Hi All
There seems to be some confusion over what constitues a positively geared property. Some seem to think if it returns +ve cash at the end of a 10 yr financial analysis then that prooves it’s a +vely geared property…phwooeee. I believe to be positively geared it MUST be +ve from DAY ONE. eg Currently a 10yr fixed interest mortgage rate = 6.99% therefore net return must exceed this figure (including all costs, however one off costs I would amortised over 10yrs & use the offer price) eg for a property that can rent for say $300/wk and we expect is to be rented for 51weeks a year (I believe the major risk in this type of investment is rental return fluctuation & vacancy…most pronounced in small rural towns) gross rental = $15300pa. Taking out annual expenses, rates $1200, landlord and property insurance $1000, property management fees (2.5% + 2 weeks rent per year = $982.50, minor repairs $500, purchase costs 10yr amortised $420 = total gross rental is now $11197.50pa. To be +ve geared from DAY ONE the MAXIMUM you can pay for this property is $11197.50/0.0699 = $160193.13.
I know…I ‘ve completely missed incorporating any capital appreciation the way negative geared proponents would do, but then, if I can at all avoid it, I DON’T PARTICULARLY WANT TO HAVE TO FORK OUT EACH MONTH TO MAINTAIN AN INVESTMENT PROPERTY. It does not mean I’ve really missed it. It’s the whole reason I believe property is such an excellent investment. It’s just that for me (I’m just an average salary earner at the moment) to accumulate properties at a rate of more than 1 or 2 every 4 or 5 years (while I wait for the rents to increase or frantically and stressfully use other money to reduce the debt so I can start the process again with another negatively geared property)…I can only buy DAY ONE positively geared properties.
My search…so far to no avail…to find positively geared properties has only uncovered a few buyer agents who say they have got (but won’t tell me until I subscribe) or offer (sometimes for an extraordinarily high fee) to find me what I am looking for. Surely someone out there has gotten a hold of properties like this as my gut tells me they do exist…somewhere.
Ben Morris
Hello Ben,
I share you views for what it is worth, (positive from day ) and to be this means the rent received covers all out goings and mortgage.
From my limited experience but much reading here, its difficult to find positive cash flow, but not impossible, yes it’s a challenge, if it wasnt everyone would mutli what evers hehehe.
Ok city area’s generally have little scope for positive ( more capital growth ) country area’s more chance of positive ( less capital growth).
Of course you can put in a huge deposit to make it cash flow positive, but thats no fun and a waste of monies.
To answer you if I can, head rural, keep your head down and research, keep in contact with agents.
Cheers & good luck.
P.s I am in the process of purchasing first Commercial property, and yes positive cash flow ( about $180 aweek positive)
Hi Ben,
Im new to cash flow property, but am looking in Melb CBD. I have found if Im happy with being limited on capital gain and the potential buyers market, they can be found.eg. Hotel Room. Purchase price = 140,000. Financed 70% IO loan at 6.47% fixed. Lessee pays all outgoings and pays weekly rental of $230.
Cash Down = 42,000
Annual Interest on Loan = 6340
Annual Income = 11960
Net Return = 5620
So I profit $5620 on 42k investment = 13%.This is right in the CBD. So what did this type of profit cost me?
Its a hotel room that I can do nothing with!I guess a typical mainstream property wont provide a good return, however the qwerky ones may.
Hey all
I am having to get creative too to find the positively geared properties, however it is good practice crunching the numbers, and certainly makes you think outside the box, when trying to create a winner deal.All the best
MaiHI Ben Morris,
Surely someone out there has gotten a hold of properties like this as my gut tells me they do exist…somewhere.Depending on your criteria we may be able to help.
Cheers
[email protected]
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In my circumstances, I agree “positive from day one” BUT !!!
Lets assume pay 24k dep for 120k property earning
330 per week and S/D and solicitor fees come to 2500.
Total outlay = $26500
Interest on borrowings total $124/week
Assume rates and agent commission =$110/week
Then property returns $106/week ($5112 per annum)
Therefore return is 19.29% (5112/26500*100)
If this is correct , and using the same costs etc, what happens to the % return if you do not put any of your own money in to the purchase but instead buy totally on Equity–even down to the fees and charges .???Interest would now be $158.30 /week on total purchase and costs , and rates etc would be same therefore netting only $61/week ($3208)
on outlay of ZERO!! How do you work out the %return???
