I have been doing some number crunching over the last few days regarding my future property investing. I would like some feedback on the numbers, are they realistic, problems, have i overlooked something, left something out, etc.
Purchase price 200K
closing costs 5K(this will be first house)
deposit 30k
loan 175K
new value(after reno) 250K
equity 75K
LVR 70
interest(8%) 14K pa
rent(300pw) 15600
rates,insurance, etc 2K pa
Annual CF -$400
exp CG(6%) 15K
cash down(CD)(deposit + reno) = 40K
Net Profit percentage = ((CF + CG)/CD)*100 = 36.5Ok after 5 yrs, assuming CG at 6% and rent growth at 4%
Annual CF +$2980
CG(pa) 20K
CD(still) 40K
Net Profit Percentage = 57.45Now i'm looking at a case further in the future say if i wanted to sell and use money to reduce PPOR debt, ok;
value after 5 yrs(selling price) 334,556
capital gains 134,556
taxable gains(50% discount) 67,278
CG tax paid(30% tax) 20,183
selling costs(5% of sale price, I don't know how accurate this percentage should be, major Q) 16728
profit 122,645
40K put in 5 yrs ago—>122645(306% return) or 61% return annually, better than 6% provided by bank(less tax).Note: I have not taken depreciation into account here with CF over the years.
With the Net Profit Percentage I have not taken into account the value made by the reno, thats why they are smaller than the actual % return annually.What does everyone think here? If i use this 122645 to help pay off a PPOR debt at 8% interest then i will be $188 better off each week just due to this one investment.
Is selling a good idea, or should I hold on.Most of all, how are the numbers stakcing up with what you think they should be??
I know theres alot of numbers here, but It would be greatly appreciated if you would check em out.
Thanks,
Chris.P.S. I have just listened to that webinar that Steve and Martin did (i think) yesterday, It has opened up a new strategy.
Buy big block, reno front house, subdivide, build house on back, keep both or sell one. then later do whatever, from an initial inspection the profit looks to be much better than the strategy that I would be using with the numbers above(also there would be an increased risk).
hey chris let me just say ur numbers has just blown away my mind haha, i can't really help you with them- but maybe you can help me. How do you noe what initial numbers you must now before buying an IP (number crunching) is there a site or program that can help with this. I seriously don't know the number crunching business – what ingoings and outgoings should i do everytime i buy an IP?
Well I know certain numbers just by experience on this forum. As I am currently at uni and am not going to buy an IP until late 2009-early 2010, I have just been looking/posting on this forum and checking out sites like realestate.com, I've just been researching I guess.
Well when you buy an IP you have the purchase price, but then there are also associated costs such as stamp duty, bank fees(finance), solicitors, etc. When you get the IP you can take some sort of strategy, if you want to buy and hold, then you look for a tenant, you could get a property manager(which usually charges 6-8% of rent) to manage your tenants and search for new ones when desired. This of course eats into your cashflow.
You will have council rates, insurance(i'm not exactly sure about insurance, like the technicalities thats something else i'll have to find out), etc I have asked around and most people say 2-2.5K per annum for those kind of things.
Also initially you may have to pay a certain insurance called LMI(Lenders Mortgage Insurance), I don't know if you are familiar with it, but it is generally an insurance for the bank(no benefit to you) if you don't pay your repayments, You have to pay LMI if your LVR is quite high(80+), that can eat up alot of money if you let your LVR get really high(95+).You borrowed money off the bank, so you gotta pay it back, your loan repayments will be your dominant outgoing(by far).
Rent, your big income.The figures with selling are say for example;
You buy a house for 200K, then 5 yrs later it is worth 350K.
The value of the house has gone up 150K, so this gain is taxed(capital gains tax), there are certain rules, if you hold the IP for over 12 months(in this case yes, 5yrs) you only pay CG tax on 50% the gain, so you pay tax on 75K not 150K, which is pretty good. Then you work out form the 75K how much actual tax you pay, say your tax bracket was 50% then you would have to pay $37,500 in tax out of your 150K profit.
You have selling costs(this is also an area where I don't know the figures, there are agents fees, some other fees), ive been told about 5% of selling price.There is depreciation, this is where your belongings(the house, the fixtures, the carpet, paint, sinks, etc, etc) lose value, you can claim a tax deduction for these. You can also set up with the tax office to get paid this depreciation on a weekly basis(just like how your employer might withhold tax before you even get paid) this is good as it helps cashflow. The value of depreciation depends very much on the age of the property, the building state and recent renovations.
I hope this cleared something up, if you need anymore help with anything or if anything didn't make sense just post back, i'm more than happy to help out.
Chris.
