FAQ 54 How do I work out if a property is Cash Flow Positive? – Rule of 2

Hello Students,
It is very important to understand this process. Like any business there is a requirement to know if the property is making or will potentially make an income or not.

DYMPHNA\’S CALCULATIONS ARE ALL BASED ON BORROWING 100% OF THE PURCHASE PRICE AND DO NOT INCLUDE ANY TAX BENEFITS.

It is of benefit to understand the correct financial terminology when making your calculations. Access the entry under the DOWNLOADS section titled \’Thursday Q & A The Numbers\’\’

In a nut shell simply add up all of rental INCOME and then take away ALL rental EXPENSES. The result is
the Gross Cashflow. Subtracting any loan interest charges from the Gross Casflow will result in the Net Cashflow. This means that if borrowing the deposit or stamp duty and legal costs or anything else pertaining to this property then any interest costs payable on these must also be included. (Columns L & M)

REMEMBER THAT IT IS NOT IMPORTANT WHERE A LOAN IS SECURED – ONLY WHICH PROPERTY THE LOAN IS USED FOR.

We recommend that the Portfolio Analysis spreadsheet located under the DOWNLOADS section of the
website ( Under the SUPPORT tab) be downloaded.

Gather the following figures from settlement docs, loan statements, rental statements and valuations and enter into the spreadsheet:-

AQUISITION COSTS

Property Purchase Price – Column D
Stamp Duty and Legal costs – Column L ( enter ONLY if borrowed )
Loan Interest Rates – Column K and Column M
Loan Amount ( eg the 80% borrowed) – Column J

OUTGOINGS (Sum up all and insert in column H)

Council Rates
Water Rates
Management Fees/charges
Land Tax
Insurance Premiums

INCOME

Rent – Column G

PERFORMANCE

Current Property Value – Column T
Current Year – At Z

Just fill in the numbers and the spreadsheet will do the rest.

The figures of interest are:

Net annual Cash Flow – Column P
Gross rental yield – Column Y
Estimated Annual Averaged Growth Rate – Column Q
Return on Equity – Column W

USING THE RULE OF 2

NOTE THAT THIS IS AN APPROXIMATION ONLY AND WAS CORRECT WHEN THE INTEREST RATE
WAS 7.5%ALWAYS USE THE FULL METHOD WHEN ACCURACY IS REQUIRED.

With the current sub 5% interest rates the rule of 2 becomes the rule of 1.4 ( metro areas) or 1.6 ( regional areas)

A property costs $400,000 ( note that buying costs are not included)
to work out what the rent should be
Divide by 1000
And Multiply by 2

So (400,000/1000)x 2 = 800
The rent should be $800 per week – Annual Rent $41,600

For the numerically challenged this iPad app will do the hard work

https://itunes.apple.com/au/app/property-evaluator-real-estate/id372063167?mt=8

Here is a link which shows some of the calculations:
http://m.wikihow.com/Work-out-a-Rental-Yield

Michael and Sara
Ultimate Coaches
The information supplied is general only and not intended to replace professional advice. As coaches we do not provide advice on what or where to buy or to assess the suitability of a property. We advise students to perform their own due diligence when considering a property purchase.

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