Positive Cashflow

[stinadaze]

Its been 2 months since we decided we want to invest in property and we are getting closer to knowing what we want to achieve and how to achieve it.

There is one thing which to me is still a “myth” as I have not come across any properties that are positive cashflow from the start!

I know that as a guideline for rent it is sometimes seen as, if the property cost $300k then rent would be approx $300/week. Is there some sort of guideline re cashflow properties? I’ve heard of formulas (which are quite far fetched!) and its not what I’m after. I’m not looking for a quick fix either. I’m just curious as to whether properties need to be brand new for them to be cahflow positive (maximum depreciation), or maybe very cheap and then refurbish. Can a property with a purchase price of say $700k be cashflow positive? Am I right in saying that units are generally more difficult to be cashflow positive? I say this because the strata and body corporate fees etc always add up quite a lot!

Sorry for the long post, but just throwing this out there to see what I can learn from others who have been doing this for a while and have probably noticed a “pattern” when looking for such a property. I know there are always exceptions, but I’m just after the general idea!

Thanks and hope 2010 will be a great year for you all!

 

[PI141]

I can't make the numbers work for me if I were to buy a house for $300 000 and rent it for 300 a wk I would still make a loss of $1000 a month - even if I were to be in the highest tax bracket it would still cost me $500 a month -

I think I need to suck it up for a few years and hope that the rents rise to become CF neutral

 

[jaycee]

The way I look at it is:

Expense other than interst 2.5% of purchase price
Interest 5-7% of purchase price

So up to 9.5% per year return to break reve.

Oh, but youll get to claim depreciation without having to spend the money, so tke 1% off

so you I figure you need 6.5% -8.5% return -

Most normal average Jan Somers, within 5-8km's of the cbd dont give this as the normal return from what I have seen - the average for average properties (now I've opened can of wors, what is verage, as if it's we've never discussed this in context before....) in averge city areas seem to give around 5%.

So one would suspet someone looking for something 100% positive form the start to search to identify something undervalued or with potential

Identifying and quantifying would be my shortfall....

 

[Jamie M]

The CBA put out a report a few months back on CF+ areas in Australia. Most were in regional areas (I know Wagga Wagga had two suburbs) but there were some in West Sydney (I think it was units around the Bankstown area).

As interest rates go up they'll be harder to find - but not impossible.

Cheers

Jamie

 

[Nathan]

you need to calculate all expenses, with no roughly numbers they must be spot on.

from that you need to get rent higher then this amount, over time you know how to use rough numbers but i always qualify them to be exact before doing a deal.

 

[Lil Skater]

you need to calculate all expenses, with no roughly numbers they must be spot on.

from that you need to get rent higher then this amount, over time you know how to use rough numbers but i always qualify them to be exact before doing a deal.

Wouldn't it work just as well if you over estimate the numbers?

I understand looking for CF +ve means a property could become CF -ve by over estimating, but surely you can see what one is closer to neutral and go from there?

I more or less agree with Jaycee though, you'd be looking for something that is undervalued or has improvment potential to immediately have money coming in. Plus you'd need good tenants from day one, as we all know, it's not as smooth a ride that we'd like it to be.

Goodluck Stinadaze.

 

[our obsession]

Stinadaze:

There is one thing which to me is still a “myth” as I have not come across any properties that are positive cashflow from the start!

throwing this out there to see what I can learn from others who have been doing this for a while and have probably noticed a “pattern” when looking for such a property. I know there are always exceptions, but I’m just after the general idea!

Welcome Stinadaze.

We have been purchasing and building in areas of regional Victoria with what we deem "good returns".

Just from memory they have been 8% returns and greater.

-Seeking to "buy well"good deals...my love of research, networking and knowledge of areas, (we have invested in), has been an important factor.

-Eg; attending all the auctions of everything I am remotely interested in, not only was fun theatre, but showed me sometimes how poorly presented property can be a fickle thing to consumers/would be purchasers.

-Keeping a close eye on what comes onto the market, (or not).

So, having relatively good knowledge and research under the belt about what houses had been fetching, what they had been renting for, when opportunity arose to put offers in on (some) of the "less public appeal" places and land, I jumped.

