working out positive cashflow on a prope

Hi all,

I'm getting closer to being able to apply for my first ip and I just have a question that I would like answered so I know exactly how to work out if an ip is positive or negative cashflow. My aim is to purchase property with positive cashflow with an upside for growth.

What do I have to factor in when working out if a property is positive cashflow? Eg repayments, strata if buying a unit or townhouse, landlord insurance, property manager fees etc

What would be the minimum yield I should be looking for to have a positive cashflow property?

Is there a thread on here that I would be able to find out this info or would anyone mind sharing the info with me?

I'm hoping to get a good valuation on my ppor which will hopefully allow me to buy 2 properties to a budget of $350k each.

Thanks in advance

 

The simplest way to work it out is if the income from the property is greater than the expenses, it will be positive.
All property types are different, so there is no certain yield which will say whether positive or not.
You can be slightly negative, but positive after tax deductions, depreciation being a major one.

Personally, my preference is to be slightly negative to neutral cash flow, but considerably positive after deductions.
I think that position will allow the best compromise and allow more premium properties for capital growth.

 

What are all the expenses I need to factor in?

 

Prop value
Rent assume 80% or even 90% to allow for vacancies

Loan amount
interest
Pm fees %
Council rates
Water/sewer
Insurance landlord and house
maintenance and repairs (allow 1-2k for unforeseen things)

 

Thanks bob. That was more what I was after in regards to info.

 

Now time to research and find an area to buy in.

 

Look for 6+ to start searching

 

One thing I recently realised is that whether a certain property is cash flow positive at a particular yield really depends on the price you pay. For example a $200,000 unit in a regional area with a yield of 6% might struggle to be cash flow positive as there is less of a cash in hand difference between your mortgage payments and rent and the maintenance, rates, insurance etc isn't that dissimilar to a $600,000 house which would have a larger difference between mortgage payments and rent and thus more actual cash in hand to get the 6% yield figure. So you probably would be cash-flow positive if you could find one at say 5.5% in a higher price range in say Sydney... Maybe, I didn't run the numbers and no idea if such a thing exists in Sydney. But it illustrates my point

In any event 6% is a good place to start, it's the magic number I worked off to try and hunt down a cash flow positive property recently

 

I was just mulling over the Perth map in the Investment section of RE.com.au, looking at rental yield. 6% just knocked off all areas in Perth metro

 

Toodyay has 6.2% yield, @bob shovel

But growth of -3.1%

 

Yeh, you generally have to go regional to get that kind of yield. I purchased in an area of Ballarat with a median yield of 5.5% worked out what I would need to offer on a tenanted property to get a 6% yield and CF+ and offer was accepted.

I believe Carlton in Melbourne has median yields in the 6%+ range

 

Airbnb or similar would be the go in toodyay. All the city slickers come out on their motor bikes for the weekend and there is always an event or festival type thing. I'll look more in a few weeks, it's a very proactive community.
Northam has 7% yield but the vacancy rate is high. But bunnings is rumoured and dome has just bought a pub. Plus hospital upgrade 20 of mil. Lots of positive but i still wouldn't touch the place however, all the gear no idea!

 

Income verses expense with consideration to tax deductions basically covers the cash flow position. It's not as easy as that to work out though.

Here's a very basic rule of thumb:

*** Take 70% of the annual rental income. This is roughly how much rent you might get after other holding costs.

*** Compare this to how much the interest repayments are on 105% of the purchase price.

*** Ignore the tax deductions, they just complicate it. Treat the tax refund as a bonus at the end of the year.

The immediate cash flow position is important, but what's more important is how you anticipate this property will perform over the longer term. Both rental increases and value increases need to be considered in this.

 

This would pretty much apply to all cap Cities, and pretty much all of the time, and pretty much always has been...

Unless you are putting in a sizeable amount of cash into the purchase.

 

This calculator might be useful for calculating cashflows:
http://www.yourmortgage.com.au/calculators/can_i_afford_investment_property/

It may be easy to find cashflow positive properties due to current low interest, you may want to take into account for future rate rise.

 

Hence interstate

 

That's a very useful insight, @Bayview

Thanks.

Do you use any rule of thumb for yield in capital cities?

 

So how would you do that? Are there proven methods to anticipate long term performance? Can past performance be used to predict the future?

 

Generally, and historically, cap cities revert to around 5.2% yield.

Currently, due to the combo of recent boom and very stagnant wage increases over the past few years, hence the rents haven't gone up much; the yields have gotten even worse.

But, when the boom ends, the wages creep up a bit, the yield will return to the usual crap amount....unless of course you ask a real estate agent and ask their opinion about the yield - always good, in their opinion.

 

Brian, do up a simple spreadsheet in Excel. Add in all the known expenses. Make sure you find out things like Council Rates, as they vary a HUGE amount from Council to Council. I have a column for each expense, so you can do the numbers on several properties at a time. I calculate the rental yield on 50 weeks per year, and allocate around $1k for maintenance. Of course, this could rise or fall depending on the quality of the property, but as an average, I don't tend to spend more than this amount. I don't count things like depreciation, as that's just a bonus. Make sure you do your homework in regards to the rent return