Putting data into PIA

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From: Apprentice Millionaire


Hello,

It certainly is very quiet around here!
I have just installed PIA Adv on my PC, and started playing with it. Playing is the word, because although I can type in figures, I realise that as there are so many parameters that can be changed, I need to learn more.

For starters, I put in the figures for a few IPs that I am considering. No drama with purchase price, rent, income figures. So I got a report out, and then I started looking in more details, and I saw I needed to ask questions. Maybe it is tutorial time

First question:
- how does one determine building costs and factor in the depreciation? How do I differentiate between a 10 years old or a 1 year old IP? Is it just by varying % figure of the purchase cost?

- The program has defaults for insurance costs, rates, maintenance. Is it usual to just leave the defaults there, or does one change the values for each property? (Ancillary question: if the values are changed, are there good sources of data for them - such as rates, etc. - on the Internet?)

- The program mentions that loan costs, if paid at purchase time, reduce the amount of the loan. How is that reflected in the program: does one just enter 0 for all loan costs?

Just a few questions... Thanks for any help and advice!

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)

 

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Reply: 1
From: Terry Avery


Hi AM

I too play with PIA when I am considering purchasing an IP, it is a
reasonably good decision making tool. Based on my experience I would offer
the following:

You have to work out the building costs yourself but the program applies the
2.5% to the capital allowance and I think an average to the furniture
depreciation but you can customise this for each furniture item. I don't
think you can differentiate between a 1 or 10 year old house but your
starting cost would reflect the age of the item and not the replacement
cost.

You can also change the defaults for insurance and rates, etc. I change the
defaults to match what I know about the costs, this is usually lower than
Jan's assumptions so you could say she uses a conservative estimate to make
sure you are not mislead with fantastic figures. I wonder about the second
tier marketers who use her program to sell properties, whether they put
unrealistic assumptions like higher growth rates to make it seem more
appealing. I tend to lower the growth rates to be conservative in my
calculations.

Some of the information you ask for, such as rates, you need to ask the
agent when doing your research although I often get a blank look when I ask
about depreciation schedules and the like.

On the loan detail screen I would leave the costs in the calculation as your
return on investment is calculated on all the costs of acquiring the
property. If you leave the costs out then you get a return figure which is
not accurate, it will be higher than reality. You have to play with the
figures to get the costs recorded and the loan amount right. My costs are
part of the loan so interest are calculated on the costs as well.

 

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Reply: 2
From: Ian Somers


Hi Jacques,

First of all you should think of the PIA software as a tool for helping you make objective decisions with regard to IPs. It is not meant to be an accounting tool. It is also meant to be as easy to use as possible, given that a precise can be quite complicated. Here are a few tips that might help you on your way...

1. How does one determine building costs and factor in depreciation?

In theory, you are required by the ATO to get an estimate of the cost of construction from a registered quantity surveyor or from other appropriately qualified people e.g. a clerk of works such as a project organiser, a supervising architect or a builder who is experienced in estimating construction costs of similar buildings. The structure of PIA is such that it always wants to give you a bottom line and so has default values for all the variables including building costs and depreciation rates. The default is set at 50% of the property price and the rate at 2.5%. If you are in a position to provide a better estimate, do so.

2. Is it usual to change the default values for property expenses?

Yes! As mentioned above, the program must have starting values to give an answer and the default values have been chosen to give reasonable and conservative estimates. But of course these will be different for different types of properties (maintenance, insurance, etc) and in different States (land tax, agents commission, etc). For most residential properties, the expenses will be somewhere between 15 and 30% of the rent. For holiday units with on-site managers, it can be more like 50%.

3. Loan costs?

The total cost of an IP is made up of the cost of the property itself, the purchase costs (stamp duty, conveyancing, etc) and any loan costs (establishment fees, etc). If you are borrowing the lot, then the loan might be about 106% of the actual purchase price. The complicated bit is that some of the loan cost components are usually set as a percentage of the total loan so it is not easy to work out the loan amount manually. Likewise, if you pay the loan costs up front, the total loan amount is reduced which in turn means that the loan costs are reduced. You do not have to be overly concerned by this as the software recalculates the appropriate loan amount for you.