First thing; have you actually seen a property that you can buy for $200k that rents for $300 p/w, or are you assuming you can buy one with those rent returns. It is rather difficult to find one with that good a return at the moment; especially in areas that have any hope of cap growth in the near future.
Ok; now to the other figures;
Allow approx 6% on top for purchase price costs; this includes stamp duty. (I guess you have factored in F.H.O.G?)
Allow approx 20% for expenses to come out of the rent; this includes management, rates (council and water), maintenance, repairs, insurances, 4 weeks vacancy etc. This doesn't include the loan interest.
Allow for a couple more grand for Loan Mortgage Insurance, because if you put in less than 20% deposit and money for the purchase costs, the Banks will slug you for LMI if they loan you more than 80% of the purchase price in most cases. 80% is $160k, so at $175k loan you are over the cut-off; LMI would apply.
You mentioned renovations, but I don't see any funds allocated for that.
Allow $5k for a very, very basic one, $10k for a half decent one, $20k for a good one – new kitchen, bathroom, paint throughout and carpet, update light fixtures and switches and door furniture, other repairs. You may be able to borrow this money in with the original loan, but you will have MORE LMI.
The strategy Steve talked about is not new by the way, but is a good one none the less. There are considerable costs with the subdivide and various 'hoops' to jump through, so before ever attempting this do a thorough cost analysis and check with Council on their regulations.
Do another number crunch and show us the new figures.
Mate you have crunched the numbers well. I can not see any problems however there is a gamble with regard to capitol gains over the net 3-5 years.
Hmm, with the capital gains, I have tried to be conservative with 6%, is that conservative. I know the market has "averaged" i think 10% for tonnes of years, I've dropped this incase the market doesn't perform as expected.
Do you think its to high?I need to fix up some of the things, there are 2 possible cases, I buy and live in house ofr 6months and get FHOG and reno at the same time, this will incur the mortgage repayments, and so my holding costs will fly up nearly as high as the FHOG i will be getting, or i could get in there, get the reno and get out with not FHOG, i don't know, i think the safer bet is to stay the 6 months, as i will have no problems with time blow outs if i have to stay minimum 6 months(also maximum). Hmm, What are your thoughts on this?
This would mean that my reno costs would jump up, i would have to work out how much more and also i would have a larger deposit, but then stuff like(maybe) LMI, bank fees, all those costs initially won't be tax deductable, hmmm….What should I do…hmm…Chris.
Hmm, thanks Marc for your reply I didn't see your message.
Ok Marc in my number crunching I have revised it a little but not yet to what you mentioned. I did not allow for holding costs during the 6 months, which turns out to be 7K(just like the FHOG). Now as it will be my PPOR(for the 6months) would the 6% on top of purchase price hold, I don't think I pay stamp duty as first home owner and its relatively cheap, can you please clarify the actual things that I have to pay, this area has always been so grey to me.
The LMI, I cannot believe I didn't think of that, hmm, i remember I had some sheet of paper which had like a matrix table that is averages of LMI for certain %'s and loan amounts, i'll find it.
Hmm, the reno costs added on to the loan, how would this work, a line of credit??
How inclined would they be to giving me this considering my high LVR?Thank you Marc and others for your help I do appreciate all the help from everyone, it is nice to think that people come on here and genuinely want to help out.
Chris.
The reno costs can simply be part of the loan the Bank gives you, but the critical factor will be the LVR and the servicability of the loan.
With the reno costs, plus the LMI, the interst bill goes up, which affects your servicability.
Also; depreciation was mentioned somewhere (by Draconis I think). Any depreciation you claim over the period you hold the property gets added back on to your cap gain, which will increase it and then increase your cap gains tax. It may end up being ok, but it needs to be factored in.
The other figure that I have a question over is the rent; do you know for certain you will get that much? What are similar renovated properties in the immediate area renting for? Be very wary of selling agent's OPINION about the likely rent. I made this mistake back in 2001; it ended up being $100 per week less than I was expecting.
Thanks for your help Marc, greatly appreciated,
Ok I have now crunched the those numbers, and re-crunched em. Here they are;
Purchase price: $200,000
Closing costs(6%): $12,000
Deposit: $32,000
Renovation costs added to loan: $20,000
Loan amount: $200,000
LVR 100
LMI(2.5%): $5,000
New Loan amount: $205,000
Holding costs for 6 months(including rates, insurance, interest): $10,000
Value after renovation: $240,000
New LVR 85
Interest(8%): 16460
Rent(6% renovated value): 275pw/14300pa
Property expenses(20% of rent): $2,860
Cashflow: -$4960pa(-$91pw)
Expected capital gains(5% renovated value): $12,000
Net Profit Percentage = 18.05With an expected rent rise of 3% with all others constant property will be cashflow neutral in 12.5 YEARS, now this is my big shock, what the hell, is it due to my high LVR, or something else.
