Formula for calculating required growth on a negative investment?

Discussion in 'Accounting and Tax' started by albanga, 15th Jun, 2015.

1. albangaMember

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Hey Accountants,

I was just curious as to what formula you would use to calculate the required capital growth to offset a negative cashflow investment to break even.

So the annual loss which would take into account all income received (rent & depreciation) minus all expenses.

For example if you were holding a very poor yielding property in a top location but wee relying on growth to offset the negative cashflow then what formula would you use to calculate how much annual growth would be required?
Now obviously you would invest to make a profit but this is just to understand how to breakeven on the loss.

I hope that makes sense?

2. Peter_TersteegFinance broker/strategist

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Somersoft sells the PIA program which allows you to enter a massive amount of information. Amongst other things, it can produce cash flow projections over time and also projects capital growth over time so you can compare the two.

There's no easy forumla if you want to be accurate, I doubt there's a complex one either. There's dozens (hundreds?) of variables.

If you want a really simple way to figure out your cash flow position, here's what I use (and there's so many things this doesn't really consider):

Total cost = Purchase price + Purchase costs.
Annual interest = Total cost x Interest rate.
Rent after holding costs = Weekly rent x 52 x 75%.

Cost to hold per annum = Annual interest - Rent after holding costs.

There's so many reasons why this might be completely inaccurate, so many variables it ignores; but it will get you somewhere in the ball park of what it costs to hold a property.

3. Paul@PFITax, SMSF & Planning

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PIA software will do all your modelling and maths.