# How To Calculate Positive CashFlow Property (Ep127)

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If you don’t know how to calculate the finances of a property then the chances of you actually finding a positive cash flow property anywhere in the country is going to be extremely slim because you wouldn’t know a positive cash flow property if you saw one.

It is important to understand exactly how to calculate positive cash flow properties so that when it comes time to look at properties you can tell whether a property is going to have a positive cash flow or be negatively geared.

In order to be able to calculate positive cash flow property you need to take into account all of the income that the property is going to deliver as well as all of the expenses that it is going to take away from you.

We’ll go through this process step-by-step so you can know the major income and expenses that you need to calculate and take into account before you can estimate whether or not the property is going to have a positive cash flow.

## Step 1: Work Out The Annual Rental Income

The way to do this is to simply estimate the weekly rental income and multiply it by 52 (for the 52 weeks in a year).

Your property may lay vacant for some time but we will deal with those vacancies in the expenses and work it out later in the process. I have found it much easier to simply calculate the annual rental income if the property is 100% tenanted rather than taking vacancies into account at this point.

If you want help on knowing how to find out what your property is going to rent for and you don’t want to talk to a real estate agent then head over to Positive Cash Flow Academy and sign up today. In that course I go through exactly how to find out how much a property rents for.

## Step 2: Find Out Your Total Loan Amount

Not how much you are going to have to pay but how much your loan is actually going to be.

This is a step that not many people do properly and it is a very important step if you want to understand what your cash flow is going to be. Most people will simply look at either the full purchase price of the property or the purchase price minus their deposit and consider that as their loan amount. But here’s what we need to do:

1. Take the purchase price of your property
2. Add stamp duty (and you can use any stamp duty calculators for help).
3. Add other expenses and fees like setup fees and solicitors
4. Add lenders mortgage insurance (LMI) if you have a deposit under 20%

Once you add up these things then you subtract it from the amount of money that you have available.

It is important to calculate all of your expenses first and then subtract the amount of money you have in order to get your total loan amount.

## Step 3: Work Out Your Loan Repayments

If you’re going with an interest only loan this is a pretty simple calculation to do. Take your full loan amount from the previous step and multiply it by the interest rate. For instance you might multiply by 5% or 0.05 and the result will be your annual figure for how much money you will need to pay interest on that loan for the year. You can then divide by 52 and that will give you how much you will pay per week if you prefer to work it out in weekly increments.

If you’re doing principal and interest (which means you’re paying your interest but also paying money on top of it in order to pay down your loan in 20 to 30 years) then this calculation is much more difficult to do. The simplest thing to do is to find one of the loan calculators online (and you can go to onproperty.com.au/calculators for a list of those) and punch in your figures and it will tell you how much you need to pay either monthly or yearly towards your loan.

So mortgage is our major expense. We’ve worked out our major income (which is our rent) and our major expense (which is our mortgage). Now if your mortgage is more expensive than the rent then that’s automatically going to be a negatively geared property. But now we need to calculate more of the expenses to make sure that even if your rental income is greater than your loan amount and interest repayments you will still have a positive cash flow.

## Step 4: Calculate Property Manager Fees

These fees range between 6% to 8% but can vary depending on the area you’re in and the rental manager that you go to. I suggest that you interview a few rental managers before hiring one to find out what they are going to do for you and what they charge. Then choose the best rental manager for your property based on that.

However at this stage I would calculate a higher percentage of approximately 8% because I believe that it’s a more reasonable figure because if your property becomes vacant then the rental manager has to go out and find another tenant. This means that the manager has to advertise to attract tenants and is going to charge you to do that marketing and advertising. In a lot of cases those charges calculate to be about 110% of one week’s rent.

So even if you can find a rental manager who charges 6%, one vacancy in the year is going to increase the cost for your rental manager because you’re paying marketing fees. That’s why I like to calculate at about 8% but is up to you exactly what you want to do.

## Step 5: Calculate Your Expected Vacancy

In the beginning we looked at how much the rental income would be if the property was 100% tenanted. Now hopefully your property will be 100% tenanted and you won’t have to deal with getting new tenants regularly, but we do need to calculate an expected vacancy.

There are a couple of ways you can do this:

• You can calculate a percentage like 5% (which is a good percentage)
• You can calculate it based on one week vacancy which is 2%
• You can use a property magazine like Australian Property Investor and look in the back and use the vacancy rate of your area

So if your area has a higher vacancy rate of 10% then you might want to calculate 10% vacancy rate. Likewise if the area is extremely low like 0.5% you could use a smaller percentage in your calculations. I would use a minimum of 2% vacancy which is one week’s vacancy but I try to calculate based on a 5% vacancy rate for all the properties that I analyse .

As a property investor chances are you’re going to want landlord insurance which will cover you for a wide variety of issues as an investor. It’s going to cover you for all major damages like fire and flood but it also protects you against your tenants, whether they disappear and don’t pay rent or damage the property.

There’s a wide of issues that landlord insurance covers and as a rough estimate it usually costs anywhere from about \$500 to \$1000. You can get quotes online so I would suggest doing that and trying to work out what the insurance is likely to be for the area that you’re in.

