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The Reserve Bank’s hiked the OCR yesterday. Yeah ... interest rates are on the rise (once again).
That leaves many property investors thinking about the C-word …
Cashflow.
But there is one major mistake property investors make when crunching their numbers.
They leave out too many costs and end up with an inaccurate view of how their property will actually perform.
So when you’re doing your sums, here is what you must include in the cashflow.
1) Rent
This is the income coming into your bank account. Few people miss this
2) Vacancy
Sometimes your tenant will leave, and it takes time to find a new one.
So budget to not have a tenant for 2 weeks of the year. Rather than budgeting for 52 weeks of rent a year, only budget for 50.
Investors miss this all the time.
3) Mortgage costs
4) Rates
5) Insurance
6) Body corp or resident’s associations (if applicable)
Investors are pretty good at remembering these three.
But if you’re going to get landlord insurance (usually about $400 a year), factor this in.
7) Maintenance
Some investors don’t include maintenance in their cashflows. Then when it crops up, they have to pay for it out of their own pocket.
Allocate about $500 a year for a new build and $1,000 for a property that is 10-20 years old.
And if it’s built before the year 2000, budget for around $2,000 a year.
8) Property management and letting fees
The core property management fee is usually 7.5% – 8.5% + GST.
But also, don’t forget to allocate a week’s worth of rent + GST each year if you need to replace your tenant.
You won’t have to do it every year, but it’s better to budget for it and be on the conservative side.
9) Accounting
This is usually $1,150 + GST per year for your first property and about $200 + GST for every additional property.
Here's an example
Let’s say a few years ago, you bought a standalone house and took out a $500k mortgage on interest-only. And the property rents for $550 today.
Here’s what the cashflow would like: