Crunching the numbers for 1st IP - how to??

[newlywed1311]

I am in the process of looking for my first IP. I've read quite a few books, attended a few forums and feel I have a very basic understanding of the property investment process - certainly aware of the benefits. I'm looking at a long term (20 years) plan to build a portfolio to support my husband and I in retirement.
What I am trying to find is a really basic summary of the costs and how I crunch the numbers reasonably quickly to ascertain what we can afford.
I have come up with the following list of 'costs' that I believe we will encounter for our first purchase. However, I'm not sure how to flesh them out so I can work out our weekly costs - and therefore, what we can afford.

1. House price
2. Pest inspection
3. Building inspection
4. Stamp duty on loan
5. Stamp duty on property
6. Lenders mortgage insurance (95% LVR)
7. Transfer fee's (not sure what these are exactly)
8. Conveyancing fee's
9. Mortgage application fee's (Line of credit mortgage using equity in current PPOR)
10. Landlords Insurance
11. PM fee's
12. Rates
13. Strata fee's - if any and includes sinking fund

So what else do I have to think of? Also, what are the average costs of some of these fee's like pest/building inspections, transfer fees, Landlords insurance (and do you all have cover for loss of rental?)... I know the other costs are variable and I can work most of them out based on the price of the property.

What is the best way to ascertain market rentals in the area - the local RE agents or another method? Same with vacancy rates?
If I was able to purchase something relatively new, how do I factor the tax benefits into my sums?
Should I really be utilising Somersoft software or something similar to work all these variables out?

Many thanks for your help,
newlywed1311

 

[Propertunity]

Also, what are the average costs of some of these fee's like pest/building inspections,

$595 for combo of P&B

Landlords insurance (and do you all have cover for loss of rental?

$1,000 for house, contents & LL insurance

What is the best way to ascertain market rentals in the area - the local RE agents or another method?

re.com
rental appraisal from a few PMs for free

Same with vacancy rates?

Yes ask PMs and see www.sqmresearch.com.au

If I was able to purchase something relatively new, how do I factor the tax benefits into my sums?

Can't - you need a QS report but allow maybe $7K 'average' give or take $2-3K.

 

[newlywed1311]

Thankyou very much for your reply, it was very helpful.
Do you recommend any software I could use or should I just go and pay a good investment advisor???

 

[Propertunity]

Thankyou very much for your reply, it was very helpful.

Youre most welcome.

Do you recommend any software I could use

MS Excel works for me

or should I just go and pay a good investment advisor???

What would you be buying from this investment advisor?

 

[Rixter]

You cant go past PIA for all your property analysis software.

The developers also kindly provide this forum for us all.

Hope this helps.

 

[newlywed1311]

My mortgage broker recommends I get good financial advise before purchasing a property and I agree with her - in respect that I don't have the knowledge or the skills to know everything there is about crunching the numbers (as my post indicates). Do most investors work with a good accountant or similar financial advisor to assist with working out viability? Propertunity, what columns do you have in MS Excel and what sort of forumula's - I wouldn't really know where to start (apart from a very basic table).

I have a free downloadable version of PIA but at first look, was a bit overwhelmed with it. Maybe I need to give it a bit of time - and the respect the data input deserves. Do other investors here utilise that software or other similar spreadsheets to assist with planning?

 

[Propertunity]

My mortgage broker recommends I get good financial advise before purchasing a property and I agree with her

It is good advice

Do most investors work with a good accountant or similar financial advisor to assist with working out viability?

I'd venture to say - NO. Most investors find it extremely difficult to find either a good property savy accountant ot financial adviser that also invests in property. Once you find one - never let them go
After you've been at it for a while you can find yourself somewhat limited by their experience especially if yours is starting to exceed theirs

Propertunity, what columns do you have in MS Excel and what sort of forumula's - I wouldn't really know where to start (apart from a very basic table).

Nothing special - a basic table. There's really no trick to it. To see cash flows on an IP it is just income (rent) less expenses + an add back for depreciation and neg gearing (if applicable). A good accountant can show you how to do this.

 

[Peter Parker]

I am in the process of looking for my first IP. I've read quite a few books, attended a few forums and feel I have a very basic understanding of the property investment process - certainly aware of the benefits. I'm looking at a long term (20 years) plan to build a portfolio to support my husband and I in retirement.
What I am trying to find is a really basic summary of the costs and how I crunch the numbers reasonably quickly to ascertain what we can afford.
I have come up with the following list of 'costs' that I believe we will encounter for our first purchase. However, I'm not sure how to flesh them out so I can work out our weekly costs - and therefore, what we can afford.

