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QLD Cashflow strategy recommendations?

Discussion in 'Where to Buy' started by hash_investor, 8th Jul, 2016.

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  1. hash_investor

    hash_investor Well-Known Member

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    I am working on a few different high cashflow strategies and looking for opinions from others who have executed something similar. I don't have anything concrete yet its still under progress so let me know how can I improve it please. One of the possible strategies I can think of is buying dual occ properties where its relatively easy to rent and vacancy rate is low enough. So for instance

    Equity available: 450K
    Purchase price: 500K
    Deposit: 100K
    Property (example only)
    3 Coppin Street West Kallangur Qld 4503 - House for Sale #122680022 - realestate.com.au

    This one is generating 650 p/w at the moment which is roughly about AUD800 p/m after expenses in +cf. An equity worth 450K can buy probably 4x properties like this one which is AUD 3200 p/m.

    What is you opinion about this utilization of 450K equity if focus is solely on cf?
     
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  2. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Pending your serviceability...

    I'd look at using the $450k more strategically than that and renovate for cashflow while aiming to increase value too.

    If you buy stuff and renovate/reconfigure..

    e.g.
    • Buy at $300k
    • Reno for $30-$40k
    • Rent for $450-500/wk
    Not only will you have similar, if not better cashflow (depreciation on reno will be a big boost) but you'll add value (increasing equity) and ideally be able to pull more cash out than you spent on the reno, thus:
    • Increasing equity
    • Improving your cashflow
    • Allowing you to recycle equity
    I have a bunch of clients doing these kind of deals.

    Oh, when I say reno, I don't mean yourself. Pay others :)
     
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  3. John Bone

    John Bone Well-Known Member

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    I am not sure how you do your numbers but a $500k purchase with rent at $650pw is neutral at a 5% interest rate, not $800pm positive.
    My calculations include provisions for all expenses and a allowance for vacancy and maintenance.
     
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  4. Coastal

    Coastal Well-Known Member

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    What would the post te no value be
     
  5. hash_investor

    hash_investor Well-Known Member

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    Here is an example calculation

    Interest Rates: 4.09
    Purchase Price: 500000
    Body Corp / B+LL: 1500 p/year
    Council Rates: 1533.4 p/y
    Water: 2000 p/y
    Gross Rent: 655
    Management Fee: 50.435 p/w
    Net Rent: 604.565
    Downpayment (20%): 100000
    Price after downpayment: 400000
    Gross Yield: 31437.38
    Net Yield: 26403.98 (Net Rent - Expenses)
    Net Yield (p/m): 2200.331667
    Loan installment (p/m): 1363.333333
    Net Income (p/m): 836.9983333

    I agree I am not factoring in the vacancy and maintenance. This is because I am looking at newer blocks.
     
  6. wobbycarly

    wobbycarly Well-Known Member

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    You need to throw in stamp duty, too, onto your purchase price. There is also the "opportunity cost" of the $100k. eg, where does that come from? If from equity, then you need to pay interest on that.
     
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  7. John Bone

    John Bone Well-Known Member

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    I agree with Wobbycarly, you need to calculate interest on the total cost, not just the bank loans. Also add legals and conveyancing to the stamp duty. There is also no mention of Insurance and Accounting fees in your expenses. If you are buying in a trust (and you should be) there is the cost of set up and the annual compliance fees to add to your outgoings.
    Regardless of whether it is a new property or not the average tenancy in Australia is 24 months. Assuming a one month delay in placing a new tenant you will receive 24 months income in every 25 months. There is also a tenant change over cost and tenant placement fees to consider.
    Also, maintenance is inevitable even in a new property and the cost will increase over time.

    I use a simple calculation and I call it the "Rule of 39". Multiply the gross rent by 39, divide by the purchase price (do not add costs or stamp duty), and multiple by 100. That will give you your return (EBITDA) as a percentage. Then deduct the interest rate and you have a percentage of your purchase price that will be your net income.

    I stand by my calculations, this is a neutral investment at best. However that does not mean it is a bad deal because growth may be above CPI and an estimate of growth needs to be added to the equation.
     
