Show us your numbers!

[Gerrard]

Hi all - I've been an avid reader and occasional poster for some time now. I noticed a few references on this site (and other sites that I dare not mention for fear of being sued about profits being generated from properties.

When looking at opportunitis, I factor in every conceivable cost (including landlord insurance, inspections, R&M, longer term capital improvements, etc) which gives me a fairly conservative projection of profits. To date my projections have been pretty well right, but hearing some of the other numbers out there I'm wondering if I'm missing the absolute bargains, or simply calculating differently to others.

Below are some example figures with my expected after tax return. Note the numbers are rounded, and you'll have to make your own assumptions about some numbers (e.g. tax rate, etc).

Would anyone else care to do the calculations on these figures and tell us what your expected return is?

Purchase price $85k
Rent per week $180
Interest rate 7% (interest only)
Property manager 8.5% (incl GST)
Rates $1500 p.a.
Insurance $350 p.a.
R&M $500 p.a.
Other costs $200 p.a.

I would expect to make about $1000 p.a. from this property (average of inflation adjusted profits over a few years). Note: I'm ignoring valuation, capital growth benefits, etc.

So what are your results and commentry?

Would anyone else care to share figures from properties they own or have evaluated so we can do a similar exercise?

Cheers
Gerrard

[Glenn]

Hi ya.
I am always very sceptical of massive profits as claimed by some super experts. I have managed to mostly buy properties that have had 10 to 12% gross rates of return. The last one had 10% net but that was three years ago and it was commercial. With these sorts of profits it is possible to get on top of mortgages far more quickly than the low rate of return properties at say 7 or 5%
what many people forget is that with property the rents are for the first few years are going to be used to feed the bank. The real profits (money you put in your pocket) come from sales or when the bank is sent packing by paying off a mortgage. Now I know this is not the conventional wisdom but then being in property is about doing things the way you want to do them not the way your boss tells you to do it.
Glenn

[orion]

Purchase price $85k
Rent per week $180
Interest rate 7% (interest only)
Property manager 8.5% (incl GST)
Rates $1500 p.a.
Insurance $350 p.a.
R&M $500 p.a.
Other costs $200 p.a.

I would expect to make about $1000 p.a. from this property (average of inflation adjusted profits over a few years).

Hi Gerrard, the property itself seems fine, the rates are quite high - what area do you live in, buy in??

Note: I'm ignoring valuation, capital growth benefits, etc.

What is the property worth - is it $85,000 or is it more than that?
You say you are ignoring capital growth benefits, although it would appear you are relying on them, if you are going interest only.
If they do not eventuate - who is paying for the property? You will still owe the same amount to the bank when you started.
I presume you also used equity or a deposit to buy this property which is not shown.

Regards
Graeme Fowler

[cube]

I'm in the Auckland market, so there isn't a lot at $85K - double that to $170K, and you could find somewhere to buy, but the rent would probably be around $260. I'm not saying I would buy something like that, but that is typical of what is available at present.

Apart from that, the example property and calculations look in line with what I would do, although those rates do look high.

Happy calculating.

cube

[muppet]

Hi Guys

Rates in Te Kuiti are around the $1400 to $1500 mark.

Tokoroa about $1000 to $1200 mark and Napier is around $1200 for the average rentable house.

Regards

[Gerrard]

Thanks for the replies. Good to know I'm on track.

The example quoted was one I looked at in Rotorua. I was getting very keen based on the financials, but didn't go though with it after finding out the street / area wasn't so good. As it would have been my first deal I quite happy to to find this out and stop the deal.

To answer a few other questions:

I had a verbal valuation come in at $94k, but again didn't proceed because of what I found out about the area.

I use equity to purchase properties, but don't factor this in to the profit calculation, otherwise I would not get a consistent measure on which to compare properties. I have a separate measure that looks at a ratio of equity commitment to expected profit (which is particularly useful when comparing houses to blocks of flats).

I have been ignoring any capital growth projections / expectations because I don't want to rely on it. My properties are a long term investment towards a secure retirements income. If I get the benefit of capital growth on these kinds of properties then that's a bonus, however in the mean time I've got an income now, which should slowly grow over time.

After all who really knows what the property market is going to do in places like Rotorua in 30 years time. The major cities are more predictable, hence I take a different approach there.

As I learn more my overall strategy may change, but I prefer not to be tied to P&I in the mean time. Also, the profits I make now are being channelled back into paying off my own mortgage, which gives me more security in the shorter term (even if it is only in my head!).

Cheers
Gerrard

[cube]

Also, the profits I make now are being channelled back into paying off my own mortgage, which gives me more security in the shorter term (even if it is only in my head!).

