From: Sergey Golovin

Dear fellow Investors,

I have heard that in USA they calculate return on investment (rent) as 1% a month of the total cost.

Basically it works this way -

If property let say $200,000 and you get rent of $2,000 month it considered to be just good enough to break even or maybe have little bit of positive cash flow.

But some people think it is not good enough, it should be around 1.5-2% (3,000-4000) month.

What other charges are there to cover the cost and have positive cash flow?

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Reply: 1
From: Scott Elsom

Hi Serge

I have heard of Americans using that as quick check for covering costs, but I just use the 10% rule (Geoff Doidge's rule..not mine).

If you can get a Gross Rental Return (GRR) of 10% the property should come out slightly cash positive (ignoring tax deductions - they're just a bonus).

For Example,

Property costs $250K. A 10% GRR would be $25K pa. (or roughly $500 pw).

On my properties break-even has been between 8.5% & 9.2% pa. 10% gives you a bit of fat.

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Reply: 1.1
From: Sergey Golovin

Thanks Michael.

I probably should have explained (ask) differently.

I know in Australia it is a different environment.

"I heard that in US..." Now,

Why are they not happy if they do get 1% a month rent? It is hell lot money compare to our conditions.

Here in this country we are happy to break even. If you do have positive cash flow it is bonus.

What else is there that forces them to expect even higher return. It must be lot of other charges, which have to be paid before you get your money in the bank?

But we do have all those charges here as well (rates, repairs, etc).

OK, 1% just to keep you afloat, but 2% it is massive amount of money.

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Reply: 1.1.1
From: Paul Zagoridis

Is this thread relevant to Australia? Do we have US REI experts posting here? Are there not enough US REI forums already out there?

No. Work it out.

To avoid a totally negative post...

Property losses in the US cannot be deducted from other income (i.e. no negative gearing). So negative cash flow is more painful to them, but they do it anyway.

US and Australian conditions are not comparable. If you think the grass is greener, get on a plane and investigate the situation. Maybe even attend the CREOnline conference.

Be aware that out-of-state owners are always "in season" for bargain hunters. So imagine what they'll think of an overseas landlord.

Plus you fall into two tax jurisdictions who tax you on your global income.

This is not to discourage you from doing your due diligence. I personally know 2 people who live in Oz and invest in US real estate full time. They spend 3-9 months a year over there.

Paul Zag
Oz Film Biz is at
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Reply: 1.1.2
From: Sergey Golovin

Thank you Gents.

No, no I am not going to invest in US.

Just wondering what are they winging about, that's all.

It seems like good income and still not enough.

But then again it is never enough. I personally do have very much same problem.

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Re: 1 %

Reply: 1.1.3
From: Terry Avery

You might add that in the USA they also have rent controls, a politically
motivated act by local governments. When tenants complain about rising rents
the pollies listen to the voters and not to the landlords (about supply and
demand). So they impose rent controls fixing the rent as of a particular
date. Any increases (if allowed) are then limited to inflation. How would
you feel if you just bought a property and then the rent was fixed
regardless of the interest rate you have to pay? So as Michael says it is a
whole different ball game and that is why they probably work on a return of
1% per month, you need that much to cover your risk. Also for multi unit
buildings the value of the complex is based on a multiple of rents so if the
rent is fixed guess how much capital gain you will achieve? Zero or negative
in real terms. If the rent is indexed to inflation then in real terms the
value of the building does not increase. If the rent does not keep pace with
inflation then you are losing money.

You want to invest in a market where politicians can restrict your income
then go ahead, just be aware of the risks involved.


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Reply: 1.1.4
From: Apprentice Millionaire

Salut Michael,

>Property in the US competes for attention with many lucrative investments, and US
>investors aren't as one eyed as us. They put their money where the $$ returns are -
>now. They treat cap gain as a bonus, not as a prerequisite to investing in property.

Very interesting! The one-eyed bit, I mean. Because every time I have spoken with someone who was more experienced than I am in property, and told them that I was after cashflow before capital growth (because that is what makes my budget grow), I was frowned upon. Is it just a result of the negative gearing approach?

Apprentice Millionaire
(aka Jacques)
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From: Apprentice Millionaire

Bonjour Michael,

>The advice given by most of advisers/professionals is 'don't worry if you're making
>a loss, the taxman will pay for it'. A loss is a loss! period! You only get part of
>your loss back.

