Hi
im fairly new to all this and im in the middle of reading steves book 0 -130 properties and i need a little help under standing how he calculates the cash on cash return?i get that cash flow recieved is the annual rent but im not sure what the net cash flow paid is?
i take it it's the loan repayments and agent fees but what other costs are involved?
also how can i calculate the nesessary cash needed part out as i've never taken a house loan before?
if someone could take the time to help me understand i'd greatly appreciate it as i'm not having much luck understanding this theory as i cant seem to find any positive properties in darwin using the 11 second rule. even though the adds say there an investors delight.
i dont mind if someone contacts me via msn
[email protected]
cheers
Council rates, landlord's insurance, repairs, accounting (tax returns, plus fees for maintaining Trust and corporate trustee if applicable), body corporate (if applicable), possibly excess water charges, etc. I budget on all costs apart from finance adding up to 2.5% of total value of property, or more (3-4%) if the property is valued under $300K. ie no less than about $7K per year on any property.
so it's safe to say that if i calculate the 4% of the purchase price this would be my annual cash flow expenses???????
Hi,
The cash-on-cash return formula is as follows:
(cash received – cash paid) / cash down
where:
cash received: rental and other income
cash paid: all cash costs, including capital loan repayments and excluding depreciation
cash down: deposit paid + purchase costs + finance costs etc + initial repairsA quick example for you to try:
$200,000 property bought with a 20% cash deposit.
Allow 5% for closing costs (paid cash)
Annual rent is $15,150.
Rental Management 7% of rent collected
Rates: $1,500
Interest: 8.5% interest only
Other cash costs: $2,500 per annum
Depreciation: $3,100 per annumBased on the above, what would be the cash-on-cash return?
Also, if ROI is net profit / asset value, what would be the ROI based on above?
Cheers,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
this is going to sound really dumb to some people but i dont even know what closing costs are? is this something your charged on a loan by the bank?
to be honest i dont really get were all this info fits in?
i understand cash recieved is
rental $15,150cash paid:
is this were the 5% closing cost comes in along with the 8.5% interest payment?cash down:
$40,000 depositwere does the deprecitation and other cash costs fit? and the agents 7%?
were do i put these?
i've never had a home loan before so i have never heard of most of these and i dont want to take a lucky guess as to where they should be and what they mean.thanks
AimeeAimee, I think if you allow 4% for annual expensees, that would be ample. This should cover everything except mortgage interest quite comfortably.
When Steve refers to "cash received" and "cash paid" he's talking about the ongoing costs that recur every year so your income and expenses. Cash received is rental income, cash paid is mortgage interest plus all those other costs you're allowing 4% for.
"Cash down" is how much of your own money you invested in the property when you bought it, as outlined by Steve above. This is the one-off injection of cash at the time you bought the property. The majority item is your deposit, but as you see Steve (wisely) also includes the other costs of purchasing the property. These "other costs" of purchasing, payable when you buy the property, are also called "closing costs". These are your legal fees, loan establishment fees, stamp duty, etc. A good rule of thumb for "cash down" is deposit plus 5% closing costs. So if you buy a $200K property with a $20K deposit, it'll probably cost you another $10K (5%) in costs (stamp duty, loan establishment fees, legal fees, etc). So your "cash down" would be $30K.
Warmest regards, Tracey in Brisbane
Closing or purchase costs are what you have to pay over and above the price of the property to finalise the deal.
A good rule of thumb is to allow 5-6% of the purchase price for this. For eg; $200k property; the closing costs will be around $12k maximum. This covers things like stamp duty, the solicitor's fees, adjustments for rates etc.
In normal circumstances, you would put in a 20% deposit, plus the closing costs, and the Bank will lend you 80% to finance the rest. But these days, you can borrow much more than the traditional 80% for the property.
So, on your $200k property, you are up for $40k deposit, plus $12k closing costs = $52k.
The Bank lends you the rest = $160k (80%). You would probably go for an interest only loan if it is an IP.
Once you have bought the property, you will have on-going costs such as the loan, and also the "holding costs" such as rates, insurance, repairs, property management fees.
As a guide, the holding costs will be up to 20% of the rent, and this includes 4 weeks vacancy. It is general, but if you use this figure, you won't under-estimate expenses.
