Positve Cash Flow anyone ?

HI All

Have checked it out and done the calcs.

FYI I allowed

rates as stated,
vacany rate at 4%,
PM fee at 8%
no land tax
insurance assume $500 p.a.
repairs allowance of $1000 p.a (for two)
loan for $92,500 being $90k plus some for legals and SD at 6.5% interest rate (obviously not fixed)

Shows a positive return of $652 p.a.

but if you spend $2k a year on repairs and you loss $347 p.a.

This highlights the risk in + geared small value properties. They have to be always rented and indestructable to break even and unless you can get CG the return is marginal and the risk is high.

Regards Peter 147
 
Peter 147 said:
HI All

Have checked it out and done the calcs.

FYI I allowed

rates as stated,
vacany rate at 4%,
PM fee at 8%
no land tax
insurance assume $500 p.a.
repairs allowance of $1000 p.a (for two)
loan for $92,500 being $90k plus some for legals and SD at 6.5% interest rate (obviously not fixed)

Shows a positive return of $652 p.a.

but if you spend $2k a year on repairs and you loss $347 p.a.

This highlights the risk in + geared small value properties. They have to be always rented and indestructable to break even and unless you can get CG the return is marginal and the risk is high.

Regards Peter 147

And that is a real risk in some of these smaller country town properties, Peter. You are so right!
You are forgetting, however, the tax breaks that can make this property even more attractive (but we all know that you shouldn't buy a property for the tax breaks!!), especially to advocates of Lomas' theories.

However, there are investors out there who rely on these types of properties to fund their other neg geared properties. After all, you can only negatively gear so much before you reach a ceiling. The big thing that has made these properties so attractive over the last few yrs has been the bonus of unforseen cg, but who's to say that will now continue?

Without planning, long vacancy periods can really kill cashflow. For example, we prettied a regional house up recently after tenants moved out. Gave it an interior repaint and new window treatments, new bathroom bits and pieces etc. Thought we would easily rent it out again for $40 more than what it was receiving. After 7 wks vacancy with constantly dropping rent (and a string of unsuitable riff raff applicants) , we finally got $15 more instead ($195 instead of the anticipated $220).
For those who don't plan for such vacancy periods, there is a real danger of the property becoming negative after a mth or so. That's the reality.
I say always factor in 4-6 wks vacancy p/a because you just never know what's around the corner.
 
Here's a suggestion to reduce vacancy periods between tenants. Instead of bearing gifts to tenants, why not excite the PM, after all, the PM receives the daily enquiries into the agency from prospective tenants, makes decisions about things which cost you money, and decides which properties to push, and hopefully holds the price line for you. Most PMs would be swayed by an offered incentive, gift, cash, tickets, whatever. The licencee would see it as a compliment for the PM's work and PR skills - the PM is keeping those fee paying IP owners happy with the agency. Perhaps this is oversimplifying it and it is not true every time but in general, when you really think about it, tenants come and go, pivotal person PM stays. PM is the key, multiply that if you have more than one IP. In seeking the best return for outlay, that's my suggestion. wishing you all minimal downtime . . . . cheers
crest133 ;)
 
crest133 said:
Perhaps this is oversimplifying it and it is not true every time but in general, when you really think about it, tenants come and go, pivotal person PM stays.

My own experiences so far is that the PMs come and go more frequently than the tenants ; )

Peter
 
Jacque said:
And that is a real risk in some of these smaller country town properties, Peter. You are so right!
You are forgetting, however, the tax breaks that can make this property even more attractive (but we all know that you shouldn't buy a property for the tax breaks!!), especially to advocates of Lomas' theories.

However, there are investors out there who rely on these types of properties to fund their other neg geared properties. After all, you can only negatively gear so much before you reach a ceiling. The big thing that has made these properties so attractive over the last few yrs has been the bonus of unforseen cg, but who's to say that will now continue?

