my cashflow + props are negative!

[TMNT]

Just thought id throw a few questions out there,

just been looking at a few spreadsheets,

when i calc cashflowness of a property

I include the following
- PM management fee
- PM leasing fee
- Maintenance
- rates
- water rates
- Insurance
- 3 week vacancy

a few props that were supposed to be positive for the first year are neutral or negative,

eg, vacancy was a week longer, a few extra bits of maintenance along the way, a few bits of maintenance during open for inspecion period, eg broken windows, another clean, rates being about 10% higher then quoted, water supply charges going up since last meter check, tenant did a runner and the excess would pretty much equal the claim, got quoted rates at 1100pa by council, but turns out its 2100 pa because that particular area is higher etc. etc.

so how do you guys deal with this psychologically,

these props were supposed to be neutral at worst, and now they have cost me a fair bit in the first year,

do you guys simply say "meh, 2nd year, wont cost as much as 1st year, all good"

or do you simply say "obviously my estimates were wrong"

or do you panic and put them all on the market,

would be interested to see how people deal with this

 

[starter]

I look at it as cost of doing business, and property investment is a long term business.

 

[westminster]

Do not panic

How much out were you? If it was REALLY out and it's hurting your hip pocket then you could consider selling but the selling fees will really eat up any profit and might even cost you so really it's last resort unless the area has gone up and you stand to make a tidy profit.

Most of the services, ie rates, water, insurance etc will continue to rise so it is a bit of "obviously my calcs were wrong" but with a dash of "meh second year won't be so bad" because you might have no vacancies and no maintenance issues OR the hot water system will blow up on all of them and you'll be sunk.

Maintenance will generally even out over the years but you might need to set aside a bigger contingency fund.

Then you turn and look at it and think "is there any way that I can reduce my out of pocket?"
- why did it need another clean? Was it not cleaned properly by the tenants at vacate?
- why did it remain vacant for longer then 3 weeks? Is your PM advertising for new tenants early enough? Did they hold inspections early enough and screen applicants? was the price right? An empty rental sucks more cash than waiting for that $5 a week you want.
- can I increase the rents by $5. Remember to review all rents 6mthly or yearly and put up as you can.
- depreciate, depreciate. Do try and depreciate any work you do on them - claim every single thing you can.

 

[Africandaisy]

Great post Westminster! That was really sensible and supportive advice.

 

[Jen_PFR]

I look at it as cost of doing business, and property investment is a long term business.

Spot on. I said exactly this to my other half the other day - we've replaced two hot water systems and two fuse boxes in a fortnight. But we've had the properties for 4+ years, and they were older hot water systems at the time of purchase. The fuse boxes were also the original ceramic boards with fuses with replaceable wire, so it's just a normal part of owning a property - maintenance and repairs.

 

[redwing]

Psychology

A man was walking in the street one day when he was brutally beaten and robbed.

As he lay unconscious and bleeding, a psychologist, who happened to be passing by, rushed up to him and exclaimed, "My God! Whoever did this really needs help!"

Why were these properties "supposed to be positive for the first year"?

Gold was supposed to continue its bull run, Japan was in a down market, The US and the Euro are basket cases, who know's what's next?

 

[Sim]

when i calc cashflowness of a property

I include the following
...
- Maintenance
...
- 3 week vacancy

How much were you allowing for maintenance? How old is the property?

I know some people allow 5% of gross rent for maintenance in their calculations - which might be reasonable for a brand new property, but for anything approaching 25 years or more, unless you are really lucky, I'd be budgeting more like 10-20% of gross rent for maintenance.

I just did a quick report on some of my properties, and over the past 4 years one property which is approaching 30 years old has had 25% of gross rent spend on maintenance (new HWS, re-tiling leaking bathroom, etc), another nearly 30 year old property has had 6% of gross rent (the HWS was replaced about 6 years ago, so not included in these figures).

Another property which is about 85 years old has had 9% of gross rent spend on repairs in the past 4 years - but we had to replace the kitchen cupboards and the bathroom vanity, replace a falling down fence and replace the badly rusted and leaking roof a few years before that, so over a longer period, costs have been significantly higher - probably exceeding 20%.

I'd guess I've spent at least 15% of annual gross rent on repairs and maintenance on average over the past 10 years across my portfolio, possibly higher.

