positive cashflow?

Discussion in 'Property Investment - Other' started by bettedavis, 3rd Aug, 2009.

  1. bettedavis

    bettedavis Member

    Joined:
    24th Jul, 2009
    Messages:
    36
    Location:
    Brisbane
    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
     
  2. Ausprop

    Ausprop Member

    Joined:
    20th Jun, 2004
    Messages:
    10,497
    Media:
    7
    Location:
    PERTH, WA
    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
     
  3. Jebb

    Jebb IP Addict

    Joined:
    19th Oct, 2008
    Messages:
    145
    Location:
    Earth
    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)...
     
  4. Propertunity

    Propertunity Real Estate Buyers Agent

    Joined:
    1st Jul, 2008
    Messages:
    9,698
    Media:
    1
    Location:
    NSW Central Coast, Sydney, Newcastle and Lower Hunter
    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.
     
  5. ricksta

    ricksta Member

    Joined:
    14th Jul, 2009
    Messages:
    23
    Location:
    Brisbane
    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.
     
  6. The Y-man

    The Y-man Member

    Joined:
    27th Sep, 2004
    Messages:
    11,564
    Media:
    29
    Location:
    Melbourne

    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
     
  7. jaycee

    jaycee Member

    Joined:
    21st Nov, 2007
    Messages:
    5,952
    Location:
    WA
    but Y-Man, why do you suppose so many of us who have posed this question consistently refer to 100% loans ?
     
  8. evand

    evand Member

    Joined:
    9th May, 2007
    Messages:
    5,171
    Location:
    Sydney
    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)
     
  9. The Y-man

    The Y-man Member

    Joined:
    27th Sep, 2004
    Messages:
    11,564
    Media:
    29
    Location:
    Melbourne
    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
     
  10. crc_error

    crc_error The Rule of 72

    Joined:
    21st Oct, 2007
    Messages:
    946
    Location:
    Melbourne, Victoria
    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
     
  11. crc_error

    crc_error The Rule of 72

    Joined:
    21st Oct, 2007
    Messages:
    946
    Location:
    Melbourne, Victoria
    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...
     
  12. bettedavis

    bettedavis Member

    Joined:
    24th Jul, 2009
    Messages:
    36
    Location:
    Brisbane
     
  13. Perth Investor

    Perth Investor Member

    Joined:
    20th Oct, 2008
    Messages:
    370
    Location:
    perth, WA
    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.
     
  14. HiEquity

    HiEquity Member

    Joined:
    18th May, 2008
    Messages:
    3,178
    Location:
    Australia
    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:
     
  15. BV

    BV Think outside the square

    Joined:
    11th Sep, 2003
    Messages:
    5,397
    Location:
    SYDNEY N.S.W
    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
     
  16. skater

    skater Capitalist

    Joined:
    8th Nov, 2003
    Messages:
    9,220
    Media:
    1
    Location:
    Sydney
    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
     
  17. crc_error

    crc_error The Rule of 72

    Joined:
    21st Oct, 2007
    Messages:
    946
    Location:
    Melbourne, Victoria
    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...
     
  18. kero

    kero Member

    Joined:
    7th Nov, 2005
    Messages:
    515
    Location:
    Perth, WA
    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.
     
  19. crc_error

    crc_error The Rule of 72

    Joined:
    21st Oct, 2007
    Messages:
    946
    Location:
    Melbourne, Victoria
    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..