Calculating Break-Even (Sub-leasing, HMO)

Discussion in 'Share Investing Strategies, Theories & Education' started by NHG, 2nd Apr, 2020.

Join Australia's most dynamic and respected property investment community
  1. NHG

    NHG Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    463
    Location:
    Sydney NSW
    Hi,

    Sharing a post I wrote on the Hi-Res (Ian Ugarte) page a couple of weeks back.
    May be useful for those not quite understanding their break-even.
    I wrote this to cater for sub-leasing, however it is important to understand your business / investments.
    Modify to suit whichever investment you are doing.

    Regards
    NHG.


    CALCULATING BREAK-EVEN

    After a few conversations, I've noticed a lot of people actually don't know how to do their break even calculations.

    However without diving deep into P&L, cash-flow statements, and balance sheets, here is my fairly accurate way of figuring out the numbers.

    eg.
    CALCULATIONS
    Number of rooms: 5
    Cost to establish: $15,000 (bond, furniture, fire-safety).

    In-comings (weekly):
    - $1,460 sub-lease rent (I usually break it down per room)
    Total: $1,460

    Out-goings (weekly):
    - $760 rent
    - $328 (elec, water, insurance, manager, etc)*.
    * $30 cleaner, $25 gardener.
    Total: $1,088

    ANALYSIS
    Now: Important numbers I look at.

    1. Profit: $1,460 - $1,088 = $372
    2. Profit per room: $372/5 = $74.40
    3. % on turnover: $372/$1,460 = 25.5%
    4. Payback time: $15,000/$372 = 9.3 months

    DISCUSSION

    This will give you an idea of how much you can reduce rent, how where you need to cut costs to increase your profit margin.

    Try the exercise again, this time cut out the $30 cleaner, and $25 gardener. % on turnover goes up to 29%.

    What is the right $, and % returns? That depends on you.
    Size of house doesn't matter. I recently leased 1 bedroom granny-flats (not air-bnb) that make 35%.
    Number 1-3 is important to determine your ability to withstand a recession, or hard times ahead. The play you have to reduce rents before hitting break-even.

    If you don't budget for a manager, even if self-managing, you will limit your ability to automise the business.

    Number 4 is important to determine how long it may take for you to recover and redeploy your funds. The longer it takes, it will limit the momentum of your growth.

    However a cheap setup, and low % on turnover will leave you exposed in tough times.

    There are other numbers to look at such as vacancy rates, however I would strongly recommend you at least have a basic idea of your resilience.

    When I get a phone call asking for a rent reduction, I can easily say $30, knowing it still leaves me $44.40 play in the room to withstand vacancies, and overheads such as accounting fees, etc.

    I also know which houses to drop first if I have to cut back, or where I need to prune my porfolio to keep it lean and mean.

    Hopefully not too technical, and for those that are all over this, hopefully not too simplistic.

    All the best.
     
    Leeroy93 likes this.
  2. Omnimaqq23

    Omnimaqq23 Member

    Joined:
    22nd Aug, 2019
    Posts:
    24
    Location:
    Sydney
    How do you calculate approx. expenses in estimating things like electricity and water? And what type of insurance do you need to get?