Hi All,
I'm trying to work out my net position of a property investment. Please let me know your thoughts on my calculations or if you have any tips/suggestions.
Property value = 600k
IO loan = 480k (80%)
Expected Rent per annum: $22,080 (480 per week at 4% yield)
Expected Expenses per annum: $44,100 ($36,000 loan repayments + $$8,100 for strata, management fees, insurance and maintenance).Gross Margin: -$22,020
This amount is tax deductable so I will be saving tax of 22,020 x 0.38 (tax rate) = $8,368
Therefore my Net Position is -22,020 + 8368 = -$13,642
Is this the right way of determing suitable investments and its total cost per year?
As a general rule of investment, you exclude the effects of tax and interest.
Please explain? How do you exclude interest when interest repayments are one of the biggest factors in property? Similar to tax
I think what IP Freely is saying applies to comparing investments. Work out whether the investment is a good one or not (and compare to others) first and then work out whether it works for you personally regarding holding costs and cash flow.
For example a large propoerty in South Hedland may return 10% ROI and is therefore a good investment but if you haven't got the money to buy it or have to borrow so much that it wipes out the rental then maybe things change.
However that doesn't mean the property is a bad investment.
I'm a newbie though so could be way off the mark here…
thommo
Appreciate that.
But back to my original question, any thoughts on my method for calculations? What do people do differently?
G’day Brunowa,
I had a quick look at your figures and have the following feedback for you:
* You’ve calculated your rent per annum at $480 per week for only 46 weeks of the year (your annual rent is stated as $22,080 which is 46 x $480). Is this reasonable? What are the vacancy rates like in the area?
* You’ve used an interest rate of 7.5% on your loan of $480,000. Do you think this is wise considering interest rates are tipped to go up again? I personally think it’s worth factoring in a few interest rate rises. Call be pessimistic, but right now I’m doing all my calculations with 9.5% interest rates. I figure if a property looks ok at 9.5% then it’s ok! You don’t want to be caught short if interest rates start pushing upwards and upwards…
Apart from that, your basic method looks find.
Hope this helps!
Cheers,
DenThanks Den,
Appreciate your response. The vacancy rates and interest rates can be easily altered to identify different scenarios..
I was more hoping to get a feel for the methodology I am using in working out whether an investment is worthwhile and that my method of calculating the tax deductions and net position is correct.
Hey Brunowa,
Your basic methodology seems OK. It should give you a reasonable result.
Good luck!
Den
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