Replacing a HWS (which is urgent and mandatory - you can't put it off!), repairing or replacing broken air-conditioners or heaters, blocked pipes requiring extensive plumbing work, fallen trees, broken fences, broken range hoods (all of mine seemed to stop working in an 18 month period!), leaking showers, worn carpet, torn curtains, faulty sensor security lights, the list goes on and on.

With some care, you can work to minimise the amount of maintenance - but that often requires some capital investment to achieve - which has the same negative impact on cashflow in the short term.

Also, I think 3 weeks vacancy might be a little optimistic - depending on the location of the property. If it is in a really good location, average should really be less than 2 weeks annually (a lot less if you have long term tenants), but don't forget that the rental market is cyclical and you will get periods where you simply have difficulty getting a tenant, so over time the average will possibly be higher.

On the upside, unless you have bought in an area with a glut of rental properties available - you should be able to increase rents annually, which will help over time with expenses (although the cost of repairs does go up over time as well).

One of my properties was bought just over 10 years ago at around 9.5% yield. In that time, rent has gone up 75% ... but this is in an area of high rental demand (close to a university and hospital).

 

[Deltaberry]

You guys spend too much on maintenance. 25%?

Remember it's also a function of how much your property costs.

To use an example. Tiles will probably cost the same to replace regardless if it's in a $300k house and a $900k house. Same with ovens, dishwashers, broken taps etc.

But you obviously collect MUCH MORE rent at the $900k house. And that's one reason why little small houses have its disadvantages and I avoid them. In the bigger numbers, a week's rent will flood the maintenance cost to oblivion.

Looking at my portfolio (after reading your post), my maintenance costs at all the properties are below 3% most years and I've had some pretty horrendous things that cost thousands of dollars.

 

[lizzie]

I look at it as the cost of doing business.

I had a leaking shower/bath in a unit that was my problem (strata rules ) shortly after taking possession and it cost near $2,000 to fix as had to rip the bath and tiles out.

However, this property has also increased in value by around $90k over the last 4 years, and rents are now at around 13% gross on purchase price, so I don't complain.

Also remember that repairs are a tax writeoff

 

[TMNT]

thanks for everyones words and wisdom, especially westmin and sim,

westmin
I havent worked out individually what they have set me back, but
a few examples are

purhcase price: $140k, rent $240, $150k, rent $240, $115k rent $220pw

oh and I dont intend selling, definitely a long term investment, the worst one would have been $900 pa negative estimate, but in reality was probably more like $1500-$2000 negative

cashflow isnt really the issue, but I guess the psychology was what I was getting

sim: yes defnitely 25 years+ older, its interesting that the $150k property has had about $1000 of maintenance, whilst the $115k property has basically had 1 plumbing call out (the 3 above properties are on the same street basically, all in similar condition

id never considered the % of maintenance, more like an absolute figure of $300-$400 per year

as for vacancy, unless its a regional town with little demand or inner city pad with high demand, ive been giving myself 3 weeks, but on average its been probably 4 weeks, however, my ones, were 2.5 weeks, 3 weeks, and 8 weeks, so the last one brought the average up significantly, so yes I might need to allow 4 weeks on average from now as an expectation

im actually pretty happy with the growth on them, Ive had them for about 7-11months, and are now worth $150k, $150k, $135k, so about a 7.5% growth in less then a year, (was expecting more though! ) however, deep down am a tad disappointed, as was expecting more growth! (dont mind me)

 

[westminster]

Get your TMNT mojo on and think of the positives - 7.5% is pretty awesome for the low end of the market in regional areas. Slower growth is better in my opinion than big ups then big downs.

When you are having a 'woe is me' moment remember that the first year is the hardest. You have no other years to compare it to and it's a huge learning curve. 10 years down the track you'll have a great amount of data to average out these amounts and get the big picture but now you just have one year of data.

So stick a magnet on the fridge about the Turtle (tortoise) and the Hare and look at that when you worry things are moving too slow.

 

[TMNT]

Get your TMNT mojo on and think of the positives - 7.5% is pretty awesome for the low end of the market in regional areas. Slower growth is better in my opinion than big ups then big downs.

When you are having a 'woe is me' moment remember that the first year is the hardest. You have no other years to compare it to and it's a huge learning curve. 10 years down the track you'll have a great amount of data to average out these amounts and get the big picture but now you just have one year of data.