One place I bought was sold to me for $55,000. Good, solid 3 b/r 1 bath house, took $250 to fix a hole in the wall, I painted most of it out, put in a decent split system, few other bits and pieces and had about 8 offers of renters coming to the door while I was painting.

It now rents for $155 p/w and about to go up to $160. It also is adjacent to another IP we own.

Some recent land blocks I bought for relatively good value/low prices are going to keep me busy constructing much sought after new, well presented IP's, (houses and units), the one at hand will have a 10% return. Loan being $157,000, rent for $320, with possibility it may even rent for more, the renters are determining what they are prepared to pay ATM. I am not about to interrupt them.

Similar land blocks within a few months, (closeby), have already increased over $15,000. Actually $17,000+ and they are all but sold out.

So, I am investing in regional Vic, and there can be a perception that because it is regional=therefore no/little capital growth. That is only a perception. Sometimes our personal, emotional perceptions can cloud good business.

Some data here, (only for Vic):

http://www.somersoft.com/forums/showthread.php?t=57396

Deals are out there. I do believe there are other investors finding/sourcing and creating good cashflow property deals too in other States.

Regional cities of Victoria can have some good buying.

I also invest in some smaller towns. Now that obviously does not have leaps and bounds of capital growth, but demand and supply is a wonderful thing.

Or maybe it is part of the myth and I am but a mythical creature.

That's just me being silly, good for you giving consideration to investing and out there checking things out. Best to you on the old investing journey.

 

[quoll]

There is one thing which to me is still a “myth” as I have not come across any properties that are positive cashflow from the start!

Your not looking in the right place, your not looking at the right property and it might not be the right time.

We bought back in 2004 at Roxby, 2 houses on 1 title, $300k, rent was $260/week each so $520 week on $300k or about 7.5% which made it break even or + by a few $, the next year rent went to $350 each and we where well in the +.

Currently in Roxby it's sitting around the 5% mark same as the average 3x2 house in suburbia.

Positive is still around you just need to know where to find it. It may not fit into your investing style either.

Cheers
Graeme

 

[jaycee]

Your not looking in the right place, your not looking at the right property and it might not be the right time.

We bought back in 2004 at Roxby, 2 houses on 1 title, $300k, rent was $260/week each so $520 week on $300k or about 7.5% which made it break even or + by a few $, the next year rent went to $350 each and we where well in the +.

Currently in Roxby it's sitting around the 5% mark same as the average 3x2 house in suburbia.

Positive is still around you just need to know where to find it. It may not fit into your investing style either.

Cheers
Graeme

the two most pertinent points I've found on this so far...

 

[stinadaze]

Thanks Mortza for the CBA report. Interesting and was happy to see a few of the suburbs on my list to look at on their list!

Jaycee – thanks for the rough explanation re the return I approx need to aim for. and I understand re the “average” part of your explanation wont hassle about that!

Nathan – agreed. Would rather use numbers that are as accurate as possible! The only problem is that it is quite time consuming. Or maybe its just till I get used to the inputs! I have not been able to find an excel sheet that is quite straightforward to use yet. The one I have and really liked does not work probably I think! :s

Our Obsession – that encourages me thanks. Being our first investment we are bit scared of venturing out to states other than NSW. We have felt really uncomfortable when we have tried to trust “professionals” and would like to try and do this “alone” as much as possible. Though I am aware that this might limit us :s but I think that having a full time job plus run a business on the side does not leave me enough time for property investing, let alone in another state! Might get more confidence once we have the first up and running I guess. But would rather walk first and run later then try to run and stumble!

 

[tez]

CF+ or CF- wouldnt it also depend on the amount of deposit you are putting in?
What percentage of deposit are people using when working out a property is CF+ or CF-?

 

[stinadaze]

the two most pertinent points I've found on this so far...

that is exactly what i am trying to do i.e. learn where i should look and what i should look for

could you explain further re: not fitting into my investing style.

Cheers!

 

[boods99]

CF+ or CF- wouldnt it also depend on the amount of deposit you are putting in?
What percentage of deposit are people using when working out a property is CF+ or CF-?

I base all of my calculations on 100% finance, including legals etc. As I use a LOC to fund the deposit, these are still borrowed funds.

Boods

 

[Propertunity]

Is there some sort of guideline re cashflow properties?

jaycee is pretty right. You need Mortgage IR + 1.5% to be cash flow neutral > +ve.

