Okay, when it comes to purchasing investment property, it's really important that you understand
the potential cash flow of a property before you go ahead and purchase it. You want to
understand whether or not that property is going to be positive cashflow and put money
into your pocket or if it's going to be negatively geared and you have to pay money each month
just to keep it and how much money you have to pay because you don't want to invest in
a property thinking it's going to be positively geared and then find out it's negatively geared
to a large degree and you're struggling to keep your head above water because you have
to keep to keep this property and not go under. So in this episode I'm going to show you how
to calculate the cash flow of an investment property. So we're going to go through it
the long way that I'm going to go and show you a tool that I created myself that allows
you to do it way shorter.
So here we have a property in Birmingham Gardens, New South Wales, which as we can see down
at the map is just kind of out near Jasmine in Newcastle. So West Newcastle. This is currently
being rented as a share House for 770 per week. That's if all the rooms are full. Currently
there's only four out of five tenanted. So potential rental income, seven 70 per week
asking price is 560,000. So to start with let's just go over here to property tools.com
dot a u, which is the tool I created myself that just does these calculations for you.
So I'm just going to quickly punch it in. We'll see if it's likely to be positive cash
flow. Then we'll go through all the individual steps if you just want to be able to do it
yourself and you don't want to pay for this service. Super affordable but some people
might not want to.
Alright, so purchase price. What was our purchase price? Five hundred and $60,000. And rental
income was seven 70. Okay. So it's looking like this will be positive cash flow of about
$171 per week or about $9,000 per year. But how do we get that figure? How do we work
out that cashflow ourselves? So first thing we need to do is look at the rental income
which has seven 70 per week. So I'm going to times that by 52 to get that annual rental
income. I always like to calculate cash flow annually and then work back to the weekly
from that I just find that's the easiest to do. Next thing you need to do is work out
your loan amount. So the purchase price of this property is $560,000. What's happening
here? Five hundred and $60,000. And then depending on what deposit you make. So maybe a 20 percent
deposit that are working out how much of our loan will have.
So let's just do the full amount times zero point eight. So that'll give us a loan amount
of $448,000. The reason we need this line amount, because that will work out how much
interest we need to pay over the course of a year. So let's assume that our interest
rate is five percent. To do the interest calculation, we can just do the loan amount times by five
percent. That's going to give us our annual interest of 22,400. Now if you want to pay
principal and interest on this, then you can use a mortgage calculator. So here's one from
ing which I really love. And so if we go ahead and punch in 448,000, 25 year loan at five
percent, then we can say that our monthly repayments are $2,618 and ninety six cents.
So let's work out how much that is per year. So we can see that that would be $31,400 per
year.
So that's an extra $9,000 per year that you would need to pay and that will obviously
be paying off your homeland. I prefer doing interest only at the moment. You can get some
pretty good deals on principle and interest loans and so if the interest is better than
obviously that is a good option to look at, but I like calculating interest only because
I believe that any extra money that you're paying off your mortgage, you're building
that in equity that's going towards your wealth. That's extra cashflow that you're choosing
to put on your loan. And so I still see that as positive cashflow myself, but you might
want to do principal and interest. So anyway, we're got interest of $22,400 per year so
far and we've got rental income of about $40,000 per year, but that's not all. That's what
a lot of people do.
They just look at the purchase price of the property and what the repayments are going
to be and if they see that the rental income is greater than the repayments are like sweet,
this is going to be positive cash flow. But there's so many other things that you need
to take into account. We've got our property manager face, so this is. You've got to pay
a property manager to manage your property, so fees might be, let's call it about eight
percent. It varies from about six to 10 percent. So what we're going to do is times the annual
rental income by eight percent. That's going to give us how much we have to pay in rental
manager fees. So that's about $3,000 over the course of the year. It's a decent chunk
of money right there. You've also got vacancy rates for the property. So this property is
in Birmingham Gardens, which is.
This one is a bit unique because it's student housing. So four out of five bedrooms are
presently tenanted. You know, you got five incomes coming in for this property, so you
could have one empty at a time, you couldn't have them all full. You've kind of with the
regular property, if it's vacant, it's vacant. You earning nothing, at least this one. If
you've got a bedroom vacant, then you're still getting four out of five bedrooms there. So,
but you'd like to work out the vacancy of an area. I like to be conservative and put
it at five percent. So five percent, what's that divided like 52 times by five percent.
It's like two weeks a year or something like that. Two point six weeks per year vacant.
So I kind of put that as a vacancy rate. Sometimes it's worse than that because you have to pay
fees to relate a property.
Sometimes you just get a tenant for the full year and there's no vacancy. But I like to
use five percent as a baseline. So again, let's do the total rental income and then
let's times that by five percent and that's how much rental income we're going to miss
out on, which is about $2,000 per year. So that, let me write these down. So that is,
we got manager fees and then we've got vacancy and we've also got interest. So as you can
see, we're starting to build up a whole list of expenses here. Next thing we're going to
look at his insurance. So you're going to want to go through and get some landlords
insurance for your property. Probably talk to an insurance provider about that. Obviously
I can't give insurance advice. Um, but let's say that your insurance is a thousand dollars
per year, we also need to look at repairs.
