Cashflow Positive Formula

[mrodwell]

Hi all,

I'm just starting out in my property investment journey and was wondering if anyone can help me out. Is there a standard formula that can be used as an initial qualification of a property deal?

Thanks

Mike

 

[exstatic]

I wouldn't say there is a common 'formula' if you want to be cf+ from day one, you basically need to find a property that costs less to service than your yield.

So if a property costs say $2000 a month to hold, then to be cashflow positive you ideally want to be receiving $2001 so you make $1 profit..

What you do need to take into account is the $2001 doesn't always come directly from rental income, you can also claim tax deduction and depreciation which can also add to your monthly yield.

So as an overall 'formula', choose a property that is below market value, easy enough for you to service, gets good rental returns, has great depreciation and choose a loan that is well structured for deductions.

Sounds easy hey? I am no expert by no means.. but I think this is a good start.. some of the veterans may be able to shed some more light on the subject

 

[stumunro]

positive geared properties are very very different to positive cashflow. When you are taking positive cashflow properties into account you need to have your finger on the pulse as to how each dollar will affect the situation. You need to be able to calculate your tax implications, estimate the maintenance, allow for movements in interest rates.

Essentially


(Cashflow) Rent + Tax Breaks (neg gearing & depreciation) equal or greater than (Costs) Interest + Maintenance + Insurance + Levys

 

[Sim]

There's a quick-and-dirty formula you can use to work out high yields (you should be able to do this in your head):

(Rent / 2) * 1000 = maximum purchase price

eg: expected rent = $200pw, then maximum price you should pay = (200 / 2) * 1000 = $100K

This calculates an effective 10% yield for you (10.4% to be precise). Whether that's enough to make it cashflow positive (or indeed too much if you take depreciation etc into account) - depends on many things. It's a good rule-of-thumb for quickly getting you a ball park price to offer for a property.

Good luck finding anything with those kinds of yields at the moment though - rents need to go up and prices come down a bit first I think.

 

[PrimeCommercial]

There's a quick-and-dirty formula you can use to work out high yields (you should be able to do this in your head):

(Rent / 2) * 1000 = maximum purchase price
......This calculates an effective 10% yield for you (10.4% to be precise).

Thats the basic one that I generally use .Even though it doesn't take into consideration associated costs and operating expenses, it does give you a good idea about what yield you can expect.

Rule of thumb

$200pw rent on a $200,000 purchase price equals 5.2%
$450pw rent on a $450,000 purchase price equals 5.2%
$632pw rent on a $632,000 purchase price equals 5.2%

you get the idea

As Sim was saying above if you double the rent in my examples or halve the purchase price your yield doubles to 10.4%.
Just a basic formula you can use very quickly.

 

[Dazz]

Nett yield > interest cost.

 

[Perchy]

& anyone having any luck finding these 10% yields?

 

[The Y-man]

& anyone having any luck finding these 10% yields?

The Dazzling.......

Cheers,

The Y-man

 

[knightm]

They are not sitting on the shelf for all to see the deal must be put together - see something others dont in a property, buy it cheaply as a dog, add value, then hey presto, 10% on cost base is achievable.