So stick a magnet on the fridge about the Turtle (tortoise) and the Hare and look at that when you worry things are moving too slow.

haha, you are a true inspiration, when you are down in my area, give me a yell and I will shout you a coffee,

im not in my first year any more, a couple of years in, however, despite buying under market at the bottom of the cycle , I dont think some of my properties have had the 7% compounding interest average, eg for a $200k property, im not quite sure they've actually risen 14k per year

since ive yet to experience a full property cycle, im expecting mine to double + more in 10 years, but when there is so much negativity in the market, its a bit hard to forsee it worth $400k in say 2023!

how do you focus on this aspect>?

 

[Sim]

since ive yet to experience a full property cycle, im expecting mine to double + more in 10 years, but when there is so much negativity in the market, its a bit hard to forsee it worth $400k in say 2023!

how do you focus on this aspect>?

Don't forget that growth is not linear - it is quite lumpy.

It is not unusual to see zero or negative growth for a few years and then see 50%+ in a year or so.

If you bought at the wrong time and paid too much, it can take much longer than 10 years for the property to double in value. If you bought at the right time and got a good deal, I have seen properties double in value in under a year.

One of my properties tripled in value in about 8 years. Since then, it has gone up only about 30% in the past 6 years or so (it was actually about 25% in 4 years, and the last 5% has taken nearly 3 years).

 

[tobe]

I try to underestimate potential returns. The rule of thumb I use is the same most banks do, 20% on the gross rental is a good average allowance for rates, repairs, vacancy body corp etc.

I also calculate interest costs on the full purchase price, plus costs. regardless of the actual amount borrowed. I am calculating return on investment, not return on a particular level of borrowings.
Id also calculate the interest rate on either a current 5yr fixed rate, or 2% above SVR.

As you can tell, I dont see many 'cashflow positive' properties available.

 

[TMNT]

Don't forget that growth is not linear - it is quite lumpy.

It is not unusual to see zero or negative growth for a few years and then see 50%+ in a year or so.

If you bought at the wrong time and paid too much, it can take much longer than 10 years for the property to double in value. If you bought at the right time and got a good deal, I have seen properties double in value in under a year.

One of my properties tripled in value in about 8 years. Since then, it has gone up only about 30% in the past 6 years or so (it was actually about 25% in 4 years, and the last 5% has taken nearly 3 years).

yeah agree, growth is never linear, what is it on average, 3 years of 80% growth 3 years of average 5-7% and 4 years of flatness? or something along the lines of that,

tripling in 8 years is awesome! most of mine have been bought at the bottom except my first 2 which have stayed pretty much flat/slight drop for the last 12 months, so im getting ready for a ride....eventually

I try to underestimate potential returns. The rule of thumb I use is the same most banks do, 20% on the gross rental is a good average allowance for rates, repairs, vacancy body corp etc.

I also calculate interest costs on the full purchase price, plus costs. regardless of the actual amount borrowed. I am calculating return on investment, not return on a particular level of borrowings.
Id also calculate the interest rate on either a current 5yr fixed rate, or 2% above SVR.

As you can tell, I dont see many 'cashflow positive' properties available.

agree, always 100% LVR calcs for me too however, I dont include stamp duty,

no point in getting a zillion % return because you borrowed $1 for the stamps to post the signed contract

 

[Sim]

yeah agree, growth is never linear, what is it on average, 3 years of 80% growth 3 years of average 5-7% and 4 years of flatness? or something along the lines of that

I don't think you can assert an "average" property cycle - I think you'll find they are all very different and depend on economic conditions, interest rate movements, availability of capital and other factors which do not follow the same cycles and so can have an almost chaotic effect on sentiment and the prices people are prepared to pay for properties.

 

[jackbak]

Remember it's also a function of how much your property costs.

To use an example. Tiles will probably cost the same to replace regardless if it's in a $300k house and a $900k house. Same with ovens, dishwashers, broken taps etc.

But you obviously collect MUCH MORE rent at the $900k house. And that's one reason why little small houses have its disadvantages and I avoid them. In the bigger numbers, a week's rent will flood the maintenance cost to oblivion.

That is a great point Deltaberry!

 

[BayView]

Never had a prob with being neg geared until the income didn't match the outgo.

Then, the sell-off.

 

[BayView]

SNIP
But you obviously collect MUCH MORE rent at the $900k house.

I agree about the repair cost ratios from cheap house to expensive house, but the prob with a $900k house is the size of the tenant pool is rather small - if it is a standard resi IP house.

The possibility of more vacancies is there.

Also, unless things have changed enormously, the yield on a house in that price range is usually not that good.

Maybe ok if the owner is a very high income earner who can handle the neg cashflow, and wants to minimise tax...