    Last edited: 10th Jul, 2016
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  8. Beano

    Beano Well-Known Member

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    1
    100pc agree with you
     
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  9. Beano

    Beano Well-Known Member

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    Well said !
    So rule of 39 allows 13 weeks to cover costs and vacancies?
     
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  10. John Bone

    John Bone Well-Known Member

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    Correct! The average outgoings are 25% of Gross Income and 25% of 52 is 13 weeks ( or 39 weeks income you get to keep). The calculation also takes into consideration the purchase costs such as stamp duty.
    It is not a calculation that I would use as a basis for any financial decisions but it is a quick way to avoid doing a lot of research on properties that may not work from the outset.
    It does not work on properties like student accommodation or rent by the room where the cost base is different.
     
  11. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Depends on the valuer and how well you pull off the reno. My clients are typically seeing $1.5-$2 of value added for every $1 spent.
     
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  12. hash_investor

    hash_investor Well-Known Member

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    seems to be about right. The cost is covered with 7.5 weeks. The rest is for vacancies I guess
     
  13. ashish1137

    ashish1137 Well-Known Member

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    Hi @John Bone ,

    This is interesting figure. May i know if this is documented somewhere or you came by yourself?

    At a very high level if i figure out, my first property that is yet to settle stands like this:
    1280 per year which is approx. 100 per month excluding depriciation. Which is not too bad. Effectively that is
    5% (approx) net return per year excluding depriciation on the actual deposit cost as well.

    Regards
     
  14. John Bone

    John Bone Well-Known Member

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    ashish1137,
    It is my own calculation although it was derived from an even simpler one and that is called the rule of 2. For this rule you divide the purchase price by 1000 and multiply the result by 2. The answer is the amount of rent you need to get per week to be cash flow neutral. Unfortunately this calculation only works when the interest rate is 7.8% so I set out to do the calculation in reverse and get the % return rather that the $ return. I did this mainly because I was going to the US and wanted a simple calculation that would work in their market (I failed).
    As a general rule I am more inclined to use the rule of 2 for long term investments simply because it is a serious financial mistake to expect interest rates to remain as low as they are at the moment. The long term average interest rate is 7.6% so if an investment does not work at that rate, then as far as I am concerned, it does not work.
     
  15. Beano

    Beano Well-Known Member

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    Yes I agree for planning long term interest rates need to set higher and yes 7.6pc seems reasonable
    Athough we have probably got a 3yr window to reduce debt before interest rate look like rising
    So reducing debt in this period seems like a wise idea
    There seems to be no shortcut in seeing if a investment will be viable
    Calculating net yields still seems to be ny best guide!
     
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  16. ashish1137

    ashish1137 Well-Known Member

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    That number is by far the most unachievable thing. :eek: dont u just calculate 5% which approx. Comes to xxx rent per week for xxx000 value of property?

    Even if it is 7.5%, you would have xxx*1.5 = per week rent.

    Regards
     
  17. John Bone

    John Bone Well-Known Member

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    Beano
    I do not agree with the notion of paying down debt when interest rates are low and the property is cash flow positive (I would not invest in a negatively geared property). You may be paying down debt but you are also paying down your cash flow. The cost of funds is all you save by paying down debt and what you should be doing is putting the money into something that is also cash flow positive and earns more than the cost of funds.
     
  18. John Bone

    John Bone Well-Known Member

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    ashish1137
    I'm not sure I understand your calculation. If you are only getting a 5% return on investment then the property will be substantially negative after costs and expenses.
    You say that my numbers are unachievable but I deal with hundreds, if not thousands, of property investors who are achieving these numbers and better. It is true that it is difficult in our larger capital cities but it can be done with strategies like rent by the room (student accommodation etc), multiple tenancies on the one lot with granny flats (not in Victoria), Subdividing land to pay down debt (to increase yield only).
     
  19. LCT

    LCT Member

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    @John Bone
    Regarding the percentage of a property's purchase price that will be your net income, do you have a benchmark % you look for in deals?
     
  20. Sonamic

    Sonamic Well-Known Member

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    So by the rule of 2 a 400k purchase price has to generate $800 a week in rent to be neutral? I'm screwed.
     
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