## Step 7: Allow For Unexpected Repairs

If you have a brand new property that has just been built then chances are in the first year or two you are not going to have to do as many repairs on the property as you would for an older property. If you have an older property then you are going to have to pay to maintain that property and to keep it up to standard. As a property gets older more things are going to age and begin to break and then you’re going to need to fund the repairs.

I tend to allow again about 5% for maintenance but depending on how old your property is it could be less or more. And when I say 5% I mean 5% of the rental income.

## Step 8: Calculate Your Strata Fees (Body Corporate Fees)

If you are purchasing a house then you probably don’t need to do this and can skip this step.

If you are in a unit townhouse complex chances are you’re going to have to pay body corporate fees or strata fees and these are fees that you pay to maintain the common areas. You will generally be able to easily find what the strata fees are and they are usually charged quarterly. Simply multiply by four and that will give you a yearly amount.

## Step 9: Calculate Water Rates

It used to be that the landlords would always pay for water but this is not always the case anymore. In a lot of situations now the tenants have to pay for their own water usage. So if you’re looking at property where you can meter the water and charge the tenants then you can leave this out but if you’re going to have to pay for the water then you need to take this into account.

I would consider at least \$150 a quarter or about \$600 a year for this expense. I would even suggest taking into account up to \$800 or \$1000 as well depending on how big your property is and the types of tenants that you’re going to get. Obviously smaller rental properties with less people living in them will probably use less water then a family of six people.

Land tax occurs when you have a certain amount of property or land in one state. You are often charged what’s known as land rates or land tax and this is an extra fee that you pay for owning a certain amount of land. This needs to be taken into account if you are over that threshold and you can check the government websites to work out exactly what that threshold is for each state.

A lot of new investors won’t need to worry about this but seasoned investors who own a lot of property might need to consider it.

Speak to the council or the real estate agent to find out what the council rates are for the area are you looking at purchasing in. Again it is probably charged on a quarterly basis or maybe on an annual basis. Just make sure you calculate this expense as well.

If you can’t find out what it is then I would look at \$1,000-\$2000 per year but it varies significantly based on the area that you’re in.

## Step 12: Calculate Your Total Cash Flow Before Tax

To do this simply take what we did in step one (which is our total income assuming 100% hundred percent occupancy and no vacancies) and then subtract all of the expenses we just talked about (your mortgage, manager fees, vacancies etc…). If your rental income is greater than what all of your expenses are then chances are you may have found a positive cash flow property which is great news! But obviously if the expenses are more than what the rental income is then it is going to be a negatively geared property.

This step will give you your total cash flow before tax and again you can divide it by 52 if you want to get the weekly figure. If you take the next step and work out what the cash flow is going to look like when you take tax into account, you can do some calculations based on this. But I do advise that these are rough calculations and that they should not be considered taxation advice. Always seek the professional tax advice when doing your tax returns.

## Step 13: Deduct Depreciation From Annual Cash Flow

In order to work out what tax you’re going to be paying or if you will receive a refund you would take your total cash flow before tax and then deduct what’s known as depreciation. You can get the full details on claiming depreciation at onproperty.com.au/32 where I did a full article about that but basically depreciation is when you claim the lowering in value of either the building or the fixtures and fittings inside the building as a loss.

You can claim this against the income that you’ve earned in a financial year and subtract your total cash flow before tax and then subtract depreciation on top of that to give you another figure.

If you’re in the top tax bracket and you earn over \$180,000 per year then you’re going to add the full amount of tax that you would pay. If you’re in a lower tax bracket however then you’re going to charge yourself less tax. So if you are still making a profit on paper after you take away depreciation then you’re going to pay tax based on your tax bracket.

But if you’re losing money after taking depreciation into account then it’s possible you’re going to get a tax refund. However like I mentioned you need to speak to your accountant to be sure.

So using your tax bracket, multiply by your remaining figure of profit or loss by your percentage tax bracket and this will give you a rough estimate of either the tax you have to pay or the tax refund that you’re going to get.

## Step 15: Add or Remove Your Tax Refund or Tax Bill

Either add your tax refund or remove your tax payment from your total cash flow before tax and that will give you total cash flow after tax which will lead to the final step.

## Step 16: See Your Total Cash Flow After Tax

Now you can see your total cash flow after tax and really understand the potential cash flow of this investment property.

As you can see there’s a lot of different things you need to take into account when you’re calculating positive cash flow property. If you want an easier way to do this then I have the Advanced Property Calculator which is a simple Excel spreadsheet that helps you go through this process and analyse it for yourself. You simply punch in the figures and it gives you what your estimated cash flow is going to be .

It is a paid product but it’s cheap and extremely useful. You can access this by going to onproperty.com.au/APC.

Until tomorrow remember your long-term success is only achieved one day at a time.

Today’s episode is sponsored by Blue Horizons Property – Corr and Helene have already helped hundreds of investors invest in positive cash flow properties with high growth potential in the Surat Basin in Queensland. Don’t invest in the wrong area. View their featured listings for their latest properties.

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