When you’re looking at investing in positive cash flow property, how do you know whether or not a property is going to be positive cash flow or not? That is what I’m going to be talking about in today’s episode.
Hey guys my name is Ryan and I’m from onproperty.com.au your daily dose of property education and inspiration. Knowing what the cash flow of an investment property is going to be is an important step to take before you invest in property. You can never know exactly what the cash flow is going to be because there’s always hidden things that you never really predicted. But doing a cash flow analysis beforehand will give you a good idea of roughly what a property is going to return and whether or not it’s going to be positive cash flow or not which if you want that passive income and you want that positive cash flow it is important to do the sums. Now every single property is different, so you kind of need to do these sums for every property.
I’ve got a question that I’m going to answer today which comes from Nicole and Nicole has asked, “Hi Ryan, not a member yet but considering it,” she’s talking about onproperty plus which is my premium membership website. If you’re interested in that go to onproperty.com.au/plus. Anyway she says, “I’m looking at properties in Tamworth. There is a property for $135,000 who has a tenant which is paying $230 per week. Would this be a good positive geared investment? Nicole.” Nicole thank you so much for this question. This is actually going to be a great question to answer because it will allow people to see a real life example of how you’re going to analyze a property and whether or not it’s likely to generate a positive cash flow.
Firstly I just want to put a #disclaimer that I can’t say whether or not it’s going to be a good investment because good is a relative term. It could be good for me but it might not be good for you depending on your financial situations and your goals. So let’s look at will this property generate a positive cash flow before tax or not. So we really define the question to make sure we are not stepping outside any lines or anything like that. So with that in mind let’s go ahead and have a look at whether or not this property is going to be positive cash flow.
I’m going to go inside onproperty plus and I’m going to go to the Advance Property Calculator which is a toll that I created to analyze potential properties and to see whether or not it’s going to be positively geared. But before that I just want and have a look at the quick test calculator which is a calculator that I got created based of Steve McKnight’s 11 second rule. Let’s see, I just need to find it, sorry about this. Let’s go to onproperty.com.au/archives, it’s going to be in there but basically this will tell you the rental yield of your property and whether or not it passes the quick test which is Steve McKnight’s test about whether or not a property would generate positive cash flow. Here it is, it’s the Gross Rental Yield Calculator.
So let’s start by putting in the purchase price, $135,000 and the rental income which is $230 per week. So we can see that this property is going to generate a 8.86% gross rental yield but it doesn’t pass the quick test. The quick test needs a property to be over 10.4%. However when Steve McKnight wrote the 11 second rule it was back when interest rates were between I think 7%-8%, so things are a little bit different now that interest rates are so low in some cases below 5%. So let’s go ahead and use the Advanced Property Calculator and do some more advance analysis here. Let’s type in the purchase price $135,000 with a rental income of $230 per week. Interest rates we’re going to put it about 5% assuming a 20% deposit and all the stamp duty and stuff, let’s not worry about that at the moment. We can see here rental yield 8.86%, annual rental income of $11,960 a year. We take vacancy into account down in expenses but let’s just look at that for now. We can see weekly cash flow before tax and potentially obviously this is a rough estimate $18.16 or a yearly cash flow of $944.32.
Now obviously none of this is guaranteed because a lot can change and we haven’t gone through and found out real cost of the property. We can look at cash on cash return before tax. It would be 2.10%, return which isn’t massive, cash on cash return after tax is 5.75%, well obviously this is going to change based on circumstances. What you can do is you can then go down and change the fees and stuff like that maybe in Tamworth property manager fees are 8%. Let’s say you’re only going to have a 2% vacancy not 5%, let’s say because it’s an old, smaller property you’re actually going to spend $1,500 on maintenance and basically you can go through this and you can change council rates and bank fees and water rates and all that sort of stuff to make this more accurate and so will this be positive cash flow? Look I would say I always like to give myself a decent buffer. At least over $1,000 because if a hot water heater breaks and you need to replace that, bam, that’s over $1,000 gone right there depending on what hot water heater you go with and installation, so I always like to leave that buffer.
