Making Cents of the Dollars

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.

Emma

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.

About these ads

9 responses to “Making Cents of the Dollars

  1. It’s amazing how many people go into an investment property with no idea of the numbers and what it means for them!

  2. Hi Emma,

    I am a little puzzled at your logic about a property losing money and comparing it to a business that loses money in the first few years.

    There is a very big difference between those two examples. Namely, a successful business in its first few years will grow with revenues (hopefully) increasing at a faster rate than costs.

    The income on a property (assuming no major renovations etc) will never grow by more than the wages growth (give or take a few percent) while the costs will also grow at a similar rate.

    In other words, if your property is not profitable this year, there is very little reason to believe it will be profitable next year (once you take into account the opportunity cost of the capital.)

    That said, I wish you the best of luck with your journey.

    Cheers,

    Ben

    • Hi Ben,

      Thanks for your comment :)

      I only used the example because whenever I have spoken about cash flow positive properties with other investors they have always compared property investing to running a business, namely that any business or property that doesn’t put money in the pocket isn’t a good investment.

      My argument is that most businesses don’t make money in the first year (maybe more), unless they are extremley successful and so we should be more flexible with investments – they are for the long term afterall. It may take 10years (perhaps longer) to really make a comfortable income off a property whether that be through equity or rental yields – some properties, like some businesses may never experience a profit at all! It’s the risk we all take when putting our money into a venture – some will pay off and some won’t.

      Like most things, this is why people don’t take the plunge. There is a lot of risk but on the other hand a lot of reward for those who invest wisely.

      Cheers,

      Emma

    • Ben,
      Rental income will grow (broadly in line with inflation), but only a part of your costs will grow. Your mortgage payments are not subject to inflation, and it’s only the other items that go up – maintenance and insurance and suchlike.

      So there is *every* reason to expect profitability to increase every year.

      John (in England)

  3. Hi Emma,

    Say I had saved up $800K – If I purchased a $1 Million dollar property (including costs), borrowed $200,000 (with repayments of $350/week) and rented it out for $800/week, does that mean I have a cashflow positive property???

    • Yes, MissionKontrol, in your scenario it would be cashflow positive, generating 450 dollars per week (excluding other costs). You could take that money out and spend it.

      This proves a number of points. First, it is not the property itself that is – or isn’t – cashflow positive, it’s the total deal. Secondly, it proves that positive cashflow is a useful piece of the decision-making process but on its own, isn’t sufficient. An investor should also consider the opportunity cost – in your case, what else you could achieve with that $800k – and the capital growth expectation, and the risk, and so on.

      I don’t know about interest rates where you are, or what loan-to-value mortgages you can get, but here, if I had that 800k ($ or £, the principle is the same), I’d try to get 75% LTV mortgages, and I’d aim to buy several properties worth 3.2M in total.

  4. Hi Emma, which suburb would you recommend to to buy m first investment property? I am currently 23 but I am doing about 60K a year, but hopefully after taxes and credit card I can set 150/week

    • Hi John,

      That really depends on what you are after – yield versus capital growth and whether your strategy is long term or short term investment. Unfortunately it is never as easy as just saying “buy here” – it really comes down to your personal situation.

      Happy to discuss more via email if you like – emma@mypropertyjourney.com

      Emma

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s