When investing in property it’s important to estimate the annual cash flow. Here’s exactly how to calculate the cash flow of an investment property.
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
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 email@example.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 firstname.lastname@example.org dot a U. and while you’re here, don’t forget to subscribe to the channel.