Hello All,
I’m new to this property investing game, and have been reading the forum posts for a while with great interest.
My basic understanding is that the technique being promoted by Steve (and others) involves purchasing properties that provide a small positive cash flow each month. Sounds good.
But my question is this – if a property is returning a small amount each month, surely it only takes one hefty repair bill (hot water system, airconditioner replacement, leaky pipes, new roof etc) or an unforeseen period of vacancy before the attractive mathematics are turned on their head.
If such an event occurs it could well be years before such a property becomes cash flow positive again.
I know you can insure against most things, but not all.
It strikes me that this risk makes the whole process rather less attractive .. or am I missing something?Cheers,
EquitybuilderHi Equitybuilder,
The cash flow is calculated after making provisions for repairs. The amount of provision for repairs depends on the age and condition of the property. I like to make a provision of 5% of rent for such repairs. And as you said, the risk of any major problem is covered through insurance.
regards
Sanjiv
******“There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living.†– Nelson Mandela
I am not sure Steve is promoting that you buy any old property just because it is cashflow +ve by a small amount.
I agree it is a dangerous thing to do. I’ve seen some of my clients fall into this trap – buying a old property in whoop whoop and then the hotwater system goes = negative geared!
Terryw
Discover Home Loans
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
A basic guide I use to work out the cashflow on a property is to allow for 20% of the rent to be eaten up each year in costs. This is an average, and some properties in some years will be way below or slightly above this figure.
Overall, my properties are below this figure.The costs I include are;
1. management fees
2. 4 weeks vacancy
3. rates, body corp
4. insurances
5. repairs/maintenanceIf the nett rent plus the tax deductions are more than the interest, then the property is pos cashflow after tax. I don’t have to worry about a blown up dishwashing machine or a/c as it is covered in the calculations before I buy.
Add to this some consistent debt reduction as you go, and re-invest any profits (tax returns) in to the Investment Loan, and you will be quite safe.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
Thanks for your replies – appreciated.
The 20% figure makes a lot of sense. I’ll be using that as a basic part of any “number crunching” I’m doing on prospective properties.Cheers,
Equitybuilder
I would take 30% as a more reasonable figure. Better to be safe than broke.
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