Hi,
I am thinking about starting an investment portfolio of positive cash flow properties however, after paying for maintenance costs of properties, is there much money remaining from the rent?
My parents owned a property in St Albans (Melbourne) which had been rented out for $750 per month and the repayment was only $420. Therefore, they were making a profit of $330 per month (equates to $3960 per annum), however, the cost of maintaing the unit was approx $2000 plus any repairs.
So it appears that they were only left with apprx $1,500 per annum from the property. Is this the kind of profits I should be expecting from positive cash flow properties? Is there a particular turn-over percentage I should try to achieve?
Hope this is not a dumb question.
Its a caustic mix at the best of times .. to answer it properly .. you have to know the mix of what goes into the deal.
Your property is positively geared when you got something left over of any substantial value after paying maintainence .. property tax (if applicable), water rates, council rates .. and community fee (body corp or owner corporation). Balance this up against the interest only or interest plus principal loan you've taken out .. and if you've worked everything out nicely .. you may have a couple of spare pennies in the jar.
However .. each of these elements is very flexible. Sometimes water bills will be proportionately cheap .. sometimes loans will rocket into double digits or worse .. sometimes a government might add a tax or levy into the mix. There may be a year when no maintainence is necessary .. or a year where EVERYTHING needs to be changed.
You cant possibly look into your crystal ball and see a scenario for everything you want to happen at the lowest possible cost. You just have to accomodate most likely scenarios .. and prepare for future situations with a strategic plan.
The fact you have leftovers on a property means you have a positively geared property. No matter whether thats 15 cents or a couple of thousand .. once its in a postively geared framework .. the renters are producing money for you above and beyond your current liabilities. Usually if I have anything more than $100pw extra on any property .. i go back to the banks to refinance and try to get something else. At $50pw extra per property .. you have a little over a safety valve .. its just not enough flexibility per annum to be anything more than safe. But once you are printing gravy .. anything over $50pw is extra money thats just going to get taxed unless reinvested.
The ideal postive gearing scenario is one where you can borrow at a lower margin than the return. Thats why people will tell you that it all comes down to timing. If you can borrow at a lower rate than the GROSS property return and leave a margin of 1.5 – 2% of the property rental return for expense .. and leave it at neutral .. slightly negative .. or already positively geared .. thats a winning scenario. Slightly negative becomes neutral in next to no time. Neutral becomes positive. And positive just grows.
Listen to the market for your knowledge to where your property potential lies. Learn what to expect for your property before you purchase it. And understand your most likely customer. Knowing these three elements will allow you to pluck the gems from the market and leave the bad ones alone.
Thanks Xdrew! Just realised how much research is ahead of me. I’ve only just started working so I do have quiet a bit of time before I have enough money saved for a deposit. Hopefully my first IP will be purchased end of next year (if the market is right). Thanks again!
Our days, if you get residential property with return of 9% and interest in the bank is 6% you will be about break even (as a general rule).
Creating cashflow positive IP is not an easy catch even if it generates $1000/year. Many will take this opportunity if seen. As you need only 100 to create $100K profit. Easy money….A few things to note:
The number of dollars left over after costs is going to depend on what size loan you took out. ie a 95% loan will be a different result to an 80% loan.
Be careful of just going after cash flow positive without consideration for the other factors. For instance, one town might offer cash flow positive investments, but could be in a high risk category. eg town has a smallish population and survives on only one industry for employment.
You tend to put the rent up each year. An increase of circa 7% per year.
Rental increases push you into cashflow positive terrain sooner or later. Some houses sooner due to how close you were in the first place. Let's say you've got a place that you paid $226k for that rents for $280 per week. That's a 6.44% yield. During the first year, assuming you do not use depreciation benefits at all, you'd be negatively geared by $45 per week. At the one year mark you put the rent up by say $22. Then you are only negatively geared by $23 and at the 2 year mark you'd put the rent up again and you'd be cashflow neutral. After that – assuming no massive shifts in interest rates – each rental increase pushes you further into cashflow positive terrain.
Personally I am happy with proven suburbs that have historically gone up in value consistently, where there is plenty of population and infrastructure and plenty of rental demand. For such a mix I am happy to pitch a little bit in per week for the first year or two if it is only $40 a week or something. ($40 a week is only $2k a year and you get some of that back in tax deductions). But after that I want the property standing on its own two feet. I have no interest in nursing a property forever.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
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