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Convert Your Current Personal House to a Rental?

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  • Convert Your Current Personal House to a Rental?

    Convert Your Current Personal House to a Rental?

    When trying to get ahead on the property ladder, a lot of people move to a new personal home and convert their existing house to a rental. Unfortunately, this is often done for emotional reasons!

    If you are thinking about doing this:

    1) Is your existing house a good rental?
    Is there high tenant demand in the area? Look at population figures for the area and talk to a local property manager.
    Will you be able to attract a good tenant?
    Is the property easy care and low maintenance?
    Is there an opportunity to add value in the future? For example, subdivide or add a minor dwelling.

    2) What is the cash flow?
    As a starting point, I would work out the Gross Yield. This is 50 weeks rent divided by the property value *100. For example, $400 per week * 50 = $20,000 divided by value of $400,000 would give 5% Gross Yield.

    The Gross Yield gives an indication of the cash flow:
    5% or under is going to be quite negative cash flow based on 100% mortgage.
    7% or better should break even or be positive cash flow.
    Between 5% and 7% is still likely to be negative cash flow, but a smaller, more manageable amount.

    Review the income less the full expenses. The example below shows a $8,784 loss expected each year before tax. After tax refunds, this drops to $4,914 per year or $94.50 per week.


    3) What happens if interest rates go up?
    At 6.5% interest, the loss after tax refunds increases to $9,950 per year or $191 per week.

    4) Can you afford the cash flow losses?

    5) Do you want to gamble that the property will go up more than the cash loss?

    6) Or do you have a plan to change the cash flow?

    • Minor dwelling to increase rent
    • Subdivide long term and sell section, or build second rental on section
    • Inheritance coming that can reduce the rental debt. NOTE: you are likely to pay off any personal debt first.


    Often I find that personal homes are not great rentals and that it is better to sell the existing personal house and buy a specific rental, with better cash flow or better long term options.

    Ross
    Last edited by Perry; 18-07-2017, 06:28 PM. Reason: fixed formatting
    Book a free chat here
    Ross Barnett - Property Accountant

  • #2
    FANTASTIC. I share your opinion but couldn't explain it as well so I'm bookmarking this to refer people back to. Thanks Ross.
    Free online Property Investment Course from iFindProperty, a residential investment property agency.

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    • #3
      Presuming the chart to be from a spreadsheet, perhaps consider clarifying the #DIV/0! formula.

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      • #4
        The Div0 error is due to there being no cash input, a 100% mortgage, and therefore no denominator in a ROI calculation.

        A good example! Though I think the R&M and Accounting Fees need to be a bit more realistic!
        AAT Accounting Services - Property Specialist - [email protected]
        Fixed price fees and quick knowledgeable service for property investors & traders!

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        • #5
          R & M - can vary hugely. It could be a new build (such as a townhouse which is reasonably common) where the repairs would be less. It was the last example I had done for someone, so was based on their circumstances. The repairs were realistic in their case, which was a relatively new townhouse.

          Accounting - The example was done for a couple who already had one rental, so the costs of adding a second are small. They are probably less than the $250!

          Return on investment can not be calculated as no money is put in.

          Ross
          Book a free chat here
          Ross Barnett - Property Accountant

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