How To Find Out If A Property Will Be Positively Cash Flow (Ep224)


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 [email protected] 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.

Leave a Reply

Your email address will not be published. Required fields are marked *