Friday, 12 April 2013

Inflated Property Returns

I was talking to someone recently about our property in Florida, and was saying how the expenses were higher than we first imagined, and in turn our return is a bit less than what we were hoping for. Initially I was hoping for a net yield of around 8.00%, I thought this might be a bit optimistic but going through the numbers before purchasing a property, it seemed like a realistic value.

But after obtaining our property in Florida and seeing first hand the expenses, it seems that despite being fairly conservative in our initial assumptions, the return is still less than what we initially hoped for. However, if you rearrange the numbers a little, the investment looks better and perhaps even a bit more realistic as well. See below for the initial and subsequent calculations which show net yield returns.

Initial Calculations

The Net Yield of 0.56% is less than desirable, and if we were told we would be getting this return then I don't know if we would have taken the leap to invest in the US as the hassle would just not be worth it. Although I did not include any capital gains on the property (as our plan is for cash flow) this can be  disregarded as the cash flow target simply has not been met.

But by making some adjustments to the calculations, like shifting some of the expenses to the capital (moving the cost of the A/C unit and the whitegoods under capital expenditure), the numbers start to look much better. This is realistic as these expenses are not a yearly expense and you would hope that a new A/C unit would last a few years at least, the same with the white goods. Further, you can remove the cost of PI  insurance (as this expense is not dedicated to this single property and will cover all properties under the LLC) and include it as part of the LLC's general overheads.

Adjusted Calculations

As you can see by adjusting the calculations to perhaps more realistic figures, we have now obtained our 8.00% Net Yield that we were hoping. It is important to note that both situations are essentially identical with all expenses included in both examples (with the exception of PI Insurance), yet it is simply a different way of
calculating that gives you a very different result.

I think this is a good sign to be careful when seeing advertisements purporting unbelievable returns. You should always look through the numbers yourself and satisfy yourself that what is being advertised is achievable. You should also always check whether the returns are 'gross' or 'net' yield and what expenses have been considered.

Thursday, 7 March 2013

Lithgow Properties

Having a quick look on you will see there are several properties that can provide you with neutral/positive gearing. Have a look below at a list of properties with their figures and gross yields for each of them. These are all simple calculations and using a spreadsheet was able to take only a minute to generate them. Note these are all free standing houses so have no strata associated with them.

House Cost Rent Per Week Gross Yield Interest Weekly Profit
$143,000.00 $165.00 6.00% $151.25 $13.75
$155,000.00 $175.00 5.87% $163.94 $11.06
$185,000.00 $210.00 5.90% $195.67 $14.33
$209,000.00 $225.00 5.60% $221.06 $3.94
$235,000.00 $265.00 5.86% $248.56 $16.44
$180,000.00 $195.00 5.63% $190.38 $4.62
$199,000.00 $225.00 5.88% $210.48 $14.52
$160,000.00 $180.00 5.85% $169.23 $10.77
$165,000.00 $185.00 5.83% $174.52 $10.48
$160,000.00 $175.00 5.69% $169.23 $5.77
$249,500.00 $350.00 7.29% $263.89 $86.11
$229,000.00 $300.00 6.81% $242.21 $57.79
$169,500.00 $250.00 7.67% $179.28 $70.72
$235,000.00 $265.00 5.86% $248.56 $16.44
$240,000.00 $375.00 8.13% $253.85 $121.15
$245,000.00 $300.00 6.37% $259.13 $40.87
$189,000.00 $210.00 5.78% $199.90 $10.10
$150,000.00 $175.00 6.07% $158.65 $16.35

The interest is assumed to be 5.50% per annum. 

As you can see, just having a quick look there are plenty of properties which can offer you positive returns. Now I understand that I have only done gross yield, and there are plenty of expenses that have to be accounted for that will severly reduce the overall yield, but hopefully even without some of these expenses the properties should be at least neutrally yielding. 

It is also important to note that it is not always the best to go purely off yield as a figure, but sometimes a figure like weekly profit would also be a good test. In the above table, a higher yield does not always correspond to a higher weekly profit. And at the end of the day that is what is really important, getting that money in your pocket! 

A cash on cash return is also a good way to check and compare properties, the following table does a cash on cash return with a couple extra assumptions. Assumes a deposit of 20%, additional purchasing costs of 5% (stamp duty, lawyer fees etc). And additional expenses such as property manager fees, insurances, rates etc of 2% of property value.