Nothing wrong with replacing bad debt with good.

cube

[The_Dog]

My properties run with very similar figures.

On the subject of inflated figures, there are many tricks used to make things look more impressive than they are. You have done it correctly, realistically.

- Some people include full first year tax rebate as income, which will not always be the case.
- some figures include capital growth
- giving a return on the initial investment can be misleading by using a particularly low deposit
- not including maintenance or other costs to inflate the 'profit'
- assuming 52 week occupancy
- not allowing for property management

This is not an exhaustive list. It sounds like you are rooted in reality, which is a good place to start.


Woof

[orion]

Hi Gerrard, some comments/questions below.

I have been ignoring any capital growth projections / expectations because I don't want to rely on it.

So why go interest only??

in the mean time I've got an income now,

An income of $1000 p.a. - you would need a lot of houses paying you this to give you even a reasonable income.

which should slowly grow over time.

Why would it it grow over time if capital growth doesn't? - ie keeps pace with inflation at say 2 - 3% p.a.

The major cities are more predictable, hence I take a different approach there.

In what way are they more predictable?

As I learn more my overall strategy may change, but I prefer not to be tied to P&I in the mean time.

How are you tied to P&I any more than interest only?

Regards
Graeme Fowler

[Gerrard]

Hi Graeme - it sounds like you've been in the game a lot longer then me so any experience you can offer on these points would be appreciated.

So why go interest only??

All the reading I've done says go interest only to maximise profits then plough this profit back into paying off debt on your own home. (Yes I am disciplined enough to do it!). This is still paying off debt over the whole portfolio so in my mind has the same, if not better result than paying off the IP's.

An income of $1000 p.a. - you would need a lot of houses paying you this to give you even a reasonable income.

The way I figue is that $1,000 is better then nothing. This is also just one example of a deal I would take if everything else stacked up (reasonable area, below valuation, etc). I have another property worth about 3x this example which returns more than $3,000. In the end it's all profit whether big or small. I'm happy so long as the profit is relative to the equity I commit.

Why would it it grow over time if capital growth doesn't? - ie keeps pace with inflation at say 2 - 3% p.a.

I'm paying interest (about 75% of the total expenses) which, apart from rate fluctuations that will be good and bad to me over time, will never go up no matter how long I keep the property. In 10 years time I'm still paying interest on todays purchase price.

If rents grow at the same rate as inflation then income is growing while 75% of my expenses remain unchanged.

Now I realise there are lots of assumptions in there, but this (plus the benefits of capital growth) seem to me to be basis for property being a worthwhile investment.

In what way are they more predictable?

The market moves faster than smaller populated areas. Look at Auckland capital growth (plenty in the last couple of years) versus Rotorua, Wanganui, etc which have hardly moved at all.

The larger cities lead the economy for New Zealand. It is rare for a smaller town to be up when Auckland is struggling. The recessions seem to hit the smaller towns much more than the cities who are diversified across a range of industries.

How are you tied to P&I any more than interest only?

Fair call - only in my mind I guess. I was seeing it as a scale, and that being on the bottom rung I could always move up to P&I, whereas if the market was bad, banks might not be so keen to let me go "down" to IO.

Too many mixed metaphores in there. Must be time to go to bed. Your thoughts appreciated.

Cheers
Gerrard

[orion]

Post subject: Some Questions For Property Investors on Long Term Goals.

Hi Gerrard, thanks for your reply. Not sure if you have read the posts on the topic above. Have a read through that first, you bring up many interesting points, but I'm off to bed now too, so may comment on them another time.

Regards
Graeme Fowler

[drelly]

I'm assuming that the server clock is wrong and you guys don't really go to bed at 6.35pm and 7.23pm respectively?

[SteveV]

Hi,

Check out what timezone you have set up in your profile, you probably have the default of GMT + 10 hours, rather than GMT + 12 hours for NZ.

Steve

[orion]

I'm assuming that the server clock is wrong and you guys don't really go to bed at 6.35pm and 7.23pm respectively?

Hi Dave, I think it must be the default setting which is Melboune time or somewhere in OZ. The time here in NZ is almost 5pm, so will no doubt show about 2 pm. So, last night wasn't an early night for me, although maybe for some.

Regards
Graeme Fowler

[Marc]

Hi,

Check out what timezone you have set up in your profile, you probably have the default of GMT + 10 hours, rather than GMT + 12 hours for NZ.

Steve

Hello!

You are so very right SteveV! please check out your profile settings by clicking on this link below:

http://www.propertytalk.co.nz/module...de=editprofile

Cheers

Marc