Property Twins | Property Twins™
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In: Home Buyers, Property Investors0

Hope you had a wonderful Easter break. It’s been quiet on the Property Twins end. We’ve been in the middle of the move to our new home which has been a dream come true – to be able to make a decision to not only build a solid real estate portfolio but to make a decision and the move to build our family home at 27 years of age. We just got the keys 12 days ago and it has been a surreal journey! All it takes is a vision and the decision to never take NO for an answer.

Talking about property, we wanted to shed light on Cashflow Analysis for investment properties.

Majority of those who invest only ever buy 2 investment properties and do not proceed to build a larger real estate portfolio. There are a couple of reasons for that:

  1. Poorly structured finance from a lending perspective – conservative lenders selected in a potentially incorrect order and hence lost opportunity as the borrowing cannot be maximised unless the portfolio lending was restructured. Let’s face it – too complicated to understand for most and a lot of various lending policies to consider. We like to leave this to the experts in the lending space i.e. mortgage brokers who specialise in investment lending
  2. Not doing cashflow analysis for the purchase and buying something because it “looks good”, is brand new, in a suburb where you live, because of the post code (lets face it, nowhere in Sydney do you buy a house for less than a million today!), because of the “tax benefits”. All are expensive lessons to be learnt! Don’t do it! Do your numbers!

Cashflow is KING! So what comprises of a cashflow analysis?

We have a spreadsheet for all our cashflow analysis which has had every deal of ours put through it to help with the decision making. The following is what we look at:

  • Deposit you are putting in (% of the purchase price)
  • Stamp Duty
  • Solicitors Fee
  • Renovation to be done

The above would give you the total outlay for the purchase.

Income for the property covers the weekly, monthly and yearly rent.

Expenses for the property would include:

  • Interest re-payments (Look at the balance loan amount to calculate this)
  • Annual Borrowing Costs
  • Council Rates
  • Water Rates
  • Property Management Fee (typically 8.8% inc GST in Brisbane, 5.5% in Sydney’s West)
  • Building Insurance / Body Corporate (depending on the type of property you purchase)
  • Landlord’s Insurance

The above is of course ball park and assuming that you do 80% Loan to Value Ratio (LVR). Anything above 80% will incur Lenders Mortgage Insurance (LMI) and that needs to be added to your balance loan amount.

Following this, we look at how much the given investment property will cost on a weekly, monthly and yearly basis before tax. This will give you the ball park holding costs for the property.

Income – Expenses = Net Income, i.e. Net Cashflow for the property

Make note of the tax benefits the property may offer:

  • Depreciation (per annum) for the property when purchasing – this reduces every year
  • LMI (which is deductible over 5 years)

Depending on your tax rate and the rental return of the property, you may: 1) have to pay further tax (if the property is positively geared), 2) not pay any tax (the tax benefits making the purchase neutral) or 3)) reduce the loss on the property i.e. minimise the negative gearing.

With a glimpse alone, these calculations should give you a decent idea of whether to proceed with a given purchase or not! As they say – “do the numbers work?” and that “the numbers don’t lie!”

All the best with your investing goals!


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Note: Please ensure you always seek specific specific credit, tax, financial, legal or investment advice. Property Twins' Blogs are not a substitute for personal and specific, taxation, financial, legal or investment advice

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