Wow, property investment is financially draining!

W

want2bewealthy

I went over my finances today and noticed that from $8k of outgoings on one IO loan in 7 months, Ive only received $2700 in rent, the rest has gone to PM's, rates, body corp and maintenance, Im not really feeling any strain on my cashflow and am still saving well but just looking at the outgoings can be a little scary.
Ive had a rent review done on this property and am going from $270P/W to $295 P/W so that will help out a tiny bit :D
Tax time should yield some interesting results though.. I hope!

Just a rant, geeez Im a whinger, I like to complain
 
You have to worry when people buy with their ears pinned back as if this IP stuff is childs play. If you don't watch your expenses, your equity can get chewed up quicker than Rudd signing Kyoto...
 
Cashflow is the number 1 killer of businesses and property investors.

A good rule of thumb to use when crunching the numbers on a prospective resi IP is that 20% of the rent will be chewed up by "holding costs" such as PM, repairs, rates etc, and this figure includes 4 weeks vacancy.

Personlly, I have never experienced this amount of expenditure, but if you factor it in, and the numbers still work, then you won't get any surprises. Maybe 15% would be more accurate, but I think it is always a good business practice to over-estimate expenses, and under-estimate income.

I also don't look at the expenses on a month-to-month basis as it will send you crazy to see all the expenses coming out. Especially if you have multiple properties.

Having said that, I have properties that cost nothing per year, and others that cost a lot (but never 20% so far).

I have one property that we have owned for 4 years, and we bought it with a GEHA tenant. There hasn't been a single day of vacancy, or a single week of late rent payments. That's exceptional for resi property, and they have just signed for a further 5 year lease with a nice rent increase, and yearly rent reviews, so this is way under the 20% figure. I'm happy to say the least.

It also is a must to buy properties with good depreciation still available on the building and fixtures/fittings. This also maximises your cashflow through better tax returns. And these should be re-invested back into the property to reduce debt. Even better for the cashflow.
 
Whoops, it aint all as bad as it seems, it seems I missed some payments ;] Ill do the "real" sums tonight and let you lot know.
it still pi$$es me off though..
 
L.AAussie said:
A good rule of thumb to use when crunching the numbers on a prospective resi IP is that 20% of the rent will be chewed up by "holding costs" such as PM, repairs, rates etc, and this figure includes 4 weeks vacancy.
[...snip...]
Maybe 15% would be more accurate
Click to expand...

My holding costs have been much greater.

If you factor in 4wks vacancy that makes it 7.7% just there.
Property Management fees in WA are normally around the 9% mark, plus fees for inspections, plus postage/petties, plus, plus...
Council Rates - say $1000/yr
Water rates - say $700/yr
Insurance (including landlords ins) - $500/yr
Maintenance - estimate $1000/yr
Misc - estimate $1000/yr

If one is getting $300/wk then:
TOTAL RENT = 300x52 = $15,600
4wks Vacancy takes this down to $15,600 - $1,200 = $14,400
Property Management takes this down to $13,104
After Council rates, water, ins, maint, misc then one is left with $8,904.
Therefore holding costs on this property are $6,696 or %43 of the rent. This can actually be more because of r/e letting fees, inspections, etc...

In a good year on may pay $0 for maint, misc and have no rental vacancy, this would reduce holding costs by $3,200 down to $3,496 or %22 of the rent.

These are real life number for me. Thankfully the IP in question is in a high capital growth area and I can afford the shortfall.

I think I will factor in holding costs of %30-40 of the rent when doing rough calculations looking at property from now on.

Tough business this one, some months I get $0 from the real estate agents after paying for rates, maintenance, etc, etc. Basically I am providing lodgings free of charge to a tenant some months, and that doesnt even consider the cost of interest....

God Bless Capital Gains, otherwise we'd all be sunk :)

TB
 
OK, In 7 months of owning the property, Ive aquired around $4500 in rent after all fees, Ive paid out about 9k [more if you include repairs and the new split system] which means that from the $270 per week rent, Ive received approximately $160 per week after all expenses.
keep in mind that the cheapest PM here is 11% plus one weeks letting fee and postage n petties.

So, according to me, after tax Id be paying roughly $60 per week to hold the property at this early stage? is that about right?:confused:
 
want2bewealthy said:
OK, from the $270 per week rent, Ive received approximately $160 per week after all expenses.