So how much repairs you're going to do on your property. If you're buying a new property,
chances are they might not be any repairs. If you're buying an older property, you might
need to spend more on repairs. Again, I'm going to use that five percent figure for
repairs. So let's go ahead and we'll make this five percent. So that's about $2,000
in repairs for the year. We're also going to look at what's next council rates. So you
need to pay your rates to the council. That varies from property to property. Let's call
this one $2,000 as well.
So I don't actually know the vacancy rate. I mean, I don't actually know council rates
are $2,000 for this property. You would have to talk to the real estate agent to work it
out. But $2,000 is a pretty good rough figure. Then you've got things like, um, strata or
body corporate fees. This is if you own a unit, townhouse or a villa, then you would
have to pay these. This is a house so you don't have to pay it. You've got water as
well, which you may have to pay or the tenant may pay. So let's put water at what's called
that thousand dollars per year. Let's assume that we're paying for water usage as well
as the water rates in this house with five people, I'm probably too much. Let's just
got like $600 or something like that for water. Then you've also got things like land tax.
If you own too much land in a certain state, then you get charged land tax and that's really
about it in terms of the expenses. And so let's total up all these expenses and say
how we go. So total so equals the sum of all of our expenses. Thirty $3,200 roughly in
expenses. And we have income of $40,000. So this is going to give us our before tax
income.
So before tax income, sorry, would equal. So you take the total rental income and you
minus by the total expenses and this is going to give you your annual cashflow. So we want
to change that to weekly. We just take this and divide it by 52. So that's about $131
per week. Positive cashflow. Now if we go ahead and just adjust this from seven 70 per
week, and let's say this property was only renting for $500 per week, how's that going
to affect it? Well our rental income drops significantly to $26,000 and as you can see,
we're now negative $90 per week and negative about $5,000 per year. So the amount of rental
income you have really affects things. You can see that manager fees go down, vacancy
goes down, repairs have gone down because there are a percentage of the rental income,
um, but everything else I've kind of left the same.
So that's just something to take into account that as rents change, your cashflow is obviously
going to change significantly. And so we can just stop there and you can just do a rough
estimate there, but you can also look at something called depreciation. So depreciation is the
lowering in value of the staff in the house. So you're talking about the building itself
as well as the carpets, the curtains, the fixtures, all this sort of stuff that goes
down in value over time. And you can actually claim that against your annual tax will obviously
speak to an accountant. I can't give financial advice, see if you can claim it, but there's
a good potential that you will be able to claim depreciation. Now, new houses, you get
way more depreciation because there's more new staff as well as still being able to claim
the building because there is a set period of time where you can claim the building all
the houses, not so much.
So we set the appreciation, let's just call it $5,000 as a rough estimate. And in order
to find out how much you can depreciate, you will need to get a depreciation schedule done.
They're not that expensive and totally worth doing. And so what happens now is we've got
our before tax income and so we would generally usually need to pay tax on this income, right?
We live in Australia. If you earn income, you've got to pay tax. So if we're putting
in a profit about $6,800 per year in tax, I mean in income, we've got to pay tax on
that, but depreciation can actually take away from that total income. So if we take that
total income and we minus the depreciation, then we can see that on our books, obviously
do this for an account, this isn't financial advice at all. Get a depreciation schedule
done and have a good accountant.
We all know that. Alright? So, but now on our books, in this theoretical example, we've
gone from having to pay tax on $6,833 and because of our depreciation and being able
to claim that we now only have to pay tax on $1,833. So we will then look at, um, like
your tax, right? So whereabouts are you in the tax rate? If you're earning a higher income
than you're paying a higher percentage in tax up in the 40 percent sort of range, if
you're earning less than you might be paying 18 percent or 30 percent or 33 or whatever
it is these days. So let's just put it, let's call it 35 percent. And then um, how much
tax would we have to pay? So that would be our total income times the tax rate. Okay,
so now you've got $641 in tax that you need to pay. So now your after tax income would
be that total amount before tax, which was 6,833. And then you've got a minus the amount
of tax that you have to pay and so that's going to give you after, after tax income.
And again, we can divide that by 52.
What did I do? Hold on.
Tough stuff. This up. It goes. This one divided by 52, that's $119 per week. So you can see
that we had $131 per week. But because we have to pay tax that becomes $119 per week.
If you have, let's say a depreciation is $10,000, right? Then we go into a situation where it
looks like on our books we've made a loss, um, and based on the current laws that they're
even looking at changing, you may actually be able to get a tax refund and so that tax
refund would then add to your after tax income making your per week income higher. So depending
on how much you can appreciate, you might have to pay tax on your income or you might
actually be able to offset the losses on your property to save tax on your employment income
and stuff like that. So this is getting a bit complicated.
