positive cashflow?

I am really confused when it comes to how to achieve positive cash flow in IP even with this low interest rate.

For example if you buy a property of $300k with 7% interest rate (current 5yr fixed rate), rental expense being 25% of rental income, in order to cover interest payment of 21k,

21k / 75% = 28k should be rental income, which is about $560 pw.

And I think there is no way you can charge $560 rent on $300k property.

I just finished reading 'more wealth from residential property' and from my understanding, what the book is saying is 'keep buying IPs with IO loan, wait for CG while paying interest on loan, then sell some IPs to get ride of debt'.

However, as you accumulate more IPs, you need to deal with increasing pressure from negative cashflow.

Is it what most investors are doing?

Sorry maybe I am asking a dumb question, but as you guess, I am totally new to all these things and trying to learn. :eek:

Any advice if I got this wrong?

Thanks in advance
 
they aren't dumb questions. a lot of property purchases don't make sense... the losses are funded by peoples other incomes. You are competing against this mentality
 
I was under the impression that most cashflow positive properties were at the foot of the mountains where $150k properties were renting for $220pw or so (is that even +ve? just off the top of my head)...
 
Any advice if I got this wrong?

Yes a bit. Firstly buying cf+ properties now.

You need to:
1. Buy a property with 6.5% - 7% gross rental return
2. Get a mortgage of 5.x%
3. Allow for 1.5% - 2% running costs
All this = cash flow neutral at worst and cf+ after tax / depreciation etc.

Secondly, present economic circumstances aside (lower than normal interest rates), most investors start of with cf neg IPs but over time, rents increase to the point where they become cf+ or neutral (IO payments stay much the same) thus allowing for more purchases.
 
I agree with your assumptions - With negative gearing or getting 300pw for a house worth 300k I find it takes around 5 years for the property to be just +'ve or neutral.
 
For example if you buy a property of $300k with 7% interest rate (current 5yr fixed rate), rental expense being 25% of rental income, in order to cover interest payment of 21k,

21k / 75% = 28k should be rental income, which is about $560 pw.

And I think there is no way you can charge $560 rent on $300k property.


The main issue is you are assuming 100% loan. What if you bought the property with 80% loan, so repayments are $16.8k pa.

Assuming 10% for management fess and another $2k pa on top for other costs, I think you'll find the rent required is about $400 per week.


If you go for a 70% loan, you only need to get $360 pw.

Cheers,

The Y-man
 
but Y-Man, why do you suppose so many of us who have posed this question consistently refer to 100% loans ?
 
Because the calcs have to be made on the full value of the house, not the loan.
Why not do the calcs a 20% loan LOL

To positive gear @100% at the moment with a property worth buying in a decent area is along shot right now. (even with circa 5% interest rates)
 
but Y-Man, why do you suppose so many of us who have posed this question consistently refer to 100% loans ?

Not sure - maybe it is the allure of getting into the deal with "no momey down", no need for saving up deposit, - i.e. that ideal something where you put no money into it and it generates cash.....


Cheers,

The Y-man
 
Generally properties will not be cash flow positive from purchase, however it will take a couple years of rent increases for this to happen.. in the mean time, deprecation and other costs will give you tax deductions which means the tax man will assist with holding costs.

People also slap on a new lick of paint and make other cheap improvements to the IP so a higher rent can be charged from the outset, making the IP cheaper to hold
 
Not sure - maybe it is the allure of getting into the deal with "no momey down", no need for saving up deposit, - i.e. that ideal something where you put no money into it and it generates cash.....


Cheers,

The Y-man

there is no point in saying "we have 50% deposit, so this property is cash flow positive" you need to work it out with 100% finance, especially if your drawing on equity elsewhere to fund your deposit.

But sure, as you pay down your IP, and rent goes up, this means your IP will be CF+ sooner...
 
Yes a bit. Firstly buying cf+ properties now.

You need to:
1. Buy a property with 6.5% - 7% gross rental return
2. Get a mortgage of 5.x%
3. Allow for 1.5% - 2% running costs
All this = cash flow neutral at worst and cf+ after tax / depreciation etc.

That's exactly what I am aiming at in buying my first IP but is it possible to get a mortgage of 5.x% even now? Sorry maybe I didn't do my homework very well.. just spoke to two finance brokers (Aussie & LoanMarket) and was told that a current fixed rate is 6.19% for 3 yr and 6.99% for 5 yr :eek:

The main issue is you are assuming 100% loan. What if you bought the property with 80% loan, so repayments are $16.8k pa.