I agree totally. Which is why at this stage of my path to wealth creation, I prefer to make sure that I keep the losses to a minimum and concentrate on finding the cashflow positive properties, at the risk of having lower capital growth.

It's the old cashflow versus capital growth debate.

Apprentice Millionaire
(aka Jacques)
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Re: 1 %

From: Terry Avery

Yeah!!! Good on you Michael, I agree with you that a loss is a loss and
negative gearing only gets you back part of your losses. There are still
plenty of people out there willing to spend a dollar so they can get 47
cents back from the taxman instead of making a dollar and paying the evil
taxman 47 cents. Better to lose 53 cents than to profit by 53 cents isn't
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Re: 1 %

From: Sergey Golovin

Maybe other reason why do people want to have negative gearing stay is that it allows them to claim all sorts of other deductions.

I think that change in calculation of Capital Gain Tax is the beginning of very slow process to abolish negative gearing in Australia. Looks like they will do it step by step.

It is probably too much of pressure to change all that in one go?

But then again they managed to introduce GST and Negative Gearing is only one part of whole tax system.

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Re: 1 %

From: Sergey Golovin

The reason I think that Negative Gearing is on the way out is (put my researches hat on) -

1. GST - Goods and Services Tax was introduced.
It is changes there to all tax matters we had to have, such as building materials and services - for new homes and old once (renovation). Strong example to it - installed appliances, plumbing products, steel product have fallen considerably - all across the sector (thanks Dave for the HIA report – “Industry Overview”). No more “fat”, everything cut back to the bone. It is slow recovery there, at least for now.
However, the fact is - it is different this days (Wholesale &GST).

2. CGT - Capital Gain Tax has some changes to it, the way it is calculated now (thanks Paul, Dale, T Avery & others). Higher expectations or potentials are eroded (undermined).

3. FHOG - First Home Owner Grant ($7K), FHOG Plus ($7K) and Stamp Duty Exemptions were introduced. It is shift not only in rental Market but also in whole approach to home ownership. Question is how long it is going to be there for? It might stay there for quiet sometime.

All that does suggest that we are moving away from Negative Gearing system.

And I would like to expand on that a bit more.

In earlier days 1 or 2 years ago (even still today) people thought that rent is cheaper option then owner occupy. People prefer to rent then to buy or at least delay purchase of the house for as long as it is practically possible to do so. They will buy something eventually, but maybe not straightaway.
As we all know “Go with Flow” theory is always there. And flow always goes by the way of lesser resistance.

If we can have look at American example – rent is presumably higher then owner occupy. It must be. Just simple logic tells us that it is higher. Lets have look at two examples – same house (and I mean it same house) was sold to the owner (in first case). What does owner pays for after they have settled? It is all usual staff – bank repayments, Council (or equivalent to it) rates, repairs and maintenance, etc.
How does it work in Landlord case? They pay all the above (except probably phone and electricity), no tax deductions or offsets against your salary (thanks Paul for your expertise, great staff, always like your comments) and still have to make sure that it is enough money (profit) there to make living out of it.
Who pays for all that? Well, looks like tenant.

Government does not pay for anything. It is exactly opposite – they charge you for it, you have to pay tax. What are the benefits for the Government in that scenario? Well, they are not responsible for anything. All they have to do is to licence them, collect taxes and keep rent price under control.

Landlord does not (under normal circumstances) pay. Why would you? You are there to run the business not charity organization ( we do need them as well but not in this case).

So, only one party left - is a Tenant. They do pay for everything.

So, assuming all that, the rent is more expensive in that case on weekly and yearly basis.

In our case (back home) with Negative Gearing, Government is always heavily involved in it on all levels.
Would they like to simplify it? You bet…

They have already started.

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Re: 1 %

From: Sergey Golovin

Initial reaction would be " Oh ye, put the rent up to cover the cost..."

But we just had discussion on the forum that it would be not bad idea to drop rent bit in this volatile market in order to get tenant in.
It is better to have any tenant in the house then none.

Oops,... discrepancies...
Is it put rent up or put rent down?

Do not get me wrong, I want to find an answer as well as you do, folks.

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