Without planning, long vacancy periods can really kill cashflow. For example, we prettied a regional house up recently after tenants moved out. Gave it an interior repaint and new window treatments, new bathroom bits and pieces etc. Thought we would easily rent it out again for $40 more than what it was receiving. After 7 wks vacancy with constantly dropping rent (and a string of unsuitable riff raff applicants) , we finally got $15 more instead ($195 instead of the anticipated $220).
For those who don't plan for such vacancy periods, there is a real danger of the property becoming negative after a mth or so. That's the reality.
I say always factor in 4-6 wks vacancy p/a because you just never know what's around the corner.


Hi Jacque

I did fail to add Depreciation.

How much? Hard to say? Pic gives no idea of age (looks old) so assuming post 1985 and bought for $90k a 4% p.a. building allowance it would $3600.

Is that correct?

Am I right to assume then, the dep loss, would it decrease the owners income or raise the income or the property?

If owners at 48c then it is $1750 plus to the $3300 p.a. allowing $1k repairs.

Am I right? how is depreciation treated in a + gearing? Never owned one :confused:

Regards, Peter 147
 
crest133 said:
Here's a suggestion to reduce vacancy periods between tenants. Instead of bearing gifts to tenants, why not excite the PM, after all, the PM receives the daily enquiries into the agency from prospective tenants, makes decisions about things which cost you money, and decides which properties to push, and hopefully holds the price line for you. Most PMs would be swayed by an offered incentive, gift, cash, tickets, whatever. The licencee would see it as a compliment for the PM's work and PR skills - the PM is keeping those fee paying IP owners happy with the agency. Perhaps this is oversimplifying it and it is not true every time but in general, when you really think about it, tenants come and go, pivotal person PM stays. PM is the key, multiply that if you have more than one IP. In seeking the best return for outlay, that's my suggestion. wishing you all minimal downtime . . . . cheers
crest133 ;)

Subtle bribery for PM's? Hehe..... I see what you're trying to say, Crest, but doing something like this isn't necessarily going to make your PM work any harder than she/he already is. I let my very good PM's know that I appreciate their efforts (nice thankyou cards and boxes of chocolates) but, in the end, there are only so many quality tenants that are going to walk through the door or enquire on the phone.
In this case, my PM showed about 8 parties through and rejected all of them because she would rather get a better quality of tenant ( as would I). There just wasn't the numbers walking in that usually do at this time of year. Believe me, she was more in despair than I was!
 
Peter,

When you have a net gain rather than a loss, naturally you have to pay tax on this gain. So, if the property returns you +$1000 p/a then you (if at 42c bracket) will be taxed accordingly. Therefore, ending up with an after tax gain of $580.
However, if you go and get a dep schedule done on the property, the on paper losses will decrease your gain, thus decreasing your tax payable.

Just taking the building allowance as an example then, the $3600 is added to the costs of the property incurred by the owner p/a. This effectively makes the property appear neg geared (on paper only), thus reducing tax payable.

Margaret Lomas explains it fairly succinctly in her books, actually.
 
Peter,

Further to what Jacque was saying, in her instance of +$1000 gain, and $3600 as depreciation, you have the added advantage of applying the whole $3600 to your Taxable income. For instance, assume income of $50k, add gain of $1000, equals total income $51k, then deduct losses (ie depreciation) of $3600, equals total Taxable income $47400.

Cheers
 
If the property is for sale at 90K you won't get depreciation on whole amount cos some of it is the land value. Only get depreciation on building value. Also 4%, I think, only applies to commercial properties. Only 2.5% of building on residential. (apart from a small window of opportunity if building in mid-eighties). I'd hazard that building is a little older than mid-80s but willing to be shot down in flames. Maybe it's just aged prematurely from all that heavy drinking in mining towns!

:)
 
In case someone is still interested in Mt Isa

Some of my opinions on the place.

If you want to invest in Mt Isa, never buy site unseen unless you have been there before several times and know your agent like your best friend.

Avoid RE agents from out of town offering properties in MT Isa like the pest, usually they are pedalling what the reputable in town agencies wouldn't sell to their worst enemy.

