I'm looking at properties at the moment and remember reading in I think it was this months or last months API about a formula that can be used to calculate if a property will be positively geared. The formula is below:
((rent * 52)/purchase price)*100 = rent return percentage
current interest rate on loan + 1%
If rent return percentage > (current interest rate on loan + 1%) then it is positively geared.
Just wanted to get peoples thoughts on this formula and whether they think it gives a quick guide for a property. Obviously circumstances for every property differ, but I've heard of various formulas which give a quick guide and wasn't sure which is more accurate.
RudraIP FreelyMember@ip-freelyJoin Date: 2008Post Count: 353
It could be used as a guide but I'd rather know what my outgoings were before I applied the formula. 1% may be a little light unless you are taking a fixed interest loan IO over 3-5 years (for certainty of payments).
How about the cost, council, management fee etc???
This should be part of equation
Depreciation and tax margin……….!!!!
Where about all the variable costs??alan_chong5533Participant@alan_chong5533Join Date: 2003Post Count: 7
I think the calc would be:
Rental income – mortgage repayments – regular outgoings (council rates, management fees, postage, GST, insurance, repairs and maintenance, any other outgoings)
Steve has mentioned that you should ignore depreciation benefits and tax benefits.
You want to evaluate the cash flow without these potential tax benefits.
I reckon it's just as easy to crunch the factors above compared to using a 'formula.'
AlanLisa XMember@lisa-xJoin Date: 2009Post Count: 4
I think it is important to note that this formula is only meant to be a rough guide and will only determine the approximate likelihood of a property being positively geared, NOT whether it will be a positive cashflow property. This formula is just a guide as to which properties warrant further investigation. I used that formula recently on a property and it passed the 1% test, however upon further number crunching, (ie: adding up the expenses such as council rates, land lord & building insurance, management fees, loan repayments, etc…) found it just scraped in as a neutral cashflow property, probably even slightly negative as I did not even allow a budget for repairs/ maint.
The formula is too simplistic
in real life… it is much complicated
You should always take into account of tax margin and depreciation on how to restructure the IPalan_chong5533Participant@alan_chong5533Join Date: 2003Post Count: 7
I wouldn't be factoring in depreciation and tax benefits…because I want to know if it is positive cash flow without depending on the tax system.
ie "Does it produce cash flow without me working in a job?"
That's where I am coming from. (I learnt this from Steve).
Makes sense to me!
Alan4lexParticipant@4lexJoin Date: 2009Post Count: 7
And don't forget to allow for vacancy. I put 85% in my calcs, but I have no experience to back that up or otherwise.
I thought that you are one of the fans of "Premium Finance"
Did they tell you using simple calculation to find out the positively geared properties?
Why not you asked your so-called mentorNewcopiaParticipant@newcopiaJoin Date: 2009Post Count: 5
There a few things to remember with this formula, It is based on a 20% deposit and it shows the probability of a property being positive cash flow not if it will be positively geared. For an on the spot quick guide then it is quick and easy to do, but you should always do your due diligence calculations before proceeding.
I am a fan of premium finance and in fact they are assisting me at the moment with some pre-approval documentation. They didn’t tell me to use the simple calculation to find out if a property was positively geared. If you read my original post it mentioned that I saw this formula in API, also I never called them a mentor. It would be greatly appreciated if you read ALL my posts regarding premium finance and this before making such statements.
Premium Finance is assisting my family and I in developing our property portfolio and I’ve explained how exactly and my experience with them in other threads which you know all about. If you want to know Premium Finances role in my current plan I’d be happy to explain it to you.
Well done rudra
Why not you explain to us… regarding the 'magic plan' of the so called "Premium finance"
I'm not quite sure what magic plan you are talking about as I've never mentioned anything like nor have I said Premium Finance did. My current plan I was referring to is to actually aim for 10 properties by the time I'm 30, and for me Premium Finance have a part to play in that.
Again Premium Finance has been brought up in other threads so please feel free to post in there but can we keep this one on topic as I'm ACTUALLY trying to get other opinions on this and try broaden my knowledge.
You did have an opinion on the formula that was stated in API and I completely agree it is simplistic and that real life is complicated. I think what I was trying to try work out that is this formula alright for a quick guide, so for example if you find say 50 properties and want to cut it down before doing in depth figure checking then is this formula alright?
I know there is no hard and fast rule but am interested in how other people do it and am hoping to learn something along the way.
RudraRichard TaylorParticipant@qlds007Join Date: 2003Post Count: 11,992
Funny the Director of PF who telephoned me threatening the world if i carried on this thread owned no property at all.
Have to admit I’m surprised that they were ‘threatening the world’ because of a thread. While I respect the opinions of people on this forum, I have had a great experience with Premium Finance and will continue to utilise them in the future. I use this forum to expand my knowledge and I have to admit all the users on here have been great.
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