I hope I have fixed any problems.
And again I haven't included deprecitaion at all, and am not worrying about selling in the near future that is just complicating everything.
Is the reno costs of $20,000 realistic for a $40,000 increase in value.
Regards,
Christopher.P.S. Would the 20K of reno costs be added at the start thus increasing my LVR and pushing my LMI up heaps??
I have been looking on realestate.com.au at lots of properties, and the properties that are about $220,000 havea tenant in them paying about 290-300 on average(and I'm pretty sure that they are not recently renovated ones, I don't know, I don't want to seem to absolute best case scenario like, I should be worst case scenario, Is that what I am??DraconisV wrote:Thanks for your help Marc, greatly appreciated,Ok I have now crunched the those numbers, and re-crunched em. Here they are;
Purchase price: $200,000
Closing costs(6%): $12,000
Deposit: $32,000
Renovation costs added to loan: $20,000
Loan amount: $200,000
LVR 100
LMI(2.5%): $5,000
New Loan amount: $205,000
Holding costs for 6 months(including rates, insurance, interest): $10,000
Value after renovation: $240,000
New LVR 85
Interest(8%): 16460
Rent(6% renovated value): 275pw/14300pa
Property expenses(20% of rent): $2,860
Cashflow: -$4960pa(-$91pw)
Expected capital gains(5% renovated value): $12,000
Net Profit Percentage = 18.05With an expected rent rise of 3% with all others constant property will be cashflow neutral in 12.5 YEARS, now this is my big shock, what the hell, is it due to my high LVR, or something else.
I hope I have fixed any problems.
And again I haven't included deprecitaion at all, and am not worrying about selling in the near future that is just complicating everything.
Is the reno costs of $20,000 realistic for a $40,000 increase in value.
Regards,
Christopher.P.S. Would the 20K of reno costs be added at the start thus increasing my LVR and pushing my LMI up heaps??
I have been looking on realestate.com.au at lots of properties, and the properties that are about $220,000 havea tenant in them paying about 290-300 on average(and I'm pretty sure that they are not recently renovated ones, I don't know, I don't want to seem to absolute best case scenario like, I should be worst case scenario, Is that what I am??If you are considering not selling in the near future, and because the rents are as high as you say, then it may not be worth doing an immediate reno, unless you are positive it can improve the returns even further. This will improve the cashflow, reduce the LMI and the interest payments, improve the LVR which is a better position from a safety aspect.
It may be better to leave the property as it is (if it is already tenanted) until the tenants decide to move out, or wait until you are a bit more established and then offer to do the reno while the tenant is still there, then increase the rent slightly and get the place revalued for further cap gain hopefully.
Renos are fickle; depending on the area, the type of property and the extent of the renos, sometimes you will only improve the value of the property by the cost of the reno, so it is a waste of an exercise.
The indicator will be what the similar renovated properties in the area are selling and renting for. This will give you an idea whether or not the reno will be worthwhile right now.
Thank you Marc, your perspective has given me something to think about.
If I can get early access to the property I could do minor reno, e.g. paint. Then move in a tenant.
This will make me a buy and hold investor, I don't like the sound of that, but if moving into a house and doing a 6 month reno and not really guaranteeing the returns i'm after its just to much work.
Also I just thought that if I buy the house and reno it then all the buying costs are non-tax deductable.
With an IP(Buy and tenant straightaway) are all the associated costs tax deductable so my 6% allowed for closing costs I get all(6%) of part(tax rate) of it back via tax deductions.So lower LMI, no added costs for reno(and risk of reno), no added costs for holding, tax deductability of loan.
I'm really swaying over to this side of things now, The reno is just not making financial sense. I will have to re-research the market rents, and crunch some further numbers to compare.
Thanks again,
Chris.I love crunching numbers. I have a calculator sitting next to me at home. The wife thinks ive lost it. Ill see a property and go through a bunch of WHAT IFS. Seing if its viable or what a reno will do. It helps hone your skills i think.
Dear Investors,
It is possible to achieve returns of up to 10% and 15% here in Australia and returns up to 25% overseas. Also are achieveable are growth up 25% to 75% growth per quarter providing you are able to negotiate heavily and are buying in the right area at the right time.
Kind Regards,
Mark Leith
Property Advocate
Global Buyers Agent
http://www.buyersagent.com.audevo76 wrote:I love crunching numbers. I have a calculator sitting next to me at home. The wife thinks ive lost it. Ill see a property and go through a bunch of WHAT IFS. Seing if its viable or what a reno will do. It helps hone your skills i think.We are very similar, I have my calculator sitting next to me too, I love crunching numbers.
Chris.
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