IP Rent vs yearly costs spreadsheet - am i being realistic?

Hi, I am wanting someone with experience to detail running costs vs rent of their investment property over a number of years - attaching a spreadsheet would be great. I dont understand how people become positively geared after say 5 years. I have run calculations on my spreadsheet (attached) detailing yearly running costs vs rent showing the shortfall each year. Can someone confirm that these calculations look right.
It looks depressing. I have done this calculation over a 30 year period and it only starts to be positively geared at year 30!! Please refer to attachment for property specs. I have only showed a 5 year timeline. But the net holding costs only seem to increase by $350 per year.

Even with property attracting 7% yield it takes about 23 years to be truly positively geared (according to my spreadsheet). Assumptions are attached in the image.

It is deterring me from purchasing more property.

Your insight would be much appreciated.




IP Running costs example.png
 
Well you could take about 30% of those costs of with tax benefits

A yield of 4.8% is not great, personally I would only consider it if property had subdivision potential

I guess it's linked to our economy at the end of the day. You've had rent rise by 10% in 5 years or around %20 over 10. Some others will have a better idea but what this actual figure is but my guess is that wages have risen around 100% in the last 10 - 15 years
So i think your rental figures could potentially be miles out or if we run into trouble you could be spot on!
 
You have identified the issue - people are limited in how many negatively geared properties they can afford. Your return should also include your capital growth. Have you factored into your cash flow depreciation and building write off.
 
I dont understand how people become positively geared after say 5 years. I have run calculations on my spreadsheet (attached) detailing yearly running costs vs rent showing the shortfall each year. Can someone confirm that these calculations look right.
It looks depressing. I have done this calculation over a 30 year period and it only starts to be positively geared at year 30!! Even with property attracting 7% yield it takes about 23 years to be truly positively geared (according to my spreadsheet). Assumptions are attached in the image.

You have identified the issue - people are limited in how many negatively geared properties they can afford.

...but it looks like you bought a low/average yielding property to start with?

A yield of 4.8% is not great, personally I would only consider it if property had subdivision potential

I hope you've noticed what the overall theme here is. If you buy a low yielding property, it won't become cashflow positive in a hurry without you doing something to MANUFACTURE a better yield.

There are things you can do, so long as the zoning is right, the land size is right, or you have a large income. For instance, you could build a granny flat at the rear, or subdivide it, or rent by the room, or even pay down the loan. But I'm guessing that you are looking for something more vanilla.

You have also calculated your interest at 6.5% and management at 8.8%. Can you reduce these costs? Are you on a fixed rate, or have you just assumed that 6.5% will be the average for the lifetime of the loan. The management is a lot higher than I pay for any of my NSW properties, but I have an out of State one with 9.9%. Can you get this reduced too?

Have you factored in all your expenses correctly. Have you allowed for depreciation.

Most of my properties are positive geared from the start. I don't like losing money! So, I won't even think about looking at a property that has a yield lower than 7%, unless it has something that makes it worth my while. As someone else said, how many low yielding properties can you physically afford to hold in your portfolio? Now think how many you can hold that don't cost you money, or better yet, put money in your pocket?
 
I have assumed 6.5% as average interest rate. Yes I have learnt a valuable lesson. The property is new, a townhouse, I initially bought as PPOR now an IP (I know I know not the best investment as I bought in Jan 2011 during the peak of the cycle and property has not grown in value. but I was na?ve and didn't know anything about property 3 years ago). I do claim depreciation and with tax returns it would be more like $3000 out of pocket per year. Currently its neutral because interest rates are a lot lower than 6.5%pa.
I learnt a lot of things in buying at the peak, a new property on minimal land with low yields.... Lesson learnt!
I did buy a cheap IP (old property) March last year yielding 7.4% - but buy the time you add all these costs it is negatively geared.

What would average rent increases be say over a 20 year period - 3%, 4% or 5% per year? Or should it be more in line with inflation, or incomes?
Thanks in advance
 
As others have said, it is a relatively low rent yield property in the first place.
Besides depreciation and building allowances which you have not factored in (not cash-flow items but will reduce income tax depending on your MTR) and the higher interest rate, your assumption of rents growing at 3% is perhaps not indicative of what rents do.

Rents tend to be more related to a rent yield based on median property value on a long term basis, so you may be conservative with your rental income projections. My experience with investors and personally in the Melbourne market, where most properties purchased are by nature negatively geared (due to low rent yields) it takes from 6 to 10 years to become neutral and then positive after that. By no means all properties do this, but a rule of thumb to use as an indication.

You could look at what you could add to the property that a tenant would value and pay extra for, a split reverse cycle air conditioner for instance, allow pets perhaps (with clauses in your rental agreement for repair for damages), gardening services etc.
 
I hope you've noticed what the overall theme here is. If you buy a low yielding property, it won't become cashflow positive in a hurry without you doing something to MANUFACTURE a better yield.

Precisely. The properties I purchased on face value were 5-6%. Afterwards I MANUFACTURED a better yield and higher equity. Using many techniques I learnt here on Somersoft.

Properties now range from 8-10% on total costs spent. However since I purchase on 80% LVR and paid stamp duty and other costs upfront, it is more along the lines of 12%. You can very quickly grow your borrowing capacity and ease the burden of property costs this way.

It is very realistic and have heard and met people with much higher yields.
 
I don't know about other states but in QLD you would able to charge back some of the water usage bill to the tenant as long as your building is compliant with the water efficiency regulations.

Its not a whole lot of money since you still get slugged with the infrastructure charge which seems to be the highest part of my water bills.
 
How is this a good thing?

Ignorance is bliss?

I've seen a lot of developments being done out west where the numbers DID NOT STACK UP if you calculated it properly.

Sometimes just sticking your fingers in your ears and singing out loud helps you move ahead with... 'investing'.
 
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