There are several areas that to the untrained eye seem fine, but that a LOCAL agent and a HONEST agent will tell you are the pits. Also there are areas that are marginal to said bad areas that are been slowly sucked into bad areas because they become impossible to tenant unless you surrender your property to the local housing authority who rents mostly to "locals", who systematically trash the place, and you have to fix it. Some of those areas are no go ghettos even for the police.

So far for the bad news.
The good news is that there are good agents, for example Jay's RE and LJ Hooker.

There are good properties clearly positive even if you borrow 100%, and there are plenty of tenant who earn 50 60 and 70k per year working underground in the mines. Of course there are also a lot of lemons, and lately some places are beginning to be overpriced.
The big question with mining towns is always what if the mine closes... In my opinion Mt Isa has gone past the one mine town, and has now population and activities that go beyond the mining.
Still, it is a higher risk area, you will make good money now, but who know how much it will last.
I wouldn't recommend a first time investor to start there, but I cannot say don't buy, you may find your best performer there.
I have 6 properties there, and cannot complain.

If you decide to go and have a look, Qantas flights out of Brisbane if bought well ahead are rather cheap. Book a day tour with a LOCAL re agent, and if you decide to buy, buy something that is possibly tenanted, and managed LOCALY and that does not need repairs. Local builders and tradesman besides being so busy that you cannot find one, charge as if you too owned a mine.

I was quoted for a 4 car's carport (after waiting for 2 months for the quote) $3500 to erect a $1800 Bunnings carport by one builder who told me he would send the apprentice to do it, and from another builder, $5,000 to erect a $2000 Mitre Ten kit and no guarantee, or $6000 to erect one made by himself, with guarantee.

Remember that termites and soil contamination are a big problem there, use LOCAL solicitor to do all the searches.
 
Still on the market

Marc1,

Interesting tips. It looks like those units you mentioned in the original post might still be on the market. Are they in the bad area of Isa? They have been on realestate.com.au for 4 months now, I guess that highlights one of the potential drawbacks of this type of regional property.

WaySolid
 
4 months on the market sounds bad. The good stuff does not last a week.

Last time I was there there was a pub (no license) for sale in the middle of the town. The Argent.. I wonder if it's sold now.
It was on the market for years, and the price went down from over a million to 200k. Three stories, a separate drive through shop, the rent from the drive through would pay for the 200k alone.

Conceded the roof of the main building leaks badly and it needs half a million repairs or more but it would make a nice investment for someone with local knowledge and with the money to bring in tradesman from Brisbane. The local trade is totally overworked and overpaid.
I am waiting for the boom to stop so that I can pay someone to fire proof between my units and get them strata titled. Something I cannot even get a quote for now.
 
We have to be careful no to put too negative a spin on our regional friends!

We can be so analytical that we can easily forget that a straight-forward property transaction is all that's between us and positive cash flow.

It's easy to fall into a theme where there is no investment unless capital growth is virtually guaranteed. Perhaps those that actually purchase property look to get a return on their money straight away.

I find this is a good manner in which to proceed. You get to have the fun of the deal and have the capacity to do another one.

Whilst regional property is more risk, there is more return. Overall much regional property at the moment is a more balanced investment than city property. Hence, in my opinion, much regional property is undervalued.

Plenty of rural coatal has now reached city yield levels. Investors are realising that traditional inland Aussie towns will continue to tick over like they always have. Furthermore, they offer more undeveloped stock (block of flats, say) which have not been touched by professional landlords (like you).

Plenty of people are realising that they have been too harsh on regional/rural. Bargain hunters are finding stock at yields of 13% or more. Please note that areas on high yields often correct to lower yields once discovered, which can take care of capital appreciation for those who get in early.

My message? if you can find 13% - take it! There are plenty of towns with a vacancy rate as good as the city!
 
Nicko said:
My message? if you can find 13% - take it! There are plenty of towns with a vacancy rate as good as the city!

If properties in regional towns are achieving 13% yield now (after the recent property boom), what were they achieving before it? 20%? 25%, unlikely.

And if yields are so high why was there no cap. growth between say 200-2003?

Doesnt say a lot for long term growth prospects. For cashflow gurus only, i can think of better ways to receive such a small income stream. Pass.
 
Top