A Good Deal?????

Can anyone advise me on this one?
It looked good at the start but the more I look at the figures the more I am unsure.

purchase price $95 000
current rent $250 week
strata levy $2450 annual
management fees - 10% $ 250 week
council $1200 annual

the property in question is an pre '85 unit and in an area that probably won't see any capitol growth.

Any advise would be most appreciated.

Chris

After your costs (but not tax) it's probably going to put about $2000 pa in your pocket. Without knowing the area and more specific details about the property, it's hard to say, but on the surface, this looks like a good cashflow deal.

Given that the cashflow is good, it is probably worth purchasing as more and more people are looking for this sort of deal these days. This could have the effect of pushing the value up.

hey PT Bear
thanks for the reply.
could you tell me how you arrived at your $2000 figure?
my calculations are way different and i am still very much a learner.
thanks again
chris

Income:
$250 / wk rent -> 250 * 52 = $13000 annual rent.

Costs:
10% management = $1300. I may have made a mistake here, I initially used $250.
Levey = $2450
Rates = $1200

Total costs: $4950

Purchase price & costs:
106% of $95k = $100700

Interest on 106%:
Assume 6.5% simple calcualtion = $6545.5

Total: 13000 - 4950 - 6545 = $1505

Cashflow would probably be about $1000 accounting for simple repairs and simplicity of the calcualtions.

My initial estimate of $2000 was based on management of $250, not $1300 which would account for the extra $1000, plus a bit extra for expenses.

It's not a great return if you'll never get any growth. I'm also wondering what the strata levey is? If it's like a body corporate, it seems excessive and I'd be looking closely at what it is they're doing (sounds like bad management or the need for expensive repairs in the near future).

If it's a one off fee for strata titling the property, your cashflow will improve significantly and in my position I'd lean towards purchasing, assuming the asking price is reasonable for the area.

Incidently, the costs of strata titling the property should be included in the purchase price. I'd be having a much closer look at this.

Hi Daisy,

I agree with PT Bear's reply, but if you also get yourself a quantity surveyor report on the property & depreciate fixtures & fittings (regardless if the building is old, they always find things to depreciate & can be pleasantly surprised) you may find that the cashflow can increase substantially (depending on your tax bracket & how it is purchased)... Good luck with it...

Cheers,

MannyB.

its gonna COST you about -$12.5 a week


figures below:

Purchase price 95000

Cost to aquire prop
Deposit 0
Closing costs 4750


Initial Cost to aquire prop 4750

loan
Principal 99750
Type P&I
Term 30
Interest rate 6.50%
Weekly repay $146.90

Annual cash flow received
Rent per week 250
weeks 50
Total cashflow received $12 500.00

Annual cashflow spent
Loan repay 7638.60
Management costs $1 250.000
Shire Rates and Water Rates 1200
Insurance 250
Repairs Maintenance 500
Strata fees 2500

Total cash outflow $13 338.60

Annual cashflow position
Total cashflow in $12 500.00
Total cashflow out $13 338.60

Annual net cashflow -$838.60
Weekly net cashflow -$16.13

Cash on cash return
Annual net cashflow -838.60
cash on cash return -17.65%

Originally posted by kelvinh
its gonna COST you about -$12.5 a week

loan
Principal 99750
Type P&I
Annual net cashflow -$838.60
Weekly net cashflow -$16.13

Click to expand...

Hi Kelvin,

The reason youre coming up with this answer is because youre using a Principal and Interest loan. Previous posters have been doing their numbers on an Interest Only loan - the type of loan most people use for an investment property.

Jamie.

Jamie said:

Hi Kelvin,

The reason youre coming up with this answer is because youre using a Principal and Interest loan. Previous posters have been doing their numbers on an Interest Only loan - the type of loan most people use for an investment property.

Jamie.

Click to expand...

Jamie,

An interest only loan would seem appropriate to me for a high capital growth property, as equity is progressively built up from the capital growth.

However, if your strategy is cash flow, with little expected capital growth, it may be more appropriate to use a P&I loan. This way, you use the positive cash flow to slowly build up equity in the property. This gives you a bit of a buffer should interest rates rise for example.

I agree with you HouseKeeper in certain situations.

If your goal with a low CG property is to create CG, paying down the loan is one approach to doing so (so are subdivisions, renovations & change of purposes).

However there is a place in many property portfolios for low CG/high cashflow properties to balance higher CG/lower (or negative) cashflow properties.

In this case if you sacrifice cashflow to pay down the low CG property loan using P&I you may be significantly reducing your ability to purchase & make a good CG return on higher CG properties.

In many cases it's better to simply pay the minimum amount you have to on a low CG property so you have the cashflow to securitise and cover cashflow requirements on more high CG properties.

Over a few years you are likely to make substantially more equity - which can be transformed into cashflow if required via the use of LOCs, annuities or sales.

Cheers,

Aceyducey

Good point Aceyducey.

This illustrates that the strategy is the key. It's important to first set a strategy, taking into account your specific situation, then finding properties that will meet the criteria as set in your strategy.

Cheers,

Another point worth mentioning on interest only vs principals & interest.

I found out recently that when assessing my borrowing capacity, most financiers ASSUME that all my loans are P&I, although they are actually set up as interest only. That limits borrowing capacity, even though interest only provides better cash flow.

There are a few financiers who are willing to take "Actual interest paid" rather than assumed interest when assessing your borrowing capacity. So you are not totally stuck, but have fewer financiers to choose from.

Cheers,