Hi I have just finished reading the book and keen to get started. The idea is to access of equity in existing PPOR to fund an ip worth 200 to 350 k
what at I am struggling with is to understand how much return is sufficient to consider the property CF+ve. For example, there are quite a few units /flats that I have come across that either break even or return a few hundred dollars in the year based on assumptions you make. Is this sufficient return? I could easily put this money into bank stocks and make more on dividends. (To be fair I won't be able to gear so highly in the share market, but the question still stands)
as as an example here is a rough spreadsheet on a studio apartment. Is this what you would call a cf +ve property?
,,,
,,,
Price ,175000,,
Stamp duty,6125,,
Other cost,3000,,
Total purchase costs,184125,,
,,,
Interest only repayment,8469.75,,
Council,800,,
Rent ,11960 @230 pw
Strata,1600 @ 400 page
Agents fee,598,,
Repairs ,169.395,,
Insurance,200. (Have no idea just putting in a number – guidance appreciated)
Net,122.855,,
This property will net me $122. Technically it is cf+ve but in reality you just break even. Knowing the market these days, my question of the gurus on the forum is whether they would consider this a deal one should enter. If not how much rent would they expect from a 175k property?
regards,
majic.
The technicality is very slight.
I would tend to class this particular property type as geared to neutral with potential.
However it is deadly important to realise you are banking on the stability of those owner expenses for the longer term. People who gear neutral without accomodating movement in any ownership expenses or rates (allow a 2% buffer on rates at least) are just asking for trouble.
As I have previously stated .. a small reserve of about the equivalent of three months rent should be considered for any property you own (index it to inflationary pressure and present day rental too). Its that buffer that prevents a small hiccup in the market becoming an issue between you and any third party.
As to the actual property .. traditionally a studio apartment tends to be the poorer performer in most market conditions, with intermittent tenancy resulting in multiple property re-letting fees, making it a less attractive proposition to the investor who demands stability in his residual income.
Hence .. why it almost always attracts a significantly better return.
The best cashflow postive properties are the ones where the rents are significantly under market .. making it easy to work out what bringing it up to the current market rent will achieve (CHECK YOUR MARKET CONDITIONS – dont toss out a good underpaying tenancy in a dud market). Or a property where the presentation and value is hidden due to the current state of the presentation and overall condition of the place. These two options are usually the best way to achieve a GENUINE positive cashflow return.
The market for property is generally sound in what it knows. If there is a deal and it is significantly above the average rate, there is usually also a genuine reason for that.
But sometimes .. even the market and the agents can make a mistake in valuing what a property might be worth. Thats when you pick up your genuine GEM property deals.
Can you claim any deductions on depreciation
Can you claim any deduction from deductions on the IP?
My IP is currently negatively geared but has CP+ of around 2K a year but only after claiming deduction.
FYI I pay around $330 for house insurance (not content).
Thanks for all the comments. Yes this is a pre depn picture – one of the takeaways from the book being that if the deal becomes cf+ve after depn, then it's not really cf+
I guess the point I am making is that for the deal to be truly cash flow positive, this studio appt would have to rent for 300 and cost 175k. While that would be great, in the current market that is just wishful thinking.
Does that mean I wait until such a truly rare deal appears or is it better to be in with a marginally +ve deal, and hope for capital appreciation and inflation to kick in at some point.
(And yes xdrew, if I was going to do that, I should probably avoid a studio appt – the driver here was to look for a truly cf +ve deal, which this is not)
Majic .. you are at the wrong end of the market to chase the cashflow positive deal unless you are prepared to creative it from an unrealised potential.
You see .. cashflow positive properties are tough to find in a sellers market, easy to find in a slack market .. and near impossible to find in a boom market.
We are at a point where the weekly turnover at auction just hit 80%. Thats a boom market scenario. Not only is 4 in 5 properties selling .. they are achieving advanced expectations.
The important credentials for a property still apply. Just dont get too hesitant if you come across the right thing in this market .. as things get snapped up fast.
Do your due dilligence .. but quickly.
And always remember that a property must match the actual fundamental market requirements.
And rates have never been lower. Take advantage of that now if you can.
Hi Majic,
There is a difference between CF+ and what I'm assuming you're after, positively geared. As others have said before, to find a positively geared house is almost impossible. You can create them through reno's or development. But it would be hard to just find one as is unless you bought for way under market value.
I would suggest that you either wait for captial growth or add some precieved value to your IP to increase rent in order to become truely positively geared. Anything that is making you money is a plus though so you're on the right track
Regards,
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