This is why you need a good accountant. So they can do this for you. They can do it by
the book, they can do it all legally and stuff like that. But this is going to give you a
really good idea. And so basically that's how you do it. You take the rent and you look
at the annual rent for the property, you work out your loan amount, and then you work out
how much interest you have to pay on the property. You then go through the different fees that
you have to pay on the property, so manager feeds, vacancy, insurance, repairs, all that
good stuff, and you look at your total expenses so your total expenses is all of those fees
plus your interest. That's how much you have to pay each year in order to keep this property
a float, and then you take the total expenses and take those expenses away from the total
income and you've eaten, comes greater than expenses.
You're looking at a positive cashflow property. If your income's less than expenses, then
you're looking at a negatively geared property and you'll have to find extra money, luckily
from your employment in order to keep that property going. So it's really important to
do this and to understand what the cashflow of your property is going to be. Especially
in places like Sydney at the moment where rental yields are really low. You could be
in a situation where you're at a severe deficit in terms of cashflow, what you're very negatively
geared, and you've also got this situation where interest rates could rise, so currently
there are five percent and that gives us $22,400 per year in interest. If that was the rates
to seven percent, then we're going to $31,360 per year, so just a two percent jump in interest
on this property. We're looking at paying $9,000 more per year and so we can see that
that absolutely decimates our cashflow and puts us in a negative position if that was
to happen.
So by doing these calculations you can also edit this sort of stuff and look at, well
what would happen if interest rates go up? At what point am I safe against interest rate
rises and all of this sort of stuff. You might be able to have zero percent vacancy and so
that's obviously going to improve your cashflow. You can play around with all of this sort
of stuff. So that's how you calculate the cash flow of a property. I have created a
tool over@propertytools.com dot a u, which you can get access to for a small monthly
fee. If I'll show you this tool right now, you can say I punched in purchase price and
rental income. That's basically all you have to do to get a rough estimate of a property.
So let's have a look at another property here. We've got one in Maxville for three 75 that's
renting for five slash 15 per week.
At property tours you can go ahead and put in three 75 and put in, what was it, 5:15
per week, and then you automatically get the weekly cash flow before tax estimate right
there. So it just does it for you. It will show you your rental yield and your rental
income. And then you can go through and edit things as well. So let's say I only want to
have a 10 percent deposit. Let's say we go further down. Property manager fees are actually
eight percent. Expect vacancies going to be three percent repairs and maintenance on an
older property, it's going to be $2,000. You can adjust all of this stuff and go through
to get a more accurate result. A water rates, let's say we have to pay for water rates and
that's $500, you know you can go through and adjust all of these sorts of things and that's
going to adjust your cash on cash return as well as your weekly cashflow before tax and
yearly cash flow before tax.
There's also a tool down the bottom of this calculator as well, showing you on the taxation
percentages so you can adjust this. You can adjust your depreciation amount and then it's
going to basically work out what your cash flow after tax is going to be as well, so
you can see the cash flow before taxes on this one, $22 per week and then after cash
flow after tax because that depreciation, it's gone up and so basically this is a really
cool tool just to allow you to do it really quickly because I just don't like messing
with expels excel spreadsheets. This one works on your phone as well, so you can just log
in on your phone. You can also go ahead and save it as a pdf if you want and you can share
that pdf with your spouse or with your accountant or with your advisors and you can look over
that or we can say the calculation for use at a future time, but really like the best
way that I do this is I'm looking at a whole bunch of different properties.
Like here's one here. What's this one? Foster? Victoria. Oh, that's rented as an airbnb.
Okay. I don't want to do the calculations on that one, but yeah, really the easiest
way I use it is I just punching purchase price, rental income, so let's go 560,007 70 per
week, and then you can instantly say if it's likely to be positive cashflow, not so you
can really quickly do the figures on a lot of different properties, so if you're out
there looking for positive cashflow property or if you want just a tool to help you predict
the cashflow of your property, whether that be positive or negatively geared, then head
over to property tools.com dot a u and you can check that out. But otherwise if you don't
want to pay for that, then you can just go ahead and create a spreadsheet just like I
did today where you estimate or these things yourself.
So I hope that was helpful. That's how to calculate the cash flow of a property. Make
sure before you purchased any property that you do calculate the cash flow of it. I don't
want you to buy something thinking it's going to be positively geared and then finding out
there's all these expenses that you didn't take into account or interest rates go up
and it puts you into a really bad position where you can no longer afford this property.
So let's be smart about this. Let's also do some predictions in here, adjust interest
rates and things like that. Look at worst case scenarios, see if we can afford it. Um,
and just be smart about this guys. Just go out there, do it, and do it against a lot
of properties and see how each property compares in their cashflow to each other and that is
going to make you a better. If you can look at this. This is one factor that allows you
to look at, is this property going to be a good property to invest in or not? I've been
Ryan from on-property dot com dot a u. thanks so much for watching this video. Again, you
can check out the calculator@propertytools.com dot a U. and while you're here, don't forget
to subscribe to the channel.