How To Calculate Positive CashFlow Property (Ep127)
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How To Calculate Positive CashFlow Property (Ep127)


If you don’t know how to calculate the finances
of a property the chances of your actually finding a positive cash flow property anywhere
in the country is going to be extremely slim the reason is you don’t know a positive cash
flow property when you see one so it is important to understand exactly how to calculate positive
cash flow property so that when it comes time to look at properly you can tell whether a
property is going to be positive cash flowed or whether is going to be negatively geared today’s episode is brought to you by BlueHorizonsProperty.com
Corr and Helene help their clients invest in high growth positive cash flow properties
in the Surat Basin which is in Queensland to go to BlueHorizonsProperty.com today to
find out more in order to be able to calculate positive
cash flow property you need to take into account all of the income that that property is going
to deliver you and also all of the expenses that that property is going to take away from
you so we’ll go through this step-by-step see you can know the major income and a major
expenses that you need to calculate and you need to take into account before you can estimate
whether or not the property is going to be positive cash flow so step number one is to work out that annual
rental income and the way to do this is to simply estimate the weekly rental income and
times it by 52 because there are 52 weeks in a year now your property may lay vacant
for some time but we will deal with those vacancies in the expenses and work it out
from there I have found it so much easier to simply calculate the annual rental income
if the property is 100% tenanted rather than taking vacancies into account at this point
so we’ll deal with that later. If you want help on knowing how to find out
what your property is going to rent for and you don’t necessarily want to talk to a real
estate agent then head over the positivecashflowacademy.com and sign up today and I go through exactly
how to find out how much a property rents for in module 4 step number two is to work out your total
loan amount now not how much are going to have to pay but actually how much your loan
is going to be now this is a step that not many people take is a very important step
to understand what your cash flow is going to be so most people will simply look at either
the full purchase price of the property or the purchase price minus their deposit and
consider that as there loan amount but here’s what we need to do first you need to take
the purchase price of your property you then need to add stamp duty and you can use any
of the stamp duty calculators out there on the Internet. you then need to add other expenses
like setup fees solicitors all that good stuff you also need to add lenders mortgage insurance
if you have a deposit under 20% and once you add up these things so you’ve got the purchase
price the stamp duty the lenders mortgage insurance and other expenses now you minus
the amount of money that you have available. because what even if you have a 20% deposit
you’re going to have to pay stamp duty so chances are that 20% deposit after you pay
stamp duty might only be 15 or might only be 10%. So it is important to calculate all
of your expenses and then minus the amount of money you have to give you your total loan
amount step number three is to work out your loan
repayments if you’re going with an interest only loan this is a pretty simple calculation
to do. what you do is you take your full loan amount which we just worked and you times
it by the interest rate three times by 5% or 0.05 and that will give you your annual
figure how much money you will need to pay interest on that loan so for that year you
can then divide by 52 and that will give you how much you will pay week if you prefer to
work it out in weekly increments if you’re going for principal and interest
which means you’re paying your interest they also paying money on top of that so you can
pay down your loan in 20 years or 25 years or 30 years in this calculation is much more
difficult to do and it’s not a calculation that I will explain to you in a video. the
simplest thing to do is simply to find one of the loan calculators online and you can
go to onproperty.com.au/calculators for a list of those and punch in your figures and
it will spit out how much you need to pay each and every month which in every year towards
your loan so that is the easiest way to do it with principal and interest I’m not going to the maths of how you can
work it out yourself as truthfully you don’t need to know and are so many calculators out
there that can do it so that you be a major expense and mortgage
is our major expense. So we’ve worked out our major income which is our rent and our
major expense which is our mortgage. now if your mortgage is more expensive than the rent
well that’s automatically going to be a negatively geared property so we can do a
little bit of analysis at this stage anyway but now we need to do is going to some more
of the expenses to make sure that even if your rental income is greater than your loan
amount your interest repayments that you’re still going to be positive cash flowed so step number four is to calculate your property
manager fees these tend to range between 6 to 8% they do vary depending on the area you’re
in and depending on the rental manager that you go to. I do suggest that before you hire
a rental manager that you interview a couple find out what they can do you find out what
they charge and choose the best rental manager for your property but at this stage I would
calculate a higher percentage of approximately 8% because I believe that that a more reasonable
figure and what we’ll talk about later on we’ll talk about it in vacancy rate but
what happens is if your property becomes vacant when the rental manager has to go out and
find another tenant has to advertise for the there actually going to charge you to do that
marketing and advertising. in a lot of cases that calculates at about 110% of one weeks
rent so even if he can find a rental manager who charges 6% if you have one vacancy in
the year or that going to increase your cost for your rental manager because you’re paying
for those marking I like to calculate at about 8% but is up to you exactly what you want
to step number five is to calculate your expected
vacancy in the beginning we looked at how much the rental income would be if the property
was 100% tenanted and I hope that your property is 100% tenanted and and that you don’t have
to deal with getting new tenants each and every six months of every year or whatever
it may be but we do need to calculate an expected vacancy another is a couple ways that you
can do this you can calculate the percentage like 5% which is a good percentage to calculate
you can calculate it based on one week vacancy if you wanted which is 2% or you can go to
a property magazine like australian property investor and you can check out the back and
look at the vacancy rate of your area and add that vacancy rate in so your area has
a higher vacancy rate of 10% the you might want to calculate 10% vacancy rate if the
area is extremely low over .5% or maybe can get away with calculating a small percentage
on your vacancy I would use a minimum of 2% vacancy which
is one weeks vacancy but I try to calculate based on a 5% vacancy rate for all the properties
that I analyse Tip number six is to calculate your insurance
so as a property investor that chances are you’re going to want landlords insurance and
that’s going to cover you for a wide variety things as an investor going to cover you for