So, if your rent is $250 per week, then expect that you will only get back on average $200 over 12 months. If you don't have a vacancy for a few years, then you are well ahead on the 20% figure.
Some people work on 15% of the rent. I like to over-estimate expenses, under-estimate income. Much safer.
The depreciation is a tax deduction, and you can call it income, but it isn't technically income; it's just tax saved on your earned income. It is an "on-paper" deduction; you don't physically pay any money from your own pocket to get this deduction.
Using Steve's example, here's a quick number crunch:
Cash in – $50k ($40k deposit plus $10k closing costs)
nett rent after all costs = $10,089.50 ($15,150 – $4,000 and 7% management)
depreciation = $ 3,100Total income = $13,185.50
interest on loan = $13,600 ($160,000 x 8.5%)
Nett cashflow = -$414.50
This is a C.O.C return of -.00829%
This is not a good example unfortunately, but the workings out are always the same basically.
Let's do it with a $300k property, loan interest @ 8% on 80% of property value.
You put in 20% cash deposit and closing costs. Rent is $350 p/w.Property = $315k (including 5% closing costs)
you pay: $75k cash (deposit + costs)
Bank loan is $240K @ 8% interest = $19,200 per year.Nett rent = $14,560 ($350 x 52 weeks – 20% holding costs)
Nett Cashflow = -$4,640 before tax. That's $89 per week approx out of your pocket.
Your tax return will cut this figure down a good amount.oh okay now it's starting to make some sense. lets see if i've got it yet.
the sell price is $140K
20% deposit 28K
loan amount 112K
likely rent $200 pw
loan repayments @ 8% are $8960 anually
20% holding costs are $2080 anually (this 20% of rent covers all costs like agent, tax & repairs yeah?)
cashflow recieved
rent $10,400minus ( – )cash flow paid
loan payments anually $8960
holding costs $2080=net cashflow
-$640net cash flow
-$640
/
cash needed
52 weeks= -$12 pw out of pocket
i hope this is right now i understand whats what and how to calculat holding expenses this seems quite easy. (i feel like im back at school LOL)
thanks heaps everyone for teaching me
in answer to steves Q about ROI
im not good at this but i'll give it a shot.net profit -$414.50 / asset value 200K = 2%?????????????????????????????
(if it's wrong please dont laugh lol i sucked at maths)
That's it; you've got it now.
Except you forgot to add the closing costs, and there will be a tax return as well.
Do it again and include the closing costs and a hypothetical (but probable) tax return of $2,500 (this is income).
This will give you a more accurate C.O.C.
The other thing to consider when assessing the success of the investment is the capital growth, The property most likely will go up, so let's work on 5% per year ($7k) which is probable.
So, after you do the formula including the closing costs and tax return (which gives you the cashflow) then include the cap growth.
This will give you the ROI (Return on Investment). Even though you physically don't have the cap growth in your pocket, it is still money that you have made.
It's a bit like Bill Gates who is worth billions; he doesn't actually have the money; it's in the value of the business, and the cashflow it gives him.
i added the 5% closing costs on the loan and did the sum again on scrap paper.
i'll keep pracitising.
also if you opt to have a tax return at the end of the year i shouldnt put it in the calculations should i as the cash flow per week would be out slighty?
or do you just add this in on general to get a quick i dea of the return?
and then the 5% capital growth estimateis it safe to say that a property close to the CBD or in radias of schools and shopping centre that it would go up in cap growth by 5% anually?
Aimee
If you opt to take the tax return at the end of year, then your weekly cashflow will be whatever is left over after the rent has been paid to you, and the loan interest and the holding costs have been deducted.
Some people like to get their tax return paid to them every week. This helps with the cashflow, but many people simply spend it on "stuff". Not good if you want to be financially free at an early age.
If you take it at the end of the year, it's money you didn't have, so you are (hopefully) more likely to use it towards some debt reduction on the loans.
You can arrange to have a variation to your tax witholding amount so you get your tax return each week. Talk to your employer about that, and you will be able to arrange it through your accountant.
With estimating cap growth; no-one can.
Except to say that historically, and on average, average residential property doubles in value every 7-10 years. That's an average of approx 11.5% per year if you go by 8.5 years. 5% is a fairly safe and conservative guess.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