So if IRs are 6.0% now, then you need gross rental yield to be 7.5%.

How to work out the rental yield when you know the RENT per week & the PURCHASE PRICE OF THE PROPERTY and allowing for 2 weeks vacancy pa:

FORMULA #1:
YIELD % = Rent per week (in dollars) x 5,000 ÷ Purchase Price (in dollars)

WORKED EXAMPLE:
What is the yield on a property that gets $500pw rent and is selling for $400,000?

Yield% = 500 x 5,000 ÷ 400,000 = 6.25

How to work out what RENT per week you need to make the property cash flow neutral if you know the PURCHASE PRICE OF THE PROPERTY and allowing for 2 weeks vacancy pa:

FORMULA #2:
Rent per week (in dollars) = (Mortgage interest rate + 1.5) x Purchase Price (in dollars) ÷ 5,000

WORKED EXAMPLE:
What is the rent I need, to be cash flow neutral, on a property that is selling for $400,000?

Rent needed = (6.0+1.5) x 400,000 ÷ 5,000 = $600 pw

Just quick easy calculations you can do in under 60 seconds.

 

[skater]

Your not looking in the right place, your not looking at the right property and it might not be the right time.

Precisely!

For a CF+ property, I work on roughly 10% yeild. This takes no time to calculate at all. So, if the property costs $300k, the rent would be around $600pw. They are hard to find, but they are out there.

For instance, I bought 2 properties in Tassie, one was $28k, the other $56k, the rents, at the time were $105pw and $155pw respectively. These have now been sold. In Vic, I bought one for $56k, renting for $155pw. I still hold this one and it is getting $170pw now.

I also have bought some in regional NSW on similar yeilds. Most of these properties did not require money to be spent on them either. I have one ATM that is a house with granny flat. Only purchased a few years ago, in Sydney, for $196k. House renting for $300pw, and the flat (I need to do some work on this) will be let for around $160pw.

If you expect to purchase something new, in your own back yard, then you will not find one. You have to put in the hard yards and do the research. Then when you find them, you might not like the risk profile.

 

[Fudge]

I base all of my calculations on 100% finance, including legals etc. As I use a LOC to fund the deposit, these are still borrowed funds.

Boods

Ditto,

F

 

[devo76]

My properties are in the shoalhaven which has 5% returns on average. At first look good returns are not there but they do pop up. Some examples are

home in cbd split into 3 units 1000 sqm subdividable block.
Asking $300,000 renting $430 pw.

Duplex. 2 bedder and 3 bedder.
Sold $258,000 rents for $500

cbd house with seperate metered granny flat. 1000 sqm corner subdividable block.
Sold $300,000 ish rents for $455

these generally pop up frequently. They don't stand out at first but if you are looking you will identify the key features.

 

[neK]

Positive is still around you just need to know where to find it. It may not fit into your investing style either.

Cheers
Graeme

Graeme, what do you mean when you say it may not fit into one's investing style?

 

[Bushy]

neK,
Not knowing what your style is the same as how long is a piece of rope.
Different styles might include
1. cashflow +, low growth --- because you have a low income
2. cashflow -ve, High growth ---because you have a high income
3. A house thats needs a reno, revalue then higher rent
4. cashflow + because you have hit the seviceability wall
5. cashflow - because all your other IP's are now CF+ because of rent rises

While initially you might be driven by cashflow you will soon find out that capital growth is the essential ingredient to expand your portfolio until the banks won't lend you money because of your cashflow (or lack of). You then have the choice to buy CF+ or to be creative to get through the brick wall.

It is easy to get caught up in the numbers trying to make sure the IP is CF+ from day one. I use to about 9yrs ago, refusing to go over 53k for a property when the asking price was 55k and you could rent it for $105pw at the time. Because I didn't want to pay $800 per year out of my pocket I missed out on properties that are now worth around 300k and rent for $240pw. Hindsight tells me that rent increases will eventually make the property cashflow + and that if you buy below market price when nobody else want's to buy you will do alright in the long term. Hope it helps

Bushy

 

[Samantha]

Hi Skater

With those yields, do you get much capital growth? I am unfamiliar with your side of the world - that is why I ask. If not can you explain your strategy to me or is their a past thread I can read?