1. House price
2. Pest inspection
3. Building inspection
4. Stamp duty on loan
5. Stamp duty on property
6. Lenders mortgage insurance (95% LVR)
7. Transfer fee's (not sure what these are exactly)
8. Conveyancing fee's
9. Mortgage application fee's (Line of credit mortgage using equity in current PPOR)
10. Landlords Insurance
11. PM fee's
12. Rates
13. Strata fee's - if any and includes sinking fund

So what else do I have to think of? Also, what are the average costs of some of these fee's like pest/building inspections, transfer fees, Landlords insurance (and do you all have cover for loss of rental?)... I know the other costs are variable and I can work most of them out based on the price of the property.

What is the best way to ascertain market rentals in the area - the local RE agents or another method? Same with vacancy rates?
If I was able to purchase something relatively new, how do I factor the tax benefits into my sums?
Should I really be utilising Somersoft software or something similar to work all these variables out?

newlywed, first thing is to seperate the initial costs (one-off and associated with buying the place) from the holding or recurring costs (pay as long as you own it).

1-9 are initial purchase costs; the rest are recurring.

It varies but 1-9 are roughly 6% of purchase cost. To this needs to be added things that you need to pay up front eg insurance and repairs that are needed before the tenants move in (if vacant posession).

The most important recurring costs you left out are maintenance and interest, and for your accountant, claimable depreciation. For a normal IP(*) the non-interest costs amount to around a quarter of gross rental income. But costs tend to be a higher proportion for cheap country houses and for new or serviced units.

(*) A regular suburban house or unit in small complex

 

[newlywed1311]

Thankyou very much Propertunity, Rixter & Spiderman for your useful responses.
Spiderman, I guess it will make it easier to split the costs into associated buying costs and ongoing costs - just to break it down further and make it clearer - thanks for that tip.
I feel like a dud not putting in interest costs - while I'm very aware they are there, they just slipped my mind when I was quickly jotting down my thoughts. Same with maintenance costs. My mention of tax benefits was my reference to claimable depreciation. How does one work all that out before even purchasing a property - is it horse before carriage stuff? Or do you just do an estimate based on the age of the property and a bit of guessing to assist you make a decision?
The 6% round figure is very useful and I will use that to assist me do some sums quickly.
I am unsure what you mean by the non-interest costs - does that mean any ongoing cost associated with the IP BUT NOT the interest?
When estimating potential rental income, do people base this on 50 weeks or so??? Or do most people base it on a full 52 week year? I'd rather be conservative to cover my butt, I think (however, it's only a small amount in the big picture, isn't it.)
What sort of $$$ do you tend to leave in your maintenance funds?
Thanks people.

 

[Propertunity]

Or do you just do an estimate based on the age of the property and a bit of guessing to assist you make a decision?

Yep, that one.

I am unsure what you mean by the non-interest costs - does that mean any ongoing cost associated with the IP BUT NOT the interest?

Yes, like property management fees, rates & insurance etc

When estimating potential rental income, do people base this on 50 weeks or so???

No - look up the vacancy rate and use it in the calcs + allow a bit to cover your butt.

Or do most people base it on a full 54 week year?

I think you'll find that there are only 52 weeks in most years

(however, it's only a small amount in the big picture, isn't it.)

Yes, don't get too hung up about it

What sort of $$$ do you tend to leave in your maintenance funds?

$1K per house usually covers it.

 

[kum yin lau]

Hi this is what I do to check rental yields.

www.realestate.com.au
click to rent click houses

Then quickly skim through asking rents for say 3BR /ensuite

Don't need to ask anyone. You pretend you're a renter looking for a house.

Simple.

KY

 

[newlywed1311]

Hey propertunity, where did I say there were 54 weeks in a year You were too quick for me!
I'm not a numbers person, so can you tell me the equation for working out the potential rental income based on vacancy rates? I thought vacancy rates meant the number of properties vacant at any one time, not the number of weeks they might be vacant in any one year. Or am I missing something??? It's not like I can just work out, say 3.4% of 52 to get an estimate of how many weeks the property is likely to be vacant is it?
I was thinking around $1,000 per house for my maintenance fund and did some quick calculations on that amount. Am using Property Profits software by Cheyanne Bray, which is giving me a better idea of costs associated especially using the 6% rule.
Kum Yin Lau, thanks for that tip - sounds simple and effective!