Cheers LenHow about this!
Instead of using Cash Down. Use Total Commitment = equity locked away & cash used to purchase.
eg 100,000 property. Bank requires you to put your house up. Standard rule is they require min equity of 20% (no mortgage ins).
Total Legal and SD = $5000.Total borrowings = 105000.
Bank equity requires: 21,000Total commitment = 21,000.
Rent Income = 10,000pa (for example)
Total outgoings = 2,000
Net Return = 8,000.
% = 8,000/21000 = 38%.Note: I would add a risk assessment. eg. equity is another property. If you go really bad you may need to sell both.
I have purchased cashflow positive property from day one.
As I have said before the best deals are not on the internet (they dont make it that far). They are on the street.Was my genuine question too hard about how to calculate percentage return, when none of your own money is outlayed for deposit, fees etc at all and the property bought from equity entirely.???
If the “gurus” cannot work it out how the heck am I supposed to???Len,
Mathematically, if you are trying to divide something by 0 you get infinity.
In this case the % return is a joke and best to forget it. Concentrate on the numbers, not the ratios.
Our latest deal did as you describe, borrowed the lot plus expenses and it is +CF…but working out all of your CoCR and all of that other accounting toss is great if you have time and playing with ratios, but it means squat really.
Get on and go get the next one for the kit bag.
Cheers mate.
Hi everyone
Thanks very much for your comments…I’m starting to look beyond realestate.com…and domain etc…by phoning agents and getting myself on their “buyer” list. OMG…do they try to sell me some crap but I suppose, and anticipated, they have their own agenda. So much time on the phone etc. I’m still not convinced buyers agents are the go but if anyone has RECENTLY had a positive experience (or negative experience) with buyers agents I’d love to hear about it.
I am starting to see some ‘day-one-deals’ out there…and came close with one: see my post in legal&accounting. I’ll keep looking and if I Jag one good deal per year then I’ll be set-for-life in a few years time.
oh..Dazzler is right Camden…infinite return…which is rediculous. I feel it’s more appropriate to focus on money in/out of your wallet each month/year and take ‘capital appreciation’ as a your bonus…a big bonus but a bonus non-the-less.
Happy hunting
Ben
hi Ben Morris
interesting post and reading lens post he has been listening, except I haven’t seen a guru around.The return is different for cash in a project and equity in a project as the cash is costing you money and should give you a higher return as the equity is not costing you and from a banks point of view is seen as the same.
but in reality they are very different us cash as cash ( for cash flow) and I try to use equity were every possible but if it works well nothing at all but thats another story and is more smoke then mirrors.
positive from day one should be most of the product held by a developer when he/she has finished the project, or a 3 br house turned into a 6 br house and rented out each room,or a rundown 3br in double bay that gets reno and rents for more then the loan.
everyone has a different version of positive from day one but I like lens version.
or dazzling.here to help
If you want to get involved in some of the projects I’m involved in email to [email protected]Hi all,
I have always been fascinated by the difference in calculating the return depending on what you way you buy the IP! Whether you use equity or cash as a deposit, isn’t the return just a function of the profit (or loss) divided by by what you put in (be that cash or equity)?!For example: $20K cash deposit and you end up with $5k profit (post Tax) = 25% return; OR
$20k equity used as a deposit and you end up with $5k profit (post Tax) = 25% return!?The only difference is what your costs are, if you put in cash you have less interest to pay and less bank fees and charges. When you use equity you get the borrowing costs, but you also pay less Tax – depending on which way is the better method for you the return could be larger or smaller!
Cashflow positive for me is when the income exceeds the outgoings, no matter which way I raise the funds.
Cheers
C@34Our greatest weakness lies in giving up. The most certain way to succeed is to always try something one more time.
– Thomas Edisonhi calvin@thirty4
nop its not.
cash is a more fluid item and so it can be used in alot of markets that equity can’t. so the return for cash is usually more then for equity.
also equity ties the person supplying the equity to risk with the venture this is not the case with cash.
equity is alot easier to rise then cash ( sorry to say this but try raising either and you will see which is the easiest).
equity is the same as cash if you are using either for your own project but from a business point of view they are very different.here to help
If you want to get involved in some of the projects I’m involved in email to [email protected]
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