Reply: 1
From: Sim' Hampel
Try this:
Borrowing costs = purchase price * borrowing costs factor
Deposit = purchase price * deposit ratio
Loan amount = purchase price + borrowing costs - deposit
Interest bill = loan amount * interest rate
Rental income = property value * rental yield
Expenses = Rental income * expense ratio
Net income = Rental income - expenses
Property is +ve geared if net income is greater than interest bill
Eg.
* Assumptions *
Purchase price = $100000
Borrowing costs factor = 5% (of purchase price)
Deposit ratio = 20% (of purchase price)
Interest rate = 6.5%
Property value = $100000 (same as purchase price)
Rental yield = 7%
Expense ratio = 30% (including repairs, maintenance, management fees etc)
So sums would be:
Borrowing costs = $100000 * 0.05 = $5000
Deposit = $100000 * 0.2 = $20000
Loan amount = $100000 + $5000 - $20000 = $85000
Interest bill = $85000 * 0.065 = $5525pa
Rental income = $100000 * 0.07 = $7000pa (= $135 pw)
Expenses = $7000 * 0.3 = $2100pa
Net income = $7000 - $2100 = $4900pa
Net income is LESS than interest bill, so property is -vely geared.
Of course, some of my assumptions are fairly harsh, and I'm looking at Interest Only not P&I. If you were to buy below value but charge rent based on full value that would help immensely, plus if you were to find that your expense ratio was less than 30% (ie. newer property and/or you manage it yourself) then that can also help.
The rental yield is very location/price dependant, so that would also need to be adjusted to your area.
If you put more money in for deposit, you can also make it +ve geared. Of course, the more of your own money you put in, the worse your returns will be (on a "Cash on Cash" basis).