 

[Peter Parker]

Thankyou very much Propertunity, Rixter & Spiderman for your useful responses.
Spiderman, I guess it will make it easier to split the costs into associated buying costs and ongoing costs - just to break it down further and make it clearer - thanks for that tip.
I feel like a dud not putting in interest costs - while I'm very aware they are there, they just slipped my mind when I was quickly jotting down my thoughts. Same with maintenance costs. My mention of tax benefits was my reference to claimable depreciation. How does one work all that out before even purchasing a property - is it horse before carriage stuff? Or do you just do an estimate based on the age of the property and a bit of guessing to assist you make a decision?

The main critical construction year is 1987 - if it's before then you won't be able to claim the building (before 1985), or will only be able to do so for a couple more years (1985-1987).

Often the post 1987 property will be dearer, be on less land and/or in a less desirable location (on average) than older property, so don't get too hung up on this and let this prevent buying an older property that's good value. But if you find two similar properties for the same price in the same area and one's post 87 and the other is a couple of years older then definitely get the newer place.

I am unsure what you mean by the non-interest costs - does that mean any ongoing cost associated with the IP BUT NOT the interest?

Yes.

When estimating potential rental income, do people base this on 50 weeks or so??? Or do most people base it on a full 52 week year? I'd rather be conservative to cover my butt, I think (however, it's only a small amount in the big picture, isn't it.)
What sort of $$$ do you tend to leave in your maintenance funds?
Thanks people.

52 if you want to make the figures look good, 48 if you're conservative and 50 if you're lazy lke me and want to be able to do it in your head. (ie $200pw = $10k pa, $300pw = $15k pa ... easy!).

Maintenance funds - highest single expense I've had cost $5000, next one has been $2000. These are fairly rare, but you'll need a contingency fund and as the start of saving to get the deposit for the next property anyway so the bigger the better. Because of the law of averages, if you have a contingency fund of $5000 for the first property, then you should be safe with far less than quadruple that for a portfolio of 4 properties (unless you believe that things happen in 3s!). Having said that, being forced to sell is the last thing you want so bigger is better and it can be used to reduce interest - eg offset account.

 

[BayView]

Here's my 11 second rule (sorry Steve McNight ) for a beercoaster total of costs;

Purchase costs - 6% of purchase price. You could probably go with 5%, but there are definitely no nasty surprises at 6.

Holding costs - allow 20% of the rent to diasppear per year to cover all the normal holding costs and 4 weeks vacancy. This is probably a bit high, but again; no nasty surprises.

Loan interest - allow 1 to 1.5% over the rate you are on, or would be on after purchase.

After factoring all these costs in and the boat still floats (you can afford the neg cashflow if there is any), you have a pretty safe investment.

I haven't allowed for any tax deductions or depreciation in these numbers. They are the bigger unknown, but ease the cashflow concerns even more.

I wish this had taken only 11 secs to type.

 

[Rixter]

Here's my 5.5 second rule (sorry BV, I cant be out done here ) to finding a cashflow neutral property - weekly rent x 800 = top purchase price you should pay. Any price lower is a positive.

Hope this helps.

 

[stumunro]

Here's my 5.5 second rule (sorry BV, I cant be out done here ) to finding a cashflow neutral property - weekly rent x 800 = top purchase price you should pay. Any price lower is a positive.

Hope this helps.

And people wander why they can't find positive cashflow property

Sorry Rix, but how hard is it to get the purchase price, times it by the interest rate and divide by 52

Clearly not exact (doesnt take into account deposit or lack of) but just as easy and more precise imo..

or if you want to work off the rent to find the neutral price

rent x 52 divided by interest rate (as a full number i.e 5% = 5 or 4.8% = 4.8) and x 100

really doesn't take that much longer.

 

[Rixter]

And people wander why they can't find positive cashflow property

Sorry Rix, but how hard is it to get the purchase price, times it by the interest rate and divide by 52

Clearly not exact (doesnt take into account deposit or lack of) but just as easy and more precise imo..

or if you want to work off the rent to find the neutral price

rent x 52 divided by interest rate (as a full number i.e 5% = 5 or 4.8% = 4.8) and x 100

really doesn't take that much longer.

Yes, good for working out interest only expense but as you know that's not the only expense to be factored into the equation. One needs to take into account all property expenses including loan interest.
The 800 rule factors in all for me.

 

[bojangles]

Pia

You cant go past PIA for all your property analysis software.

The developers also kindly provide this forum for us all.

Hope this helps.

I second Rixter on this. Got one myself. Very helpful.