sort fo tenant, and then cling to them like glue.
Wow Dazzling… That’s impressive. I’ve been reading these forums for quite a while now, and your’s and foundations names (just to name a couple) are ones which stay in my mind, with the label “RESPECT” attached! [buz2]
What are the tennants actually paying for on the land? Some commercial lease on the “crappy rusty sheds”? For someone to be paying somewhere around $1,500 a week rent, I would have thought some commercial operation?
Anyway, congrats again on the purchase, keep up the good work, and keep us informed (so hopefully we can all learn something!). [blush2]
Dazzling
How did you borrow 105% (LVR) on comercial?
Hi Daniel and roodog,
To further elaborate….the tenant has spent 140K since moving in, renovating our property, and has transformed our sheds, and built 2 extra, over the past few months into a vibrant recycling station, where they bring 10,000 cubic metres per month of other people’s rubbish onto our property (in big skip bins, not the putrid household stuff) and sort and segregate it into re-saleable products…..concrete / wood / sand / mulch / paper / carboard etc. The volume should eventually crank up to 22,000 cum per month. Bring it on.
They pay alot for the vacant dirt (which they’ve now re-bitumenised…looks great too) as they need to store all of their bins and trucks and front end loaders. The sheds themselves are the minor part of the property where they service the equipment and store the product. It’s all about turning circles with large trucks and having enough “elbow room” to manouver large vehicles efficiently.
We get 105% LVR on the comm. deals by injecting residential equity into the deals. We absolutely LOVE cross collateralising all of our loans, tying ourselves in enormous great knots, to the absolute horror of the mortgage broking advisors. Apparently there are very large pitfalls doing this, but it hasn’t tripped us up yet….maybe we are in for the shock of our lives soon, but at this stage everything is okey dokey. [biggrin]
Yeah Dazzling, I read another one of your posts somewhere else and it mentioned what I assume is the same patch of turf (or bitumen in this case). Is this the same Ugly Duckling?
My only other question would relate to how you found the tennant. Did you simply advertise the space, or did you have the opportunity lined up through networking before you bought the property (or during)?
Dazzling
Oh yes I seem to remember you talking about a venture similar to that a couple of months ago before you bought the block. Well it seems that you have gotten onto a good thing and is working out well (financially) for you.
I have also been advised against cross col but it is a simpler way to go without raising a LOC for example and most people do use that structure.
Cheers
Thanks everyone for your examples – much appreciated.
This is the type of stuff I’m looking for, some real life examples that we can base some calculations on. It will take us some time to reach guru status so maybe an ‘average’ deal would be good also so we have something to aim for in the first instance.
Thanks again, and much appreciated.
QL
QL, it occured to me that Steve’s books carry numerous examples of real and “example” deals. [thumbsup2] I’m still learning and consuming way too much info to even comprehend all this about cross-colling and bitumising yet.
We just go to the simple bread and butter, like Steve lays out, and his protege` students in the “$M1 in 1 year” book. Zample after zample.
Favoured SE will reveal all sorts of “example” figures… enough said is that… it works when you crunch with Steve’s formulae.Bob Parker
Principal
FBP and Associates
http://www.fbpandassociates.com.auWorking with you to establish a more secure financial future for you. We can assist you through investment in residential real estate, home ownership and i-Commerce businesses. What future do you want from tommorrow?
Thanks Bob, I have read 0 to 130 properties and appreciate the examples given there, has Steve since published another book? The purpose of this exercise is to validate some figures on a deal done today (which may still be possible based on Steve’s figures however I am unsure)
I have read via the forums lately that +ve cashflow deals are still out there, however they now need to be created as opposed buying them as easily as may have been possible previously.
Dazzling, these are the types of deals most property investors would aspire to create – thanks for sharing – I think I read something about that deal many months ago and remember how it set me off when I read it! thanks again.
Xenia, Your deal is an interesting one. I’d like to crunch those numbers some more and I’m interested to know what the 40% is based on? Is it 40% of the $350 that get’s held on behalf of the tennant so they can purchase in 2 years? Does that have to be held in trust or do you have access to it? I like the deal, very creative. Do they also give you a holding ‘deposit’ due to the fact that it’s a lease option? I have learnt a little about lease options however they are still relatively new to me….where is the best place to learn more?
Rgs
QL
Really inspiring to hear about all the deals. Thanks everyone for sharing.
I too am interested in how to find commercial tenants like Dazzling did? Does anyone have any suggestions?
I was thinking of :
1. Asking REAs about people enquiring about leases.
2. Look in local papers for ads?
3. Actively advertise for tenants before I actually have a property.
Are there any other better ways?I also have a general question that applies to Dazzling’s case. If the tenants are happy to pay a price for a lease that well and truely covers the interest, how come they don’t buy a property themselves?
Is it because lack of a deposit? Shortage of suitable properties?Thanks QL for starting a great thread. I’m learning heaps.
Cheers
HoBe
Wow,
thanks for sharing. This is what I have to look forward to. Dazzling – YOU ARE DAZZLING!!! Now I know how you get your name. Keep up the good work.
Dianne BurnsI also have a general question that applies to Dazzling’s case. If the tenants are happy to pay a price for a lease that well and truely covers the interest, how come they don’t buy a property themselves?Hi HoBe,
I may have an answer to that question – many businesses make such good returns on their cash that a property investment would seem like a poor investment to them! They stay in their core competency and consider property ownership as a waste of funds that could be used to grow their highly profitable business…..
Just a thought
QL
Aha, thanks for that I have always wondered how it works.
Good luck with your investment group, great initiative.
CheersHoBe
No probs HoBe,
There’s probably a myriad of other reasons why businesses often don’t own their own premises. I’m not typing from any commercial property experience – just theory. I’m sure some of the more commercially focused savvy investors can give you a more solid answer.
Rgs
QL
Many businesses make such good returns on their cash that a property investment would seem like a poor investment to them! They stay in their core competency.Exactly.
I asked my tenant this exact same question, as to why he didn’t purchase the place for himself. He answered me very honestly about his business.
He said ;
1. I pay you 11% rent, and you are probably getting 11 or 12% growth, which is 23% passive return. I’d rather get my usual 40 or 45% active return on my trucks and plant. They are depreciating of course, but I’m simply not in the RE game.
2. The other thing is size of funds. The purchase price of one property for them would get them maybe 6 trucks, 2 FEL’s and maybe an extra 100 bins, which would literally double the size of his business. The returns to him doing this would swamp the potential savings he might get by not having to pay me rent.
believe it or not, there are good businesses out there, actively making far larger profits than by simply owning property. Higher risk for sure…..but then that is natural.
Good luck in your investing everyone.
Thanks for a great lesson in how the other side (prospective tenants) is thinking. I hadn’t thought of that.
Learning by doing!
TaHoBe
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