So I would say that this property is either around the cash flow neutral area, it might be positive cash flow, it could be negatively geared, I don’t know the property in particular but at least it gives you some analysis of what the property is. Now if you want to do this yourself, you can use the Advanced Property Calculator if you’re a member of onproperty plus. If not you can do this by hand it’s just going to take you more time. All you need to do is work out your purchase price and the rental income which you times by 52 to get this annual rental income. Rental yield and stuff doesn’t matter too much. If you want to do it really basic; you work out your deposit $27,000 and you minus that from the purchase price of $135,000 to give you your total loan amount. So in this case we are saying $108,000.
Then to work out your interest costs you can go through and times obviously your loan amount by whatever the interest rate is in this case it’s 5% and then property manager fees, all of these percentages are based off the rental income that’s coming in. So this is 8% of $11,960 and this is 2% of $11,960 and then all of this. Basically what you do is take all your expenses which is here, Total Annual Expenses and you deduct those expenses from annual rental income and that’s how you get your estimate of whether or not it’s going to be positively geared. That will give you and annual estimate, you can divide by 52 to get a weekly estimate.
So Nicole I hope that has been a helpful explanation to you of the analysis of that property. Obviously I used to actually go through and do everything manually. I did create a video on how you can work out whether or not a property is going to be positively geared. Let me just find that for you so you don’t have to go searching for it yourself. As you see I do these videos pretty off the cuffs, so I’m not completely prepared for everything cause I’m winging a little bit, so calculate. So if you want to find out the step by step to calculating positive cash flow property by hand you can go to onproperty.com.au/127 and we go through all of the steps here, everything you need to do. A pretty long post because it’s a pretty long and arduous process but that will help you work it out.
Ok guys, if you’re interested in positive cash flow property, hope that’s been useful to you. Nicole you said you’re interested in onproperty plus so I’m just going to give you a quick tour. We go to plus.onproperty.com.au and basically I will show you what’s in there. You can decide whether it’s for you or not. You’ve got all your lessons, you’ve got basics about positive cash flow property, you got a help about setting budgets how to do that, I’ll just quickly show you inside these two; how to find positive cash flow properties and how to research an area.
So finding positive cash flow property, you can see we’ve got five videos and one coming soon about different techniques you can use. You can use a property magazine that’s really helpful to find areas with high rental yields, the McLean method two videos there. That’s my signature method and the way I first found my first positive cash flow property. Lesson 4 is about the types of properties that are going to generate positive cash flow and then lesson 5 is about using real estate investor which is a paid tool. You’ll find it a super useful tool, not really cheap but very powerful and then nextplace I’ll do a video on how to find positive cash flow properties doing that. So there are your lessons to help you learn how to find positive cash flow properties yourself. Obviously you found one in Tamworth so you’re already leagues ahead over a lot of people. And then we talk about researching an area so looking at demographics, finding government housing areas, finding out how long a property has been listed for, previous sales history, vacancy rates and all that sort of stuff. That’s your lessons; the advanced property calculator is the most powerful tool which you’ve already seen. We have the financial freedom calculator, which I’ll show you and then we’ve got listings of positive cash flow properties.
So I uploaded about 20 or so, usually more than 20 each and every month, properties that are high rental yield like the one that you found in Tamworth that are likely to generate a positive cash flow and so I think I’ve got over 80 or 90 archived in there at the moment and new ones coming out every single week . I’ll just lastly show you the financial freedom calculator cause I just think it’s cool. What you do is you put in your income goals, so for me that’s $60,000. You put in how much the property is going to rent for, so let’s say the property is going to rent for $350, we can see that we’re going to need about four properties to fully pay it off in order to be financially free.
Let’s go back to, we didn’t save that. It was about 20 bucks per week that property was making so let’s say if we buy a lot of properties and they all make $20 per week and we never pay them off we’re actually going to need 58 properties in order to be financially free. But if that one was renting for $230 a week, so you would need 6 to fully pay off. So you can kind of assess how many properties you will need and it helps you work out your plans. I really like that tool, something to look at. That’s the gist of what’s inside onproperty plus, they’re some other things there but, that’s your most powerful stuff.
Alright Nicole I will leave you at that. If anyone has listened this far into my rambling, oh my gosh I love you, I appreciate you so much. I appreciate the fact you watch this, listen to this and read it because without followers and readers like you this wouldn’t exist and the funds to be able to create these tools and programs wouldn’t exist either. So just want you to know I appreciate my community so much and if you have any questions please email me firstname.lastname@example.org I guarantee I’ll answer every question with a video and if you want my free list of 10 positive cash flow properties go to onproperty.com.au/free. So until tomorrow, stay positive.