House Cost Total Purchasing Costs Loan Size Interest Expenses Gross Rent Yearly Profit Cash on Cash Return
$143,000.00 $35,750.00 $114,400.00 $6,292.00 $2,860.00 $8,580.00 -$572.00 -1.60%
$155,000.00 $38,750.00 $124,000.00 $6,820.00 $3,100.00 $9,100.00 -$820.00 -2.12%
$185,000.00 $46,250.00 $148,000.00 $8,140.00 $3,700.00 $10,920.00 -$920.00 -1.99%
$209,000.00 $52,250.00 $167,200.00 $9,196.00 $4,180.00 $11,700.00 -$1,676.00 -3.21%
$235,000.00 $58,750.00 $188,000.00 $10,340.00 $4,700.00 $13,780.00 -$1,260.00 -2.14%
$180,000.00 $45,000.00 $144,000.00 $7,920.00 $3,600.00 $10,140.00 -$1,380.00 -3.07%
$199,000.00 $49,750.00 $159,200.00 $8,756.00 $3,980.00 $11,700.00 -$1,036.00 -2.08%
$160,000.00 $40,000.00 $128,000.00 $7,040.00 $3,200.00 $9,360.00 -$880.00 -2.20%
$165,000.00 $41,250.00 $132,000.00 $7,260.00 $3,300.00 $9,620.00 -$940.00 -2.28%
$160,000.00 $40,000.00 $128,000.00 $7,040.00 $3,200.00 $9,100.00 -$1,140.00 -2.85%
$249,500.00 $62,375.00 $199,600.00 $10,978.00 $4,990.00 $18,200.00 $2,232.00 3.58%
$229,000.00 $57,250.00 $183,200.00 $10,076.00 $4,580.00 $15,600.00 $944.00 1.65%
$169,500.00 $42,375.00 $135,600.00 $7,458.00 $3,390.00 $13,000.00 $2,152.00 5.08%
$235,000.00 $58,750.00 $188,000.00 $10,340.00 $4,700.00 $13,780.00 -$1,260.00 -2.14%
$240,000.00 $60,000.00 $192,000.00 $10,560.00 $4,800.00 $19,500.00 $4,140.00 6.90%
$245,000.00 $61,250.00 $196,000.00 $10,780.00 $4,900.00 $15,600.00 -$80.00 -0.13%
$189,000.00 $47,250.00 $151,200.00 $8,316.00 $3,780.00 $10,920.00 -$1,176.00 -2.49%
$150,000.00 $37,500.00 $120,000.00 $6,600.00 $3,000.00 $9,100.00 -$500.00 -1.33%

As you can see, when you do a bit analysis into the figures a lot of the properties start to give you poor returns, and are slightly negatively geared. Keep in mind that even the worst performing property above is only in negative about $1,700 per year, about $33 per week. But still, it is costing you money, not making you money! On the other end of the scale, there is a property that is earning you $4,140 per year, an extra $80 per week! It may not sound like a lot of money, but it is all passive income, money in your pocket for doing minimal work. 

As I said at the start, finding positively geared properties is very difficult, the list of properties above, although looking at the gross figures appeared to give you positive returns all of them, with a bit of analysis, it showed that most of them were indeed negative, albeit not too badly. But the point to remember is that the positively geared properties are still out there! I searched for about 30 minutes to find this list of properties above, and only searched in one city. The analysis took a further 30 minutes, so one hour of my time and I can find a good positively geared property to help increase my real estate portfolio.


Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Sunday, 20 January 2013

The Business of Property Investing in 2013

With a new year under way, now is the best time to organise your financials and plan for a prosperous year ahead. These four tips will assist you in making 2013 your strongest investing year yet.

Number 1 – Set goals

You’ve probably heard this one a bunch of times, each time brushing it off as unnecessary or something to look at later. It took me quite a few years of doing just that before I finally realised the benefits of setting goals at the start of each year.

Setting goals will help you focus your energy and give you some direction throughout the year. It doesn’t need to be an onerous exercise but each goal does need to be actionable and measurable. For example, ‘purchase another investment property’ or ‘increase passive income to $500/week’ provide clear benchmarks to aim for. ‘Get rich’, on the other hand, won’t really do.
Make sure that each goal:
  • can be achieved within a year
  • is something that you can measure your progress against
  • is, most importantly, something that you’re passionate about achieving.
The goals that you set at the start of the year can be amended and updated as things change.
Number 2 – Undertake an end-of-year review
An end-of-year review is something everyone should do, regardless if you set any specific goals the previous year or not. When you treat your investments as a ‘business’, your overall results will improve.
Undertaking a review doesn’t need to be too complicated. Start off by asking yourself simple questions such as, ‘Am I happy with what I achieved this year?’ and ‘What area could I have improved in?’.
Next, list your achievements for the year (this doesn’t need to be limited to your financials) and areas where you lost a bit of focus (for example, sticking to a budget).
The final step is to review all of your current investments to see how they are travelling.
Number 3 – Set a budget
Budgeting ties in nicely with the first two tips. Once you’ve set your yearly goals and undertaken a review of the previous year, you’ll be in a much better position to move forward with all of your financial pursuits.
Find a basic budgeting spreadsheet on the internet and fill it in as accurately as possible. If you’re unsure about any numbers, make an educated guess, but do try to be as comprehensive as possible.
With your budget complete, you will be able to see exactly where your money is going on a weekly or monthly basis. This will also assist you when you undertake your next end-of-year review.
Deposit a portion of any excess income into a high-yielding online savings account where it can stay until the next deal comes along.
Number 4 – Keep good records
Start each year with a relatively clean slate when it comes to records. It’s easy to be overrun with too many emails, RSS feeds and ‘to-do’ lists. Give your inbox a thorough clean-out and try to keep it clear by archiving old emails. Keep one ‘to-do’ list (preferably one that you can access everywhere, for example, with Evernote), then write down each day’s actions on a Post-It note.
Lastly, file everything (electronically and hard-copy) that is important using a clear folder structure.