In this advanced "How to..." session, I want to talk to you about all the sophisticated
cash flow variables that any good cash flow management and property portfolio planning
tool should have.
So let's start from the top in terms of cash flow management.
Naturally we need to do our budget, and we need to assume that value of the money will
increase over time.
We call that Indexation.
What happens with Indexation is 3%, that's the figure that we use in terms of wages growing
at 3% and also costs growing at 3% - So that's number 1.
Number 2, we are also looking at Interest Rates, so obviously the cost of money is influenced
in terms of how we borrow money and the cost we have to pay that back.
So in any good sophisticated modeling tool, you should assume a higher variable.
So we are talking in our models we use 7.25%, so even though interest rates are a lot lower
at the moment, it's important to understand that you can afford it, not only today but
into the future.
Now when we start to get into the property side of things, we need to start looking at
the variables associated with the property.
So acquisition costs.
Now anything under $750,000, a good rule of thumb is 5% to acquire that property is going
to be your cost base.
Anything above $750,000, say to $1.2 million start to use 6%, anything above $1.2 million
, you're probably around 6.5 - 7%, if you're getting up to anything above the $2 million
acquisition stages.
So that's the cost of acquiring the property.
The next phase we need to look at is ok, what about occupancy rates?
What's an appropriate occupancy rate?
Well we're conservatives so 92% which effectively reflects 4 weeks of every year that the property
is going to be vacant.
Now we think that's quite conservative.
What about the ongoing holding costs?
Well the ongoing holding costs we use 1.5% of the value of the property indexing at 3%
per annum.
So you work out the value of the property, you add 1.5%.
Now what should that cover?
That should cover things like rates, maintenance, holding costs, body coorporates as well.
Now it's really important if you do get a property that has high body cooperates, that
you adjust for that.
But you really want to focus in trying to get holding costs as low as possible because
at the end of the day you don't want your rent, which really is the income that we want
to live on, to really be just the servicing of the costs on holding that property.
The other areas are property management.
Now property management fees vary around Australia you know as low as say 5 to 5.5% including
GST right up to around 10% when it comes to looking at western Australia as an example.
Now we use 7.7 to 8.8% depending on which state or area that we are looking in.
So it's really important to understand that.
Now they're the main variables.
The other thing you will also need to factor in, don't just look at your property portfolios
and factor in isolation.
At the end of the day, it's part of the overall wealth building strategy that you do.
So although we don't advise on superannuation and other investments, we do want to factor
in some growth rates and also some income that's coming from that.
As a rough rule of thumb, we use 6% growth rates for superannuation, and then depending
on the type of investment strategy you might have with your management funds, you need
to decide what sort of growth rate and what sort of income rate you want to put into your
models.
So they're the moving parts associated with all the variables and we are talking about
a very sophisticated model here in trying to understand future value and bringing that
back into net present value.
So it's really complex.
It's not going to be an easy model to build , but we are in the advanced "How to..." session
here, and that's why I wanted to share that.
So if you wanted to build out these sophisticated models, that's great place to start.
Thanks for watching.