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What would you budget as a % for fees and costs of owning an IP?

Discussion in 'Repairs & Maintenance' started by Dan Donoghue, 18th Aug, 2016.

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  1. Dan Donoghue

    Dan Donoghue Well-Known Member

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    So as many of you know, I am so so close now to getting out the starting blocks (3 weeks yesterday till i'm fixed and then it's no holds barred).

    As most of you also probably know I have been playing around in Excel for a VERY long time building a model I can use for investment analysis.

    I have set it up so I can plug in certain variables and see it change instantly. For example:

    I have my yield set to 4.55%, my tax set to 33% and my costs set to 17.5%.

    This is where I get confused. I mean my yield I manipulate to see what yield I "need" to get my figures around where I want them so i understand that and my tax.... well not much I can do about that but my costs. This is to show the cost of a PM, repairs, vacated periods and any other fees that come with owning an IP.

    The problem is I don't and have never owned an IP so I am sort of pulling that number out of my bum.

    For those of you who have done similar analysis. What is a percentage that you generally deem as an acceptable amount to budget for the cost of owning an IP?

    Once I have this I think I have the full picture, I might upload a copy of my model and get you guys to check it out for me, always good to have experienced eyes cast over things like this.
     
  2. bob shovel

    bob shovel Well-Known Member

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  3. D.T.

    D.T. Specialist Property Manager Business Member

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    25 - 30% costs, excluding interest
     
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  4. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Bugger, I under budgeted quite a bit there.

    @30% it pushes my yield out to 6%, too high, I may need to scale back my operation a little.

    If I knock the value back and increase the number I can balance a 5% yield with 30% for associated costs.

    Basically what I am trying to use as my boundary is we currently pay $3,200 more than the scheduled payment of our mortgage (Goes into an offset account then the scheduled payment is drawn from this) I am trying to do the maximum investment without having to kick in more than that magic $3,200 a month.

    Alternatively, if I kick in a little bit more (pushing the $3,200 to $5,000 which is easily doable) I can stick with my original plan and balance out a bit with a range of values and keep the yield at 4.4% which in my mind is much more achievable.

    As usual, I walk away from here feeling more knowledgeable but with more questions lol.

    Thanks for your help guys :).
     
  5. Barny

    Barny Well-Known Member

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    Near 20% for new build houses. 30% for houses slightly older up to 20 years old.
    I have ranged this over 4 investment houses in different states and I usually stick to 30%.

    Works like this.

    Say you rent for 300/week. 300x52=15600-30%=10920 clear.
    This takes all costs, agent fees, vacancy, repairs, insurances, rates etc etc.
     
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  6. joel

    joel Well-Known Member

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    6% yield usually equates to a neutrally geared property, give or take
     
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  7. Dan Donoghue

    Dan Donoghue Well-Known Member

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    And with regards to tax on the rent (as it's an income). Is it calculated at the end of the year and paid then or does it get paid by the agent who gets the rent?

    Do I pay tax on the Gross or the Nett rent?

    For example. Fred pays me $100 in rent. I pay 33% tax, and 30% in associated costs. Do I pay 30% in my costs first then 33% tax on the remaining 70% ie $23.1 OR do I pay $30 in costs, $33 in tax and end up with $37 towards the IO loan?
     
  8. eskander

    eskander Well-Known Member

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    All your costs inc interest come out before you pay any tax. Then if there's a profit you pay tax, if there's a loss you claim a loss and have a tax refund. Feel free to correct me if I'm wrong anyone :)
     
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  9. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Banks use a benchmark of 20% as they shade rental income at 80% of actual rent collected.

    So suggestions of between 20-30% is reasonable.
     
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  10. JacM

    JacM VIC Buyer's Agent - Melb N & W, Geelong, Ballarat Business Member

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    Depends on how hefty insurance and council rates are, but generally 30% is a very comfortable figure that factors in all your bills, 2 week per annum vacancy, and 3% maintenance.
     
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  11. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Thanks guys, the tax info has brought my figures back to my desired benchmark, if I can achieve 5% yield on the number and value of properties I want, it will cost me $73.65 per month more than I am currently paying :).

    Now to start modeling the impact of increase payments to see when that will allow for further purchases without an impact :).
     
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  12. MD90

    MD90 Member

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    Hi Dan,
    how did you go with your model?
    Do you mind sharing?
    Cheers
     
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  13. Dan Donoghue

    Dan Donoghue Well-Known Member

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    Didn't end up doing the model, I got tied up on another personal project I am working on (not investment related).

    I did buy an IP and it ended up post tax return costing me $400 a month more than my old mortgage repayment (which was only $850pm so went to $1250pm).

    Then we went and turned everything upside down and decided to turn the IP into a PPOR, we move up there in 12 weeks and 6 days (but who's counting ;)).

    We will be selling off the existing PPOR (townhouse) then reinvesting into a house in the same area with a back yard big enough for me to granny flat and dual occ.

    Plenty of plans for the future, to be honest I am less focused on working out things to the cent now as I realise you simply can't know what's going to happen, what if you place is vacant, what if your tenants offer more than you advertise for (yes this actually happened to me, we listed at 800pw and they offered 825pw). This brought my yield in at 5.1% which I am very happy with.

    I have a rough idea now of what we can and can't do financially and I have a "rough" idea how much debt I can comfortably take on (accounted for interest rates to move towards 8% in my calculation) other than that, I don't get too hung up on the figures anymore.

    Maybe in the future I will build a model for the technical fun of building it who knows :).

    The interesting thing though is my next IP purchases will be approached differently, I will have a bit more confidence in what I am doing and won't spend so much time running figures and projections (ultimately I started getting analysis paralysis from doing this last time)
     
  14. MD90

    MD90 Member

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    I am looking at my first - I have hit the point of analysis paralysis and have more or less told myself to make the call and commit as my gut is saying yes (and I know subconsciously that I have done the requisite work) OR walk away and give it another month to see if I can reapproach in a more considered manner
     
  15. Dan Donoghue

    Dan Donoghue Well-Known Member

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    It comes down to if you are comfortable with it, if it's affordable without putting strain on you then you have your answer, if it rings real alarm bells then there is the other answer :).
     
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