Knowing the Numbers

11 June 2015

I'm amazed at how often the media, investors and others get the numbers wrong. This is a recent example:
"The $300 weekly rent is more than enough to cover his interest-only mortgage repayments, rates and insurance."   http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11457713&ref=NZH_FBpage

Below are my numbers! With the $45,000 deposit and working on 50 weeks and 5.5% interest rate, it is negative $5,855 per year!  Even with just interest, rates and insurance, it is negative $1,825, but obviously there will be repairs, property management, and other costs too!

This shows that it is critical to know the numbers! Long term average interest rates are 7.5%, and at this level, this property would be losing almost $11,000 cash per year!

There can be some depreciation and tax perks to help an investor, so it is always important to get expert advice.

What should you do if you own a rental like this?

I'd prefer if every investor purchased a cashflow positive property, but they are hard to find, and even harder to get in a good area with good tenants.

If you are going to buy a negative property, or currently own one, you should have a plan as to how to turn it positive.

1. If this example pays off $10,000 per year for 10 years, then the property would be at a break even point.  So that is one way to turn a negative property into neutral or positive.

2. Another is to gain more rent:

a)  Smart renovations and improvements such as heatpumps can gain more rental income

b)  Or converting an unused lounge into a bedroom

c)  Frequent rent reviews

d)  Legal conversion of a garage to a sleepout

e)  Minor dwelling on the back of the property.

For this example to break even, there would need to be around $417 rent per week!

I'm a big believer in paying Principal and Interest, so that your loan slowly comes down, and therefore your interest slowly reduces. With interest rates being extremely low at the moment, a great tip is to keep your payments the same as your loans are refixed!

Kind regards
Ross Barnett