One of the main factor to set property value is weather investors are cash flow positive or negative. With the dropping mortgage rates and increasing rents many more investor switch from cash flow negative to cash flow positive. What is your level of mortgage rates that set you in a positive cash flow?
what mortgage rate do you need to have positive cash flow?
- Thread starter boz
- Start date
What are you asking Boz? To add up all our mortgages and average all of our yields and find out what the IR needs to be to take us into +ve territory overall?
What about tax benefits and depreciation?
Yes, average all and I would include the tax benefit even if they'll come up only at the end of the financial year. Depreciation not included
I think every property investor would have an idea if they are currently cash flow positive or negative and what rate will send them in trouble and what is the neutral rate.
I think cash flow is really important to put a floor on home prices as it will set the numbers of property for sale
EDIT:
I actually forgot to add that it is only related to investment property and not to own property (as of course on own home you can't be cash flow positive)
EDIT2:
I just realised the poll show how the member voted, can a moderator correct that and put it anonymous. Sorry about that, it is my first poll on this forum and I stuffed up
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Took an overall aproach to it and included the bad investment debt that the IP's need to cover which puts us into the 5-6% area, if I just looked at the IP's and what we borrowed to get into them, as a whole they have been positive for a long time. It's just the other crappy investment debt that no longer has any assets attached to it. which sucks. but that's life.
Depends on the property type. If you own different properties, an aggregate figure won't mean an awful lot (if that's what you're asking?).
I have one newish property with depreciation etc that is now CF+ at 7% interest rates, but give it another rent increase or two and that figure would be CF+ at 6.5%.
I also have a development block that wouldn't be CF+ until 3% interest rates.
I have one newish property with depreciation etc that is now CF+ at 7% interest rates, but give it another rent increase or two and that figure would be CF+ at 6.5%.
I also have a development block that wouldn't be CF+ until 3% interest rates.
Hi Steve.
Ummm.....I'm missing something here. If the IP is cf+ at 7%, of course it would be cf+ at 6.5%, even without a rent increase. Unless you meant cf+ at 6.5% without allowing for depreciation
.Regards
Marty
on a whole - around 5.5% ... but include depreciation/tax then it's a whole nuther ball game. also, like quoll, i have some "investment lessons" debt included in that.
so if i included depreciation - and didn't have the dumb debt - i would be around 7%. live and learn.
but the dumb debt does exist - so - then if we add in what everything (depreciation, tax refund, dumb debt etc) after we build the two developments on hand ... then 7.5% would be our break even including pm fees. wow, didn't realise the figures were that good
good exercise putting it down. makes me realises we're closer to building then i thought!
so if i included depreciation - and didn't have the dumb debt - i would be around 7%. live and learn.
but the dumb debt does exist - so - then if we add in what everything (depreciation, tax refund, dumb debt etc) after we build the two developments on hand ... then 7.5% would be our break even including pm fees.
wow, didn't realise the figures were that good good exercise putting it down. makes me realises we're closer to building then i thought!
I would be cashflow positive even at 10%......but this is based on my total portfolio. Obviously at a individual property level...I would be CF- on some properties till they achieved a 5.5% - 6%.
I have calculated CF+ without depreciation.
It is looking great for me as if interest rates keep dropping I will a decent income coming just from properties.
I have calculated CF+ without depreciation.
It is looking great for me as if interest rates keep dropping I will a decent income coming just from properties.
Hi Steve.
Ummm.....I'm missing something here. If the IP is cf+ at 7%, of course it would be cf+ at 6.5%, even without a rent increase. Unless you meant cf+ at 6.5% without allowing for depreciation
Regards
Marty
I think perhaps because I'm missing the question that was asked in the poll?
My point is at this exact point in time, I need rates at 7% to be CF+ for that property. If the rent is renewed next week and rises, I will only need 6.5%.
So what does the figure really tell us except for this exact space in time, for only me as I'm the one who has been holding it for x time. But perhaps that's all the poll wanted to know? Just that Boz started by talking about how whether investors are CF+ or - is part of what sets property values. But I fail to see how my personal CF position in the property above would effect it's value. What if I have owned it for 10yrs and I only need 2% to be CF+, does that mean it's value should fall? No because someone who buys it off me next week would be much more negatively geared than me.
So the poll can tell us for interest sake what people's position is (and thinking about it more, I think that's what he meant), but doesn't really have anything to do with the properties value. That is determined by a million things, and perhaps what the yield someone who bought it NOW on the market would need in interest rates.
Lol, I'm laughing because my maths must be different to yours.
If an IP was cf+ at say 7%, and you got an increase in rent, then you could allow for interest rates to go a tad higher (and hopefully, still be cf+), whereas in your example, you are saying if you got the rent increase you could allow for a lower interest rate, that's what I'm not understanding.
I seriously am laughing because I'm probably missing something so obvious.
