A post for newer investors

I was doing my tax this weekend which forced me to have a look at the income and expenditure of my two investment properties. Even with one of them vacant for around 3 months last financial year they are both cash flow positive.



If they both stay fully occupied this financial year the nett income before tax should be around $14k.

I've owned one since 2010 and the other since 2014. The 2010 property has increased in value by 60% and the 2014 property by 44%.

This year has been a challenging one for me in a few ways. The extended vacancy was one challenge but now reflecting on the above figures I realise my properties aren't going that bad.

So what's the point of this post? For any new investors who have no idea what they are doing rest assured that was/is me. I'm definitely no expert - after 10 years I don't even own that much property. I've never had a strategy beyond I've read online other people have made money in real estate so maybe I can too. I've never had a mentor beyond Somersoft and PropertyChat. On a couple of occasions I've made substantial mistakes. And yet here I am making some extra cash and capital gains as well.

If you're like me it'll be several years before you start making money. It'll probably be even longer before you start thinking strategies. If I have any advice it's just get started.

 

You're doing alright Monty.

 

Here here! When the experienced investors started, they too didn't know anything. You have to start.

 

That's nice to read! Thanks Monty.
I'm just starting and getting to the research part of finding the first IP, and it's quiet overwhelming.

 

Do the expenses include non-cashflow deductions like depreciation ?

Reason I say this is depreciation doesnt impact cashflow but reduces (taxable) income...That is the income subject to tax. Depreciation should always be chased as its a free kick and helps cashflow. Sort of.

Other issue in this is that tax may be a cashflow impact...Whaaaaat ?
1. A tax loss (ie after depreciation) may increase a tax loss. Bigger refund. More cashflow
2. +Ve income may add to taxable income. And mean more tax. A cashflow killer especially if there is a PAYG instalment

The other issue is that the owners marginal tax rate may be a issue. eg a property owned 50/50. What happens if one owner has zero income ?? If someone is on a high marginal tax rate then positive cashflow and income may be very costly. A different structure or purchase decision should be considered.

We allow for these things in our property estimator - A tool to model tax issues and cashflow
We also include a portfolio version in another of our client tools in our new client pack. It acts as a monthly summary of income and expenses and also looks at the portfolio and some overall dashboard data.

 

The expenses don't include depreciation. They are solely what I've paid out. I.e. the expenditure in the I+E statement from the property managers plus any bills I've paid out of my own pocket.

I've got a depreciation schedule for both properties and that is something my accountant will apply when the tax return is lodged.

 

This is actually very good advice Monty. (the bit about being patient and getting started)

 

Well done Monty and great advice and motivation for others!

 

Good to hear all types of invesment journeys (not just the people with 23490324 properties!). I'm getting towards where you are, just bought my second, looking into third. It's negative geared (Melbourne) but doesn't affect my living expenses at all.

 

More tax but you're still earning more after tax right? Except from my rough calculations when the medicare levy surcharge kicks in at certain income levels

 

Nice post

3 month vacancy, was this regional???

 

Great post monty and reminder that taking action is still the most important part of investing.

 

You can sit on the shore looking at the water forever, or, you can dive in and feel how exhilarating it is. It's not rocket science.
Well done Monty. Good post!

 

No it was metro. I changed managers during that time and I obstinitley refused pets. I was told by both the original and new managers that the rental market was slow so that probably had something to do with it as well. Hopefully the tenant in there now is long term but in the future I'll probably allow pets again.

 

That's part of the reason I made this post. Property investing is part of my life...but only a part. I can go months without thinking about property. Sometimes - for a two or three months - it's the major part of my life. It's always bubbling away in the background though and over time it can start paying off even for a "part-timer" like me.
I'm now starting to think about how I can accelerate my retirement (which I never did in the past) and I'm glad I started 10 investing years ago. In other words I never thought about strategies in the past but I'm now glad that didn't stop me getting started.

 

Excellent result!

 

Awesome post! Thank you for sharing

 

Property investment is a funny experience to me. I bought in regionals in the beginning, cashflow positive, but with high interest rates and low appreciation rates, I was out of pocket much and with little appreciation, the marginal positive cashflow got eaten into quickly once you have vacancies and maintenance. That was when Australia had the greatest Treasurer who believed we needed to have a recession!

Then I left property for a while and returned to it many years later, that was when everyone believed in printing money, aka QE. Property prices skyrocketed. Of course the China factor, the Chinese just keep pumping money into Australia through various investments. I also started to venture beyond the Big Island. Some of the most rewarding investments found beyond the ocean.

My point is: It depends on one's experience in property investment. But over the long-haul, it is unusual for property to loose a major % of its value unless it is in a war-torn area or going through major havocs. But make sure you buy in high demand areas targeting investment grade stocks. Last but not least, have enough reserve to weather through the winter of property cycles. You don't know when they come but they come unexpectedly, and can stay longer than you wish.

 

Well done, spot on, RE game is not just about a property, there is a difference many don't understand (I didn't when I started out).
As you point out everything is about a number and should be precise, you just demonstrated that, there is only truth in numbers.
But most of all it is about ACTION, taking that very first step!
So for you it is about two simple words: numbers and repetition.
For me three simple words: numbers, strategy, repetition... then you can truly leap!
I remember when I did the interview at Somersoft many years ago 'The MIW Interview', I was asked:
If a budding property investor asked "what are the top 5 things I should do", you would say?
I said:
1. Start now and overcome your fear (Do not procrastinate)!
2. Establish end-mindset (Your goal)!
3. Follow a system (Your investment strategy plan)!
4. Repeat the system!
5. Anything illegal and morally unjust!

 

Do the expenses include capital items that you depreciate ?

Reason I say this is capital items affect cashflow ( over the period of write off ie the capital item will equal the depreciation ) but the timing to (taxable) income differs. Items that depreciate should be avoided if they do not generate more income than the cost as its a expense that reduces cashflow.
(I have avoided depreciating assets by only buying only the Lessors interest)