In all of the above, keep in mind the reason for using the software... to evaluate a property investment. You will never be in a position to have all of the data precisely as nobody can confidently forecast future rents, property growth etc. If you do not have precise data on items such as original construction costs, use a couple of values at each end of what you think it might have been in order to see what impact it has on the bottom line. If it has a significant impact, then you know it is worth doing more research.

 

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Reply: 2.1
From: Apprentice Millionaire


Thanks Ian and T Avery,

Very useful info!

I guess I lost the perspective (couldn't see the forest for the tree!

So the way I should use PIA is really to get a conservative picture of what the property might do for me. The parameter defaults, I take it, are all conservative? So the main inputs are really purchase price, how much I borrow, the interest rate, any costs and the rental income. And I only need to look at other parameters in detail when I am finalising a choice between two properties. Would that be a fair comment on the use of PIA?

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)

 

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Reply: 2.1.1
From: Terry Avery


Yes AM, the default figures are conservative but the beauty of the program
is being able to put in more specific information for a property you are
looking at and then play with the assumptions such as inflation rate and
capital growth. You can work out your worst case scenario such as interest
rates going back up to 15% (1991) long vacancies and so forth. By looking at
the worst case you can stop yourself from getting overcommitted too quickly.

I have been to seminars where they give you a free consultation and they use
PIA to show you how great things will be but I am sure they may not be using
realistic predictions of capital growth but best case figures and as we all
know life throws up surprises all the time.

 

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Reply: 2.1.1.1
From: Apprentice Millionaire


Hi T Avery,

>I have been to seminars where they give you a free consultation and they use
>PIA to show you how great things will be but I am sure they may not be using
>realistic predictions of capital growth but best case figures and as we all
>know life throws up surprises all the time.

When I first downloaded the trial version of PIA, I recognised the format immediately: Custodian Wealth Builder use it, and as you say, many others. The good thing about owning a copy is that I get to set the parameters

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)

 

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Reply: 2.1.1.1.1
From: Kristine .


Hello, a rather belated postscript to the topic

I am now using PIA every day to demonstrate the cash flow and potential growth to prospective purchasers (we are licensed users).

Some of the comments in this thread have referred to demonstrators 'gilding the lily' by putting in high growth, low interest or other extreme figures.

I find that by putting in low growth and high interest rates people are able to actually 'see' how good the program is, and many have said that for the first time, they now fully understand what negative gearing is, and how it can work in their case.

Because the program is so clear about the benefits of building and other depreciation, the audit trail of cause and effect is obvious.

However, because I am using the program in a demonstration sense, which means I talk a lot and explain every variable, for example, why I have chosen the figure and the overall impact of that figure, it is not a passive experience for the prospective customer.

Many people have heard of Jan Somers, but have not had the program demonstrated to them before. Also, I always have a copy of 'Building Wealth in Changing Times' somewhere near the computer, and quite a few people have made a note to buy a copy.

All in all, I must say the program is a delight to use, and People are stunned when I offer them a 40 year forecast! Although I must admit, they really love the pie charts, overlapping graphs and other graphics.

Thanks for such a user friendly program

Kristine

 

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Reply: 3
From: Wayne Scholes


Hi,

Just thought I'd add my 2 cents.

I got this trick from someone on the forum over 12 months ago and I have found it very helpful

When you first set up the program for a IP you may be interested in, wind back the capital growth figure until the program complains, then slowly go back up and when you get to the point where you are just able to display a positive IRR. Take a note of the growth.

If the property still looks attractive with very little capital growth, then it might be worth considering.

I am no expert but I have found this very reassuring.

Wayne

 

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Reply: 3.1
From: Apprentice Millionaire


Hi Wayne,

Thanks for the trick!

Cheers
Apprentice Millionaire

 

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Reply: 4
From: Grant P


I think that this topic may be a classic one for discussion and education at an MPINet meeting. What do you think?

Grant

"Whether you think you can or you think you can't, you're right!" - Henry Ford