Regards
Marty
Way to go Sash,I would be cashflow positive even at 10%......but this is based on my total portfolio. Obviously at a individual property level...I would be CF- on some properties till they achieved a 5.5% - 6%.
I have calculated CF+ without depreciation.
It is looking great for me as if interest rates keep dropping I will a decent income coming just from properties.
This is probably where a lot of intend to be.
Keep those interest rates coming!!!.
Regards
Marty
Ha Marty you're right, I'm a d!ckhe@d! I was going in the wrong direction, an increase in rent means I would be CF+ at 7.5% not 6.5%! Just like my extreme example should have been 12% not 2%!
depends on
- original LVR (even if less than 100%, you still should allow for the opportunity cost of original equity)
- pre or post tax, and marginal tax rates
- how you treat capital expenditure
- how you treat depreciation (to me it shouldn't be considered a positive cash flow as it is a dedicated contigency for future replacement of the building, and if you don't spend it, you get taxed on it via it being subtracted from your cost base on disposal.)
I have a spreadsheet that does this.
Here's an example
Buy Price 300k
LVR 107% (includes LMI @ 10k, stamp duty, legals, inspections)
Loan 310k
Rate 5.5%
Rent 400*50 = 6.25% on purchase price
PM 7.5%mx, 1% letting
No capital expenditure
No depreciation allowance in tax
Owner 1 person on median income of 55k
Cash Flow for Yr 1
pre tax -$42
post tax +$4
Keep in mind a property that is CF- in the first year moves towards CF+ every year after, something the ATO is happy about.
The other issue is why you want to know CF status.
If it is to compare against other opportunities, then CF status is a different kettle when you use return on current equity and current debt, versus original investment and current debt.
- original LVR (even if less than 100%, you still should allow for the opportunity cost of original equity)
- pre or post tax, and marginal tax rates
- how you treat capital expenditure
- how you treat depreciation (to me it shouldn't be considered a positive cash flow as it is a dedicated contigency for future replacement of the building, and if you don't spend it, you get taxed on it via it being subtracted from your cost base on disposal.)
I have a spreadsheet that does this.
Here's an example
Buy Price 300k
LVR 107% (includes LMI @ 10k, stamp duty, legals, inspections)
Loan 310k
Rate 5.5%
Rent 400*50 = 6.25% on purchase price
PM 7.5%mx, 1% letting
No capital expenditure
No depreciation allowance in tax
Owner 1 person on median income of 55k
Cash Flow for Yr 1
pre tax -$42
post tax +$4
Keep in mind a property that is CF- in the first year moves towards CF+ every year after, something the ATO is happy about.
The other issue is why you want to know CF status.
If it is to compare against other opportunities, then CF status is a different kettle when you use return on current equity and current debt, versus original investment and current debt.
Phew. Just glad to have worked it out, lol.
My brain was starting to hurt.
Regards
Marty
Looks a good spreadsheet from the outcome of the example.
I think capital expediture for maintenence should be included and that should allow to offset the depreciation of the building and land.
Anyway, why I think CF is important?
My view is that home prices are not going anywhere for long time in the future. Every home investor these days is talking about the value of houses going up and how much money they made based on that. I believe this will fade and in 1 year time or more ahead in the future you'll hear more about how much return you get from property at the end of the financial year and how much cash flow it generates.
If the RBA want they can push mortgage rate down to 5% for the variable rate and if deflation persist those rates could be around for a while. This will improve the cash flow greatly and property investors might want to hang on on their property even if the feeling of increase home prices will fade away. After all, where property prices are going to go once interest rates get at lowest point and can only go up from there?
We're supposed to know this stuff?
I have absolutely no idea where the house is going to sit if it is rented out in the next few months (have loan now! Can make house rentable! Yay!). Ignoring depreciation, rates yada yada its $130pw to hold, or $75pw if subdivided and the vacant lot sells, and will rent for anywhere between $150-190pw. But we'll have spent rather a lot on it so with depreciation as well as the crazy amount of repair its taken to get it to the point of being habitable, it'll probably be highly negatively geared on paper. Which is just weird.
Going to have to see an accountant soonish.
I have absolutely no idea where the house is going to sit if it is rented out in the next few months (have loan now! Can make house rentable! Yay!). Ignoring depreciation, rates yada yada its $130pw to hold, or $75pw if subdivided and the vacant lot sells, and will rent for anywhere between $150-190pw. But we'll have spent rather a lot on it so with depreciation as well as the crazy amount of repair its taken to get it to the point of being habitable, it'll probably be highly negatively geared on paper. Which is just weird.
Going to have to see an accountant soonish.
keep in mind all levels of govt have declining revenue, and I think Rudd will start having a close look at negative gearing.
once the world gets this crisis stabilized (or before), there's going to be a lot of examination of how to stop credit bubbles ever again pushing asset prices around too sharply.
my bet is negative gearing investment property is going to get a hair cut by Rudd....
Mr Rudd is not particularly inclined to do things that would trigger further falls in house prices. That would be one of them.
