RM advertised CF+ property

[Emblaze Pete]

Guys

RM advertise property #1111 (Link below) as cash flow positive. I am having difficulty coming to the same conclusion as RM. It could be that I am missing the point somewhere, but no matter what number I plug into spreadsheet I keep coming up with negative cash flow. I have based my own calcs on a 20% deposit, 4 weeks vacancy per annum, plus usual expenses). Even if I use my own creative accounting I don’t seem to get the same outcome as RM. I am not suggesting they are incorrect but can anyone advise how these numbers come together to make CF+


http://www.richmastery.com/nz/property/property.aspx?&page=1&c=NZ&r=ALL&e=True&y=True&g=T rue&av=True


Regards

Peter

[FatBelly]

My guess is that there will be some massive depreciation amounts in their analysis that will add to show an after-tax positive cashflow.

I havent looked at it in detail, but if you request further info from then lusing the ink on the page you can get a break-down of their analysis for the property which will show you how they have arrived at their figures.

[Dean@Massiveaction]

If you dump it into REVIQ it's CF+ after tax, just. Basically it depends on your tax situation. If you're a 39 cents in the dollar investor then that property can be paid off using your tax savings.

[Emblaze Pete]

Thanks Fat belly. I may request further details.

I don’t know why they just don’t show the whole basis of their calculations and any assumptions that would be used though. If depreciation is the basis of a property being CF+ doesn’t that suggest it’s a possible lemon? (I don’t know just thinking out aloud here)


Cheers

Pete

[Dean@Massiveaction]

Pete, what is sour about IRD paying your IP off??
I think it's sweet, very sweet!!

[Emblaze Pete]

Hi Dean - being a 39%er means being sucked up into the rat race doesn’t it. I am trying to run away from that, plus it makes me nervous when someone says sweet and IRD in the same line. . . …..But I do take your point. Unfortunately I only have a dodgy old spreadsheet crunching the numbers and not anything flash like REVIQ … Strangely my .xls does allow for the tax calculations but I am still getting negative cash flow.

[LindaR]

Hey guys – thanks for your comments. It’s great to see you are actually analyzing our deals to make sure they do stack up.

Even though you may not have the rev iq software, a print out of the spreadsheet with the full cash flow report is able to be viewed on the deal on our website. We use a 39% tax rate and all the other parameters we have used are visible on the spreadsheet. The report will show you the before and after tax cash flow, so you can make your own decisions on the deal based on your property portfolio and what your goals are. If you are looking for a property that has positive pre tax cash flow you need to look for the properties that are ticked as yield properties.

All the information we have used such as rent appraisals and valuations are all done by independent parties and are able to be viewed on the website under the supporting documentation which goes with each deal. If you have any questions I suggest you contact the person whose name appears with the deal or feel free to ring any of the people such as the valuers or rental people who prepared the appraisals.

We are having a Property Deals information evening next Wednesday night at the Richmastery Offices in Auckland , so please feel free to come along if you still have any concerns or questions about how our service works.

[whitt]

Emblaze Pete you are quite correct is mentioning this point. Often slight differences between how figures are presented can mean a drastic difference in the bottom line.
Looking at RM calculations and together with my own I would class this as a cash-flow negative property long term.
Reasons being:

-They have allowed possibly too high a chattel deductions. Approx chattel value of $110k then depreciated it. To get $18K in first year deduction.
-The property even in RM calculations is only positive for first couple of years then shows negative. My figures would put it at negative from day one though.
-Rates does seem low in RM figures at $903+ $46. I have no property that low even my place in Taupo is over $1000 PA.
-And the big error is found in the calculation of tax. They have used a flat rate of 39% which I believe to be incorrect. The NZ tax system has a progressive tax table . first $38K earned is taxed at 19.5%, &38001 to $60000 @ 33% then $60001 and above is taxed at 39%. Eg. If a person earns 80K there true tax rate is 28% not 39%. This means a smaller tax refund than assumed. ( For those still not sure on what I mean try IRD websites own calculator , click here )

So although I come up with a differing scenario than RM the important thing which you have picked up is how critical it is to do your own independant calculations.

BTW. If you want my summary of property cash-flow at 7.4% interest and mortgage of 100%.
@ Income of $40K it is -$5400 PA 1st year, 10th year -$688 PA
@ Income of $60K it is -$2700 PA 1st year, 10th year -$48 PA

[cube]

I haven't analysed the figures, but if you earn significantly over $60K, then the losses come off that top bracket first, saving 39c in the dollar until you get down to $60K

e.g.

at $80K, you pay $22470 tax
at $75K, you pay $20520, being (39% x $5000 = $1,950) less

so if the rental makes a $5,000 loss, then you 'save' 39% of $5,000

cube

[whitt]

Cube.
You are correct, that is another way of looking at the figures which gives same outcome as I was trying to explain.
So going by these calculations and RM own figures. You would need to earn at least $95884 PA to get the full 39% tax relief and make there calculations postive. ( and even then it is only for first few years)

The $95884 PA income being $35883 Rm calculated loss on property plus the upper tax threshold of $60001.

This does show any property can be made to look good if you tweak the numbers.

[CJ]

Whitt - Cube and RM are correct. If you have a loss, it comes of your last dollar earned which is taxed at the highest rate. So as long as your earnings over $60k are more that the amount of the loss, the benefit is at 39%.

I assume they are talking from experience re there chattels allocation.

Rates information should be actual rather the estimates as they should have these records - LindaR - can you confirm this.

[whitt]

Whitt - Cube and RM are correct. If you have a loss, it comes of your last dollar earned which is taxed at the highest rate. So as long as your earnings over $60k are more that the amount of the loss, the benefit is at 39%..

Yes this is what I mentioned in my last post and another way of coming up with same outcome . There calculations are based on 39%. An investor needs a income of in excess of $95000 PA to gain this tax relief. For most Mum and Dad investors there spreadsheet fails to clearly point this out. And instead just uses a flat rate which is incorrect in reality.

[whitt]

Here is another calculator which I have found to be fairly accurate also.

http://www.hybridgroup.co.nz/FinancialCalculators/StressTestMortgage/Default.aspx

[CJ]

Yes this is what I mentioned in my last post and another way of coming up with same outcome . There calculations are based on 39%. An investor needs a income of in excess of $95000 PA to gain this tax relief. For most Mum and Dad investors there spreadsheet fails to clearly point this out. And instead just uses a flat rate which is incorrect in reality.

We were replying at the same time, though you must be a quicker typer.

I agree with you and means that the average NZ wont get that return and if they own two perperties with these sort of losses, they would have to be earning even more to get that return based on that 39% tax rate. Imagine if you had a portfolio of 10 of these, you would need to be earning $300k+

I would have thought that using 33% would be more conservative on RM part.

The benefit of these losses needs to be considered, especially when you have more than one property as in most cases, your income will not be sufficent and you will only be benefiting to the extent of 19.5% or 33%.

[Emblaze Pete]

I don't see how anyone can come up with a sound cash flow positive calc on this property based on real and conservative numbers. I have been crunching this one for a while and all I am seeing is negative cash flow all over my .xls. Aside from the tax issue, the rental income is based on 51 weeks of the year. I think the general market acceptance is 48 weeks isn't it ?. So again to me it looks like creative and selective accounting to make a property sound better than it actually is. From an amature's prospective ( I.e. me) if I don't see conservative and real numbers being used, it just automatically raises a red flag.

Probably half the properties in the local paper could be made to look CF+ with a good accountant!