It is important to know how to calculate positive geared property, so that you know exactly what your weekly/monthly cash flow is going to be. In this post we will cover exactly how you can calculate positive geared property, what expenses to take into account (that you probably didn’t think of).
At the end we will share with you some tools to quickly and easily calculate whether your property is going to be positive or negative geared.
I just wanted to quickly cover the basics on a positive cash flow property. There are two types of positive cash flowed property
1. Where incomes is greater than expenses before tax (often know as positively geared property)
2. Where the expenses are greater than the income until tax deductions and refunds are taken into account, then after tax refunds are applied income is greater than expenses.
We are going to bring tax into this calculation so don’t worry.
Basically the way to calculate positive geared property is to work out all your income and all of your expenses and see if the income is greater than the expenses.
Calculate Positive Cash Flow In 5 Seconds
Due to multiple request I have released an online calculator that allows you to estimate the cash flow of any property in just 5 seconds. You just need to know what the purchase price and rental income is and the calculator does the rest.
You can then go into more detail on each expense item to get a more accurate estimate.
How To Accurately Calculate Cash Flow
We are now going to go through all the steps that you need to take into account on order to accurate calculate the cash flow of your property.
You can use these tips to do a cash flow calculation for a week, a month or a year. I believe monthly or yearly is generally best.
The first thing we need to do is look at the total income from the property.
Your major income is going to be your rental income and in most cases this will be your only source of income from the property. Calculate how much of this you are receiving per year.
Generally you calculate this income as if the property was rented for the entire year and then we deduct vacancy in the expense column.
Some properties can achieve extra incomes from things like vending machines, advertising and some other sources. But these are pretty rare.
Next we need to take into account all of the expenses of the property. One of the biggest mistakes is that people only take into account their mortgage expense. You need to take into account ALL expenses.
This is going to be your biggest expense. Work out how much you are paying each month or year on your mortgage.
NOTE: You can easily reduce your mortgage repayments and increase cash flow by changing from a principle and interest loan. Consult with a professional which loan is right for you.
Rental agent fees
If you are renting a property through an agent then their fees will tend to be between 5-9% of the rental income that comes in.
Many lenders also carge a 110% of one weeks rent whenever they lease the property to a new tenant. If you a getting new tenants often then you need to take this cost into account and add it to your yearly expense.
If you are managing the property yourself then you need to take into account advertising fees and any other fees that may come as a result of managing your property.
You need to take into account the ongoing maintenance of the property. The price of maintenance can be quite unpredictable.
Issues with taps or electrics or water systems can instantly cost you hundreds of dollars in one hit.
It is generally a good idea to allow at least 5% of your yearly rental income for maintenance. Some years you might use more and some years less.
In the income column we counted rental income as if we received rental income every week for the entire year.
If you have vacancies then you will need to include this in your expenses.
Where vacancy rates are extremely low you can usually get a property rented before the current tenant moves out. But in other areas you may not have this luxury. Work out your vacancy rate and count this as an expense.
If it is an investment property then you will likely have landlords insurance. This covers the property and your rental income in the case of any problems.
Council rates pay for things like roads, sewerage, rubbish disposal etc. If you are a home owner you will almost certainly have quarterly or annual council fees.
In many cases the landlord pays for the water bill. However, this is beginning to change in some areas, where it is now up to the tenant to pay the water bill.
There may be some cases where you as the landlord are required to pay for other utilities such as electricity or gas.
If you own a strata titled unit then you need to pay strata fees. These are generally a fixed quarterly fee and pay for the maintenance of the building and general property.
If you own too much property or too much land you are likely to have to pay land tax on your investment. Check with your advisor if land tax applies to you.
Build Buffer Fund
You may want to allocate some money to building a buffer fund for large expenses. This is generally not a tax deductible expense, but may be needed to be taken into account for your own cash flow purposes.
This is the costs of the things you didn’t even expect or think of. Many years this cost will be $0 but sometimes something comes up that you didn’t allow for. In most cases this is where a buffer fund comes in handy.
Now Calculate Your Cash Flow Before Tax
Take all your income and minus your expenses and this will give you your cash flow before tax.
If you calculated all of the above on a yearly level then it will give you your yearly cash flow. Divide this by 52 to get your average weekly cash flow.
Now we need to take taxes into account. A tax refund can turn a negatively geared property into a positive cash flow property.
You can claim depreciation on your ‘depreciable assets’. This generally includes things in and on your house. Light fittings, white goods, renovations etc.
This is not an ‘out of pocket’ expense but rather a loss of value. Like the fact that every year your car loses value…but you don’t actually pay for the loss in value.
In real estate you can usually claim these losses in value and get a tax refund on them. Get a depreciation schedule done so that you know exactly what you can claim.
Paying An Accountant
Paying your accountant or book keeper is usually also a tax deductible expense.
You can claim a variety of other things that are involved in maintaining your property portfolio.
For example, if you property is located in another state from where you live you can often claim 1-2 trips per year to that area to ‘inspect the property’. Check with your accountant for any more claimables.
Tools for calculating cash flow accurately
There are a few tools out there for calculating the cash flow of your property effectively. Most are quite expensive and hard to use.
That why I created Property Tools. A online calculator that allows you to quickly and easily estimate the cash flow of any property in seconds.
Simply enter purchase price and rental income to get an initial estimate, and then go into more details on each expense item to get a more accurate result.
Hand’s down the easiest way to calculate positive cash flow properties
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