I know that this question has probably been asked and answered a zillion times but after hours of trying to find it in the forums I just thought I’d come out and ask.
Which figures do I need to use to calculate if a property is going to be positively geared. And also how do I do the calculation.
Any other threads that answer this I will gladly go and have a look if I know where to look.
thanks
tanya
Only stupid people don’t ask questions
Tanya,
From my experiences you really just need to do the maths of expenses (paper and real) vs income.
For example, income will = rent
Expenses = interest on loan, property management fees, rates, insurance, maintenance (factor in although hard to predict sometimes).
Then recognise that there will be paper losses attached to your property in the way of depreciation on building and fittings.If your income is greater than your expenses then you are cash flow positive.
The expenses you need to work out will include;
Loan interest
Bank, legal, accounting fees
Purchase costs
Finance costs
Rates, water
Insurance (building, contents, public liability and Landlord’s)
Management fees
Maintenance/repairs (accepted figure is 1% of property price – usually less)
Body corp fees (if in units/townhouses etc).All of these can be broadly placed into 3 headings:-
(a) Acquisition costs – allow 6% of purchase price.
includes purchase costs such as stamp duty, conveyancing etc, and finance costs such as loan application fees etc.(b) Holding costs – allow 20% of rent.
includes all expenses related to the running costs of the property such as insurances, maint/repairs, management, rates etc and even 1 month of vacancy per year.(c) Loan interest (include bank fees)
For example; A $100k property with $140 per week for rent.
Aquisition costs = $6,000 (total purchase price = $106,000)
Holding costs = $28 per week ($1,456 per year).
($140 x 20% = $28).Nett rent = $5824 per year.
You also have to include Loan Interest and bank fees as an expense (which is tax deductible). Let’s assume the current interest rate including fees is 7.5% and you have borrowed the entire amount to buy the property.
Loan interest = $7,950 per year.
– Nett rent = $5,824Total cashflow = -$2,126
If you use a cash deposit and borrow less the figures will change, but the purchase and holding cost percentages I mentioned don’t change.
The good news is that these percentages are generous estimates I have found, and we haven’t included the effect of tax returns on the cashflow either. it is possible to turn a neg cashflow property into a pos cashflow property through well selected properties to maximise ‘on paper’ and cash tax deductions. This is harder to guestimate as the amount claimed will vary and so does each person’s tax rate. This is where the accountant is needed.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
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