So, according to me, after tax Id be paying roughly $60 per week to hold the property at this early stage? is that about right?:confused:
Click to expand...

Hiya W2BW,

I wouldn't expect that you will be making any cashflow out of your IP for quite some time.....we just had our very first PPoR turn positive for the first time in 10 years of ownership. The tenant squealed like a stuck pig when we increased the rent back to market levels - which was still woefully low.....but that's just the nature of the beast you are dealing with.

Of course, the tax situation now, whereby your $ 110 p.w. deficit reduces to only $ 60 p.w. becomes a double edged sword when it turns positive.

Say in 10 years time when you are making $ 30 p.w. cash before tax, that falls back to say $ 20 p.w. after tax. But that time, you'll probably have bought other negative cashflow assets, and the surplus will just get swirled around in amongst the other negative stuff.

She's a long slow road if you decide to stay on this road exclusively.....but as you've seen from other investor's on here like keithj, michael and alexlee, you'll probably diversify later to get the cashflow up somewhat.
 
I don't really look at the day to day cashflow anymore. I just do a cashflow estimate from the tax return every year.

Too busy thinking about ways to use the equity effectively.
Alex
 
was reading spannys book this morning, like an aussie version of rich dad poor dad, in which he was going on about leap frogging, pulling equity from a reno to buy another. sounds like a nightmare to me, a whole bunch of cash draining resi IPs offering no yiled and needing constant repairs. apparntly his rich dad said that's what rich people do

if you are going to hold non yielding assets I think you need a well paid job or steady passive income first. it is ironic that many people use resi IP as their foray into wealth creation
 
Ausprop said:
it is ironic that many people use resi IP as their foray into wealth creation
Click to expand...

Problem is that it's the best and really only decent way for the average person to get decent leverage into an asset.

You can use shares etc. but the gearing levels are lower, and the asset class is riskier. You can't leverage into commercial and industrial until you have more behind you - again, how do you do this?
 
Ausprop said:
It is ironic that many people use resi IP as their foray into wealth creation
Click to expand...

Fair remark.

I think this happens because direct residential property, buy/hold shares and super are the most commonly discussed investments in Aus. These three items are always discussed on the national news, Today Tonight, business reports and other media; they are what we have displayed in front of us all the time.

I dont think its surprising that resi property is the first step for a lot of people. It think its sad that many find it difficult or lose money and then pull out of all investing altogether. I hope I have learnt a few things and can keep investing (both in 'standard' resi property and other asset classes).

Gotta get that passive cashflow up, any suggestions ? :)

TB
 
steveadl said:
Problem is that it's the best and really only decent way for the average person to get decent leverage into an asset.

You can use shares etc. but the gearing levels are lower, and the asset class is riskier. You can't leverage into commercial and industrial until you have more behind you - again, how do you do this?
Click to expand...

I agree, lenders are prepared to loan the average Joe alot of money for residential property compared to an asset like shares etc etc,

The leverage is great if youre in it for the long haul and if you can service the loan comfortably within the selected time frame as they slowly [very slowly] become positive.

Darwin has higher rental yields than most other capital's and is still a little cheaper to buy into [although were at peak right now] so that seems to make a pretty good investment to me, as long as CG keeps on keeping on [as I believe it will long into the future] and I can safely service my loans from month to month then Im happy.
Hard work now, should pay off into the future, Im trying to get all the hard stuff out of the way while Im still young ;]
 
want2bewealthy said:
The leverage is great if youre in it for the long haul and if you can service the loan comfortably within the selected time frame as they slowly [very slowly] become positive.
Click to expand...


Two months into seeing the impact of property investment in inner Sydney on my bank statements, this resonates with me. And having convinced a partner that it is much better to invest than trade up to a better suburb, I enjoy reading such pragmatic comments from fellow investors. Keep it coming - I for one need reassurance from time to time that the track I'm on is the right one! Dallee
 
Dallee I hear you. When im having an off day I just think "bugger it" lets ell up and by into a flash area where my wife and I would prefer to be, get a big mortgage and just plod along. BUT like yourself and others I settle back down and think "na think long term". Thats what I tell myself anyway. I hope it pays off in the long run. Im confident it will or I wouldnt be doing it. Time will tell.

Jayro
 
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