all your major damage is like fire and flood in that. But also the protect you against
your tenants whether they disappear and don’t pay rent or if they damage the property or
they do malicious damage to the property as a whole bunch of things that landlords insurance
covers and this cost tends to range from about $500 to $1000 as a very rough estimate you
can get quotes online so I would suggest going about doing that and try and work out for
the area that you’re in what is the insurance is likely to be step number seven is to allow for repairs
now you’ve brand new property that has just been built then chances are that in the first
year or two you not going to have to do many repairs on that property maybe a little bit
but not much but if you are investing in an older property then you are going to have
to pay to maintain that property and to keep it up to standard as a property gets older
then obviously more and more things are going to age and begin to break and then you’re
going to need to fund that to replace those items and to fix them so I tend to allow again
about 5% for maintenance but depending on your property it’s new may be less if it’s
really old and may need more and when I say 5% I mean 5% of the rental income Tip number eight is to calculate your strata
so if you are in a unit townhouse complex or even potentially a duplex probably not
but if you’re in a unit or townhouse chances are you going to have to pay body corporate
fees or strata fees and these are fees that you pay to maintain the common areas now you
will generally be able to easily find what the strata fees are any generally charge quarterly
simply times by four and that will give you a yearly amount if you are purchasing a house
then you probably don’t need to do this then you can skip this Tip number nine is to calculate water rates
so this is changing it used to be that the landlords would always pay for water but this
is not always the case anymore in a lot of cases now the tenants now have to pay for
their own water usage so if you’re looking at property where you can meter the water
and you can charge the tenant then you can leave this out but if you’re going to have
to pay for the water then you’re going to need to take this into account I would kind
of consider at least $150 a quarter so about $600 a year that i would take into account
maybe up to $800 or $1000 as well depending on how big your property is and the types
of tenant that you’re going to get. Obviously smaller rental properties with less people
living in them will probably use less water then a family of six people okay Tip number 10 is to add your land rates or
land tax and so this occurs when you have a certain amount of property or a certain
amount of land in one state you are often charged what’s known as land rates or land
tax. and this is an extra fee that you pay owning a certain amount of land and now this
I need to be taken into account if you are over that threshold you can check the government
websites to work out exactly what that threshold is for each state because I’m not 100% sure
what it is so a lot of new investors you won’t need to worry about this but a lot of seasoned
investors who own a lot of property might need to consider it Tip number 11 is to add your council rates
so speak to the council or speak to the real estate agent find out what the council rates
are for the area are you looking at purchasing in. again it is probably charged on a quarterly
basis it may be charged on an annual basis and calculate that expense into all of your
expenses if you can’t find out what it is then I would kind of look at $1,000-$2000
per year but are really very significantly based on the area that you’re in Tip number 12 is in now go ahead and calculate
your total cash flow before you take tax into account. so the way that we do this is to
simply take what we did in step number one which is our total income assuming 100% hundred
percent occupancy no vacancies and then we take away all of the expenses we just talked
about your mortgage your manager fees your vacancies your insurance your maintenance
your strata all these different things we need to take away these amounts from our annual
figure of what our rental income is and if your rental income is greater then what all
of your expenses are then chances are you may have found a positive cash flow property
which is great news well done you’ve gone through all the steps and you’ve found a
positive cash flow property and obviously if the expenses are more than what the rental
income is the chances are that is going to be a negatively geared properly so this will
give you your total cash flow before tax and again you can divide by 52 if you want to
get the weekly figure if you take the next step and work out what
the Cashflows going to look like when you take tax into account you can do some calculations
based on the this but I do advise that these are rough calculations and that they should
not be considered taxation advice and should always the professional tax advice when doing
your tax returns so basically in order to work out what tax
you’re going to be paying on getting a refund you will take your total cash flow before
for and you would deduct what’s known as depreciation you can get the full details on claiming depreciation
at onproperty.com.au/32 and I did an article about that over there but basically depreciation
is you claiming as a loss the lowering in value of either the building or the fixtures
and fittings inside the building and so you can claim this against the income you earned
in a financial year and so basically you minus your total cash flow before tax you minus
depreciation against that to give you another figure and then what you do is step number 14 is you add your tax percentage
bracket so you’re in the top tax bracket over $180,000 per year then you’re going to add
the full amount of tax that you would pay If you’re in a lower tax bracket then obviously
you going to charge yourself less tax and so if after you take away that depreciation
you are still making a profit on paper then you’re going to be paying tax based on your
tax bracket. But if after you take that depreciation into account you’re actually losing money
well the chances are you’re going to get a tax refund again you need to speak to your
account and so it using your tax bracket times whatever is your remaining figure of profit
or loss by your percentage tax bracket and this will give you a rough estimate of either
the tax you have to pay or the tax refund that you’re going to get and so then you either add your tax refund
or you remove your tax payment from your total cash flow before tax and that will give you
total cash flow after tax, which is stepped on the 16th getting a total cash flow after-tax as you can see there’s a lot of different
things you need to take into account when you’re calculating positive cash flow property
if you want an easier way to do this then I have the advanced property calculator which
is a simple Excel spreadsheet that helps you to go through this and analyse it for yourself.
You simply punch in the figures and it spits out what your estimated cash flow is going
to be now you can get access to this there is a paid product but really cheap head over
onproperty.com.au/APC for Advanced Property Calculator so if that’s something that you
want to use as a tool to help you research and analyse properly better then go to onproperty.com.au/APC
your access to the full transcription or the full checklist of this episode then head over
to onproperty.com.au/127 for episode 127 so until tomorrow remember your long-term success
is only achieved one day at a time.

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