How To Calculate Investment Property Cash Flow

[arve url="https://www.youtube.com/watch?v=ceCXvWt1E5U" mode="lazyload" align="center" /] 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. Get Access to the Property Tools Cash Flow Calculator Transcription: 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 income. 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.