Hi!
I am in need of some help! Be kind i am still a greeny!
I think i have found a first investment property that i am interested in, however i just need help crunching some of the figures to make sure that this property is worthwhile or if i am on the right track. I am trying to find a positive cash flow property.
Property: Frenchville,QLD 3×1
Asking Price: 299,000
Deposit: 80,000
Rental Market: 310-330 (i’m working off 310 to underestimate)16,120/219,000×100=7.3% rental yield
annual rent: 16,120
rental management 9%: 1,450
Interest on loan 5%: 10,950
rates/insurance: 4,000Does this make the property negatively geared by -280? and if so how can the rental yield be 7.3% or perhaps that’s because it doesn’t factor in rates and other costs?
Help! am i doing this right? Should i also be factoring in other costs?
Hi JB,
Welcome to this good place !! My first question is “Where is Frenchville?” I am from SEQ, and have never heard of it – I suspect this place might be further North, or West?
Does this make the property negatively geared by -280? and if so how can the rental yield be 7.3% or perhaps that’s because it doesn’t factor in rates and other costs?
Help! am i doing this right? Should i also be factoring in other costs?
The yield shows 7.3% as you are discounting that large amount you put in as a Deposit (almost like it didn’t cost you anything to put it into the deal).
When calculating Yields, use the Purchase Price not the Mortgage as the denominator. Thus – 161120/299000×100 = 5.4% yield
Good work taking the lower expected rent. Had you not done that, I would have suggested dropping a couple of weeks rent off each year as “possible vacancy”.
Using the lower rent works though – shows you are being conservative/realistic – well done !!
The figure of $4000/year for Rates/Ins sounds reasonable to me (again, depending on where Frenchville is). Maybe a bit of Maintenance is rolled up in that too? And you are right, JB – the rates etc show up AFTER you have calculated the Yield. So even if a Yield is better than the Mortgage Interest you are to pay, it still may not be enough to cover the Rates/Ins/Maint/etc and still leave a positive cashflow.
I presume this is a house, as you don’t mention any Body Corp costs (?) Hope that helps,
Benny
Hi JB,
I just checked for myself and found that Frenchville is a (new?) suburb of Rockhampton. Since the map shows Frenchville as having lots of land to the East, and few roads, I am wondering if this is an OTP (Off the Plan) sale, or a brand new house in a new subdivision. If so, you will be buying a “solution” instead of a “problem”. That is OK, and works well for many (especially home buyers) but it doesn’t help investors a whole lot usually. Why?Well, first and foremost you will be paying top dollar for an item that has all of the developer’s “margin” built into the cost. Similarly to buying a new car, a lot of its value disappears the moment you drive it off the car sales yard. Often the infrastructure is not yet in place – schools, shops, transport, etc and it could be YEARS before you see much Equity growth, especially if there is still lots of usable land nearby.
Steve says “Buy problems, and Sell solutions” yourself – buy an existing house that needs work, do that work, and reap the rewards. Or, if buying new, find a developer who is wanting to sell “the last house in a development” at a big discount – it helps him, and you. He can then move on to his next development without having to come back to sell the last lots of this one.
Have a good “read around” on here – especially the Articles in the Training Centre (middle of home page on the right – scroll down to get to the middle) – or check out the “Buying” part of the Training Centre here:-
https://www.propertyinvesting.com/buy/If you were thinking of buying a new house from a developer, do check THIS out first (a harsh title, but with good reason…):-
https://www.propertyinvesting.com/buying-investment-property-off-plan-dumb/Hope this helps,
BennyGreat replies from Benny.
I would just add that the reason you calculate the yield on the purchase price (or even, better yet, on the actual cost price which is the purchase price + the purchasing costs = about 5% higher) is that the deposit and associated costs are coming from another property (not true for first property you buy, but it is afterwards) as that money would have been offsetting that loan and instead it’s being used to buy the new property.
Ethan Timor | Aligned Finance Pty Ltd
http://www.alignedfinance.com.au/
Email Me | Phone MeActive Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)
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