Cashflow Positive??

[AndrewG]

Hi All,

I would just like to put a property example to you to get some feedback from the experts who have been doing this a lot longer than myself.

I purchased a 2 bedroom unit in Adelaide just under two years ago for $67.750. It was built in the early 80s. It has been rented for $130.00 for the duration (is actually going up to $140 in two weeks) with no vacancy since I purchased it. Mortgage repayments are $200/fortnight, P&I. I won't go into all the details of all the expenses but put simply, it seems to be breaking even. I reckon I got a bargain (especially since its now worth $90,000+).

Question : I worked out that this represents a ROI of 9.9% which seems to be pretty darn good for 15k's out of the CBD. So if this is a bargain, and it is only just breaking even, then how in the heck does one purchase a cachflow positive property??? Can anyone actually give me some real examples like the one I used above (which is true)?

I realise I have not taken into account any depreciation, but what is there to depreciate??? There's nothing really new in there (although it still presents itself real nice), and the building is early 80s so I don't think I can qualify for any depreciation.

Your feedback and examples would be most welcome.
Thanks,
Andrew.

 

[WillG]

Hi AndrewG,

You may not qualify for building depreciation (your IP was built pre 1985) but you may be able to depreciate items like floor and window coverings, hot water systems etc. I have heard of tap washers being depreciated (it all adds up)

Properites I believe have the potential to produce positive cashflows include duplex's, sets of units or houses capable of producing dual incomes. I base this monitoring these kinds of properties in the Canberra market.

I believe larger regional & rural communities offer some scope to find CF+ opportunities. For example ... Bathurst (NSW), Wagga Wagga (NSW), Goulburn (NSW), Bendigo (Vic), Sheparton (Vic). I don't know a lot about QLD but I have heard that Towsnville offers CF+ potential. I got this information from fellow investors who invest in thes areas

Good luck finding your next CF+ IP !

 

[brains]

With a gross rent return of 10% you should be well positive.
Maybe your expenses are too high. Look at things like:

Interest only loan.
Is your interest rate too high.
Revise all expenses and see if you can reduce them, everything is negotiable.

Look at it like a business, maximise income and minimise outgoings.

Good Luck

 

[johno]

Hi Andrew,

You should change your loan to interest only. I just bought 4 units in Rockhampton for $285,000, with each unit renting for $140 per week. With interest only repayments the I will ber CF+.

Johno

 

[Les]

G'day AndrewG,

Note that with Interest rates as low as they are, the step from IO to P&I is HUGE!!!! P&I is 30% higher than IO with Interest rates around 6% - if Interest Rates were higher, then the %age difference diminishes significantly.

Note, too, that in Jan's early days, she didn't KNOW of IO - her later thoughts turn toward IO (with a fair %age Fixed - might not be a bad time to do that, either...)


In your case, it sounds like you have a 25 year P&I loan. Of course, you may have included a deposit, in which case, you might only have a 15 or 20 year loan.

But, listen to the others who say "you would be CF+ simply by going IO". In your case, you would be paying only $78/week rather than $102. And, do consider getting a QS report - sure, it may cost you between $300 and $500 (I don't know Adelaide) - but they may well produce deductions worth $5000 to $10,000 for you (and, you might be able to claim these retrospectively - but don't quote me, I'm not an Accountant).

All of the others have indicated that your IP SHOULD be CF+ already - make it so !!!!! Or, is there a reason you don't want to do this? Are you wanting the "Tax deductions" that come with making a loss? Or, do you really want a CF+ property? Your call - you can make it what you want.....

May the force be with you

Regards,

 

[Tim]

Cash Flow Property

I just purchases a pos cash flow prop in Hobart. In fact the pre tax cash flow is over $300 per year, with the post tax cash flow being just over break even, allowing for maintenance, rates etc

 

[duncan_m]

Re: Cash Flow Property

Originally posted by Tim
I just purchases a pos cash flow prop in Hobart. In fact the pre tax cash flow is over $300 per year, with the post tax cash flow being just over break even, allowing for maintenance, rates etc

So 199 more of those and you could retire on $60,000?

Whats your game plan?

Duncan.

 

[Tim]

Game Plan

Interesting question.

It was too easy to buy a place in TAssie (yest, $65k that completely pays for itself).

The deal is that with 3 other rental properties in Pottsville Beach NSW and one in Brisbane, the cash flow doesnt look too good in those areas any more.

Tim

 

[Ken]

Hi Andrew,

Are positive cashflows possible? You bet they are.

The suggestions above are the start, IO loans etc.

But you also have to think laterally, look at the POTENTIAL

in anything you buy, eg - can you convert a 2 bedder into

a 3 bedder by adding a wall to a seperate dining area , can you

rent a larger house by the room, can you convert a garage into a

seperate flat, can you do a cosmetic reno (paint, carpet), all of

these would give you a higher rent return. Then there are the

things you can do to increase the value, can the block be

subdivided, More substantial renos, extensions, garages etc. The

possibilities are sometimes only limited by what we don't or can't

see. The more research you do the more possibilities open up.


This is also when you REALLY start to have fun


Good luck

Ken

 

[AndrewG]

Thanks for your replies guys. Yes the loan is a P&I loan, fixed for another 14 months at 5.95% (quite good). No real point in paying break costs to go IO as the interest rate will be at least 6% or possibly higher, and actually I don't mind having them slowly paid off (realising this will affect the positive/negative cashflow aspect). I have 6 properties, and these two are the only two on P&I loans .... I like the idea of having these paid off eventually but the others can remain IO.

As for tax, someone asked me whether I liked the negative gearing aspect ... certainly NOT I can't see any real point in paing out a $1 to get back $34c in the dollar (or whatever my tax rate is).

Thanks all for your responses.

Andrew.

 

[D.T.]

I can't see any real point in paing out a $1 to get back $34c in the dollar (or whatever my tax rate is).

Neither could I until recently. Sure cashflow positive is great, and I'd prefer properties that are that way. But here is the way that I look at it:

On a 100k property, If you fall short say $3k per year for 3 years until it goes postive, that means you've basically paid 9k for a property that may be sell at the 10 year mark for $200k+, try finding a return like that anywhere else. Not to mention the other 7 years which may be positive, AS LONG AS MY RESEARCH SHOWS IT'S IN A GROWING AREA.

Im not exactly sure if my angle is financially correct, but it works for me. I feel that if I bought both a -ve one and a +ve one than they'd pay for each other... costing me nothing but giving me 400k in assets to play with in 10 years time (just using the example numbers from above). Can my parents say the same about their mutual funds?

 

[phm]

Hi Johnno

If you don't mind saying, where is your block of units in Rocky? I'll be in the town in the next month (not IP buying) and would be interested to have a drive past them.