how long before IP becomes cashflow+?
- Thread starter crc_error
- Start date
Long term rental trends should follow CG at 8 - 9% PA but it goes in fits and spurts and also out of phase (sync). (as you're probably aware).
Well crc that will all depend on how you perform on the catwalk, darling
How do you look in heels?....sorry couldn't resist.Aimjoy
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Rents, like CG, are cyclical, however, I have a vague recollection of some statistics from Jan Somer's "More Wealth from Residential Property" that the long-term increase in rents is roughly equal to the average of CG and CPI.
Of course, that means that, over time, yields fall, as supported by other evidence*.
M
* See - Nigel Stapledon, 2004, Long Term Earnings Yields and the Dwelling Market, Figure 8, p. 21, UNSW School of Economics.
Of course, that means that, over time, yields fall, as supported by other evidence*.
M
* See - Nigel Stapledon, 2004, Long Term Earnings Yields and the Dwelling Market, Figure 8, p. 21, UNSW School of Economics.
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Obviously the answer to this question depends upon a lot or variables. Bit like asking how longs a piece of string.
Everyones answer will be different.
All I can give is from my own personal experiences based on my investment strategy, purchasing criteria, when I bought and financed 105%, to be a ball park figure of anywhere from 3-5 years on average.
Hope this helps.
Neutral CF will be delayed by anything that
increases outgoings
- borrowing more
- increased capital expenditure : maintenance, renos, additions.
- higher interest rates
- PM fee increases
decreases incomings
- not applying rent increases when able
- not being able to attract quality tenants as property ages, then having to drop rents
- higher tenant turnover
- decreased salary -> decreased after tax cash flow because of lower tax benefit of a negatively geared property.
- unable to claim depreciation allowance due to age of building
my model shows for an average guy on 60k a year, 350k IP, 80%LVR, maintaining rent rises so that 5% gross yield is maintained against annual revals, new building, 8.5% interest, 7% growth, 8.5% PM ex letting
= 6.5 years to CF neutral after tax....
increases outgoings
- borrowing more
- increased capital expenditure : maintenance, renos, additions.
- higher interest rates
- PM fee increases
decreases incomings
- not applying rent increases when able
- not being able to attract quality tenants as property ages, then having to drop rents
- higher tenant turnover
- decreased salary -> decreased after tax cash flow because of lower tax benefit of a negatively geared property.
- unable to claim depreciation allowance due to age of building
my model shows for an average guy on 60k a year, 350k IP, 80%LVR, maintaining rent rises so that 5% gross yield is maintained against annual revals, new building, 8.5% interest, 7% growth, 8.5% PM ex letting
= 6.5 years to CF neutral after tax....
1. use a larger cash deposit
2. buy cashflow after tax properties.
3. find an area that has better rent yields than where you are currently looking.
The combination of all of the above should give you a + cashflow from day 1
yup.....if you pay 100% cash, you got a +CF IP...
but that's a lot of lazy dollars in Navra's words....
though a few lazy dollars in this climate is pretty wise.
In one particular case EIGHT YEARS
We bought an IP in 2002 for 240k.
Annual rental return for 2008/9 will be 390x52 = 20208
Int @8% on 240k is 19200
PM fees =1419
Body Corp about 3500
OUT 24119
IN 20208
Maybe two more years and we will reach cash flow neutral
It was bought for CG potential
Bank valuation last year was 380k and we all know banks are conservative in valuations. An honest look at the market would have us selling at 420-440k which means an average annual CG R at the lower limit of 8% and upper of 10%
It’s a waiting game!
We bought an IP in 2002 for 240k.
Annual rental return for 2008/9 will be 390x52 = 20208
Int @8% on 240k is 19200
PM fees =1419
Body Corp about 3500
OUT 24119
IN 20208
Maybe two more years and we will reach cash flow neutral
It was bought for CG potential
Bank valuation last year was 380k and we all know banks are conservative in valuations. An honest look at the market would have us selling at 420-440k which means an average annual CG R at the lower limit of 8% and upper of 10%
It’s a waiting game!
Sounds about right....this is how it comes up in my plot....presumed your income was about 70k.
Attachments
If I factor in depreciation on the IP to make it clearly negatively geared (which in my example I didn't) it is already CF+ in real terms.
Depreciation doesn't do anything for the pre tax CF, and makes it more +CF after tax, via Div 40&43 depreciation deductions.
That's right Winston
