All Topics / Help Needed! / Calculating A Good Investment

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  • Profile photo of DanielCumminsDanielCummins
    Member
    @danielcummins
    Join Date: 2006
    Post Count: 37

    Hi All,

    Looking at purchasing my first IP soon, and just wanted to get some thoughts on a potential property I’ve found (bear with me as I’m still learning the ropes!):

    * Property is listed at $100,000, although, has been listed for a while (I’ve been keeping my eye on it), and may sell for chaeper.
    * Currently being rented for $155.00 a week, on a 12 month lease.

    Now, having looked at online loan calculators, it seems an IO loan for $90,000 (hopefully settle for $95,000, then 5% for fees, and 5% for dedosit) would have repayments of around $125 a week… Indicating a $30/week CF+ scenario.

    Could someone please explain how this works, and what I’m missing, I’m sure there must be plenty! What other costs should I be factoring in to much calculations?

    Thanks heaps in advance,
    Daniel

    Profile photo of dejong_fdejong_f
    Member
    @dejong_f
    Join Date: 2005
    Post Count: 2

    Hi Daniel,
    You are assuming 100% tenancy, what about council rates, repairs, rental managers %, etc. You need to factor in all your outgoings, not just look at rental income versus interest payments.
    Hope this helps a bit
    Frank.[biggrin]

    Investor in training!

    Profile photo of DerekDerek
    Member
    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi Daniel,

    You need to factor in the (likely) maintenance costs, the validity of the rent received (is it out of wack with the norm in the community), what is the economic stability/outlook like for the community, vacancy rates, growth prospects, value stability, finance issues (will bank/mortgage insurance provider recognise 95% as suitable security in this area) and so on.

    Cashflow is but one part of the equation.

    Derek
    [email protected]
    http://www.mononpoly.tic.com.au
    0409 882 958
    Skype – derekjones2113

    Profile photo of Kiwi-FullaKiwi-Fulla
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    @kiwi-fulla
    Join Date: 2002
    Post Count: 371

    About 2K per annum roughly will give you and idea on repairs and maintenance… + 2-3% vacancy per annum.
    I you are getting hte house a 20% below market valuation (registered vals….) then you hsould be able get fairly close… if not you need to find a better deal and lett he mums and dads of the world (average investors) get hold of it …. however if it is in a high growth area you could consider it as a possibility.
    Look at a hundred houses and see if it is a bargain or not.

    Why Rent? Rent 2 own!
    http://www.rent2ownaus.com

    Profile photo of DDDD
    Member
    @dd
    Join Date: 2004
    Post Count: 508

    If its now been a while on the market I would assume they would be more likely to take a lower offer. So if the property has its local infrastructure and isnt in a one horse town(1 major employer in town) then its one to jump on.

    You didnt say of it was a one bedroom unit or a three bedroom house in a less accessable area. I would assume if it was a 2 bedroom townhouse anywhere in the greater brizzy region it would have a non existent vacancy rate. I recently heard of one agent recieving offers of bribes to get someone higher on a waiting list for a particular property.

    So with the average for my 6 south of Brizzy being about the $7-800/yr body corp fees and $1350/yr rates your holding cost would average out around the $2100/yr mark. If the place has recently been renovated or you do one, then your annual maintanance is also brought down to nearly zero. If the area is susseptible to termites maybe a barrier or annual treatment/inspection fee would apply. Barring anything strange from the body corporate like an extraordinary fee due to another owner enclosing a carpark without council permission, or something of that strange nature. Your holding costs would be little more than the $2100.

    Depreciation on these properties averages out at about $2200/yr first year and reduces from there. (14 yo property) Our 2 specifics for depreciation were $2073 for one unit and $2487 for the other one we did depros on last year(thats how I got the approximate).

    So $4300 deduction of your tax in year 1 means at 30% tax rate you phisically dont have to find $1290 towards your real costs year 2 of ownership.

    So as an example only, from the $2100 actual cost and having a real tax saving of $1290, your actual out of pocket could be $810 for the year. Of course if you have a hot water system blow or something of that nature you could add another $1k to that amount.

    On a $100k property assuming you get the deposit from equity elsewhere, you are then funding 100% or 100k in this case.
    $155/wk means that it is recieving 7.52% gross return.
    Allowing 7%(this week anyway) for mortgage and 0.5% for management you are hitting $0 outlays apart from the $2100 holding costs.

    I would definitely be buying this if itwere in a reasonable location.

    Good Luck on your calculations and research. Dont forget, its only you that can make this decision and no matter how many replies or opinions you recieve, they can only be a guide to assist you to finalise your thoughts before proceeding.

    Happy Hunting

    DD

    Buyers Agent (Dip Financial Services(FP)
    Don’t sweat the small stuff,and it’s all small stuff!!

    Profile photo of DanielCumminsDanielCummins
    Member
    @danielcummins
    Join Date: 2006
    Post Count: 37

    Thanks for all the kind and cluey replies so far.

    I guess I should have described the property a little more. It’s a 3 bedroom house, close to schools, with polished floorboards throughout. The area is semi rural, but NOT Broken Hill, or that isolated. Have already done that search, and thought twice having read up on these forums about the area. Still definately an area I may investigate further in the future, once I have a little more experience.

    I guess what I’m doing is beginning to perform my own “Due Dilligence” checks, but still require a definitive list of costs to factor in when calculating estimated costs. Could someone confirm of expand on the following?

    * Loan Repayments – Can be estmated based on current interest rates, factoring in somewhat “worst case scenarios” for Interest Rate rises. I was also thinking about starting the loan as P+I, and leaving myself the option of dropping back to a more servicable IO loan if required. I’m told it’s easier to go P+I –> IO rather then IO –> P+I. Would anyone disagree with this way of thinking?
    * Rates – Can be estimated from… The Real Estate Agent? Council?
    * Maintenance – Estimation based on current state of the property?
    * Rental Management – Estimation from Real Estate Agent

    Any further input would be GREATLY appreciated. [aacool]

    Thanks again,
    Dan

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    Hi Daniel
    Sounds like a good deal. (As do many) As far as rates go, depending on the state you are looking at, you should be able to get a copy of the actual rates notice from the real estate agent (or vendor if being sold privately) or if not they will give you the figure anyway….just ask. management will be anything between 8 and 12% of your weekly rent. That should give you an idea. If you are interested (I have’nt got it patented or anything) and know how Excell works, I would be happy to email you a copy of a little spread sheet I worked up, that all yo uhave to do is enter in the purchase price, annual rates, management , and rent, and it automatically calculates your cashflow + or – for a loan-valuation ratio of 80, 90, and 95 %. Quite proud of the simple little thing. I have put in the formula’s of 7 % interest and 8.8 % management, but you can of course change these to suit, and then ‘examine’ various scenarios such as more or less rent, hike in interest etc. Does not allow for maintenence but the others have covered that, and it gives you an idea anyway. When you’re rich or find some other good deals remember me….

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    If it is semi rural, what are the prospects for capital growth. I think there is no point in buying a property that is +ve cashflow if there will be no growth for years to come.

    Terryw
    Discover Home Loans
    Parramatta
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    Profile photo of kmiddletkmiddlet
    Member
    @kmiddlet
    Join Date: 2005
    Post Count: 22

    What is the population of the town where this house is located?

    Most lenders will not give you better than a 70-80% LVR if the town has less than 10,000 people in it.

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