There has been a lot of discussion, over the last 4 weeks, from various people in the investing world about the true cost of owning a property and the actual profit once all costs are taken into consideration. As an investor, and even more so now that I self-manage my property, I am always diligent about tracking every cost associated with my investment, whether it is income or an expense. Firstly, this needs to be done to ensure I get the most out of my tax and secondly, if I’m not doing this how I can really ascertain how the property is sitting in terms of providing a return on investment over a period of time? And how will I know when my property has officially hit the inaugural “cash flow positive” status?
Cash flow positive properties…the term gets thrown around a lot and every person has a different definition for it. I am going to come out and say that my understanding is that a cash flow positive property is a property where the rental income covers ALL costs, not just the mortgage. Anyone who says that their property is cash flow positive because their rent covers the mortgage is kidding themselves. The number of costs involved in property these days, after interest on the loan, can be astronomical – maintenance, body corporate, insurances, property management fees, rates, land tax, water etc. This is just the tip of the ice berg and when taken into consideration I’d be interested to see how many people think their property is still cash flow positive.
I recently handed over a spread sheet to my accountant which outlines every expense and income I have accumulated during the last financial year. I have no shame in saying that I made a loss of approximately $2,500. This takes into account EVERY cent I spent on it and every cent I made back. When you then take into consideration negative gearing this loss will, obviously, become less, but I’ll leave that handy work to my accountant. What I will do however is make a record of the amount I received back (directly apportioned to the property) so that I can ascertain the final year end result in its entirety.
Whilst people will argue that, like a business, any property that isn’t putting money in the pocket is not worth having – I argue that most business’ don’t make a profit in their first year (sometimes the first couple) and most people would be happy with such a small overrun at the end of the first year of operating. What is important is understanding the ongoing costs of the property and the long term prospects in offering a return on investment through both yield and capital growth. The area I have invested in has averaged 11% return over the last 10 years and whilst the market has dropped somewhat I still believe there is an opportunity for growth over the next 10 years, albeit lower than the previous.
I have attached for our followers a fantastic property cost tracking spread sheet that I have been utilising and which I found at Investment Property Calculator. There’s no shortage of programs and software you can purchase for managing properties but I find this works perfectly. Use this and update it regularly.
Please note, as with all information provided on this website, just because it works for me does not mean it will work for you. Take into consideration your own circumstances and seek professional advice where appropriate when undertaking your tax return.