Assuming 10% for management fess and another $2k pa on top for other costs, I think you'll find the rent required is about $400 per week.


If you go for a 70% loan, you only need to get $360 pw.

Cheers,

The Y-man

I have 150k saving but have to use all in buying my first home then draw on home equity to buy IP.. so it should be 100% loan. :(

I put together a speadsheet to see what will happen to my cashflow if I buy one IP every two year. It seems ok over time but only assuming average interest rate is 8.5% (which doesn't make me comfortable) and as the number of IP increases it dosn't seem to achieve positive cashflow in total ever. (as -ive cf from new acqusition eating away +ive cf from existing IPs)

Maybe I am looking too much ahead. :eek: I guess I may need to change my plan of buying IP in inner city areas and move to a bit outer surburbs.

Thanks to everyone.
 
Of course you could just set up a $50K line of credit to run your investment property through, and then you'll be less likely to care if it is positive or negative in the short term.

After a few years when the line of credit is filling up and you start caring, the rent should increase (as per Crc_error's post), so you won't care then either.

$50K is a bit of equity to tie up on what is essentially a trading account, but it sounds like you have $150K to play with, so the equity is probably there. Gives a great SANF to know there is $50K spare lying around just in case, and would last easily 5 years under normal circumstances for an average $500K investment property, before the negative cashflow would use it all up. By then hopefully your IP is cashflow positive or neutral.
 
Why are you using the five year fixed rate rather than the current variable rate? Not saying it's not a good idea BTW but your examples look better if you use the current variable rates.

You also don't seem to be including depreciation in your calcs. (Newer) IPs can be negatively geared before tax and depreciation but positive cashflow on an after tax / depreciation basis. This is just due to the tax refund from the depreciation claim, able to be claimed on a fortnightly basis if you're a PAYE employee.

Anyway, +ve geared properties do exist - I understand there are quite a few available in Port Hedland at the moment! :rolleyes:
 
bettedavis

It doesn't sound like a good option but
The rent will be $560/w one day.
(If rents increase at 5% pa you'll be there in 10 years time......)

You should try to buy cheap so that the initial yield is higher and then fix the place up so that you can collect a higher rent.
If you are on a good wage you will get taxes back for any depreciation plus actual losses so the initial holding costs will be lower.

Ofcourse property investing is not for everyone
and if the figures don't look good it's because they aren't good so for the figures to improve, rents have to go up or property prices have to stay flat for a long time or they'll have to come down.

So if you decide to invest be careful what you buy and where you buy it.

IMHO
 
There is more than one way to get positive cashflow.

You will find there are more properties that are cashflow positive in some Regional areas. You might subivide & sell half. You could add a granny flat. You could buy well & renovate. Convert a garage into another bedroom.

Just a few examples of thinking "outside the box".

BTW, fixed rates are OK at the moment, but you could use variable. Most of my variables are on 4.91%:D
 
Why are you using the five year fixed rate rather than the current variable rate? Not saying it's not a good idea BTW but your examples look better if you use the current variable rates.

:

because the 5 year fixed rate is a more realistic figure we should expect to pay over the next 5 years.

The current variable rate will NOT stay at 5%PA for long.. they are talking 6%PA by mid of next year.. I'm sure the banks wont hold back once there are signs of recovery...
 
can't see RBA increasing interest rates in the next few months, or dare i say even the first quarter of 2010.

though some say our appettite for property investment and business confidence has returned, there is still volatility in the stockmarket (which represents uncertainty) and the coming disasterous forecast unemployment which is expected to peak at about 8%.

with the federal and state government's spending in the past 12 months, RBA no longer has the same situation and condition they once have i.e. Federal Budget surplus. RBA knows we are in a deficit. Any increase in interest rate will hurt not only mortgage holders but also government departments!

in my opinion, RBA might even cut rates and then keep them on hold for a while.
 
Well kero, the RBA has indicated that they will not hesitate to increase rates on the back of higher unemployment. Inflation is also starting to flair.. so even though we may be safe for the next few months, in 12 months time expect increases, not decreases. RBA has indicated they have ended the rate cutting cycle.

Financial markets have factored in a 1% gain in 12 months time..
 
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