Property Investment - How to Calculate Rental Returns
By Timothy Wright
Before purchasing an investment property for rental purposes
it's always a good idea to calculate whether it will be cash flow positive or
cash flow negative. That is, will the property generate an income (positive) or
will it require a monthly cash injection (negative)?
This article will outline and briefly describe many of the
main Purchasing and Annual Holding Costs incurred when buying a rental
property. Please keep in mind that these items will vary from country to
country and they do not take into account personal tax implications.
Purchasing Costs
Purchase price - the agreed price for which the property
will exchange hands.
Renovation Costs - money budgeted for renovations prior to
the property been made available for rental.
Agents Fees - in some countries it is common practice for
the buyer to pay some or all of the real estate
agent's selling
fees/commission. However, in most cases these fees are paid by the vendor.
Stamp duty - a duty placed on the purchase of a property
charged by the local government for the registration of the property into the
new owner's name.
Mortgage Application Fees - charged by lenders upon
application to secure a loan to buy the property.
Travel Expenses - flights, car hire, and hotel costs
incurred when travelling to personally inspect a property.
Solicitors Fees - payable to the solicitor for all of the
relevant legal work for the transfer of the property.
Research - books, local suburban reports purchased to
research a suburb.
Accountants Fees - the property may be purchased in the name
of a Trust or Company. There may also be a crossover here with the solicitor's
fees.
Council Rates Cutover - A vendor may have paid rates up to a
time after the transfer of the property. The amount is then split between the
buyer and vendor on a pro-rata basis.
Independent valuation / Engineers Report - a vendor may
choose to pay for their own independent valuation or engineers report to
highlight areas of concern.
Miscellaneous - this will include postage, telephone calls
etc. It's also worthwhile to include a contingency should some of the above costs
be more than anticipated.
Annual Holding Costs
Mortgage Repayment - payable to the mortgage lender to repay
the loan used to purchase the property.
Property Management Fees - if a professional property
manager is appointed they will either charge a percentage of rent or a monthly
flat fee.
Council/Municipal Rates - charged for collection of waste
and upkeep of local services. Sometimes these are paid by the tenant.
Maintenance - costs for repairs and maintenance on the
property and it's fixtures and fittings.
Bank Fees - account keeping fees charged by the bank.
Landlord Insurance - protection against theft, damage, non-payment
of rent, legal costs.
Letting Fees - some property managers may charge a letting fee
for finding new tenants.
Pest Control - protection against pests and termites.
Cleaning - the property may require a thorough professional
clean in preparation for new tenants.
Travel Expenses - incurred when visiting the property at
times such as showing it to potential tenants or collecting rent.
Local Income Tax - may be charged by some local governments
for the rental profits after any allowable deductions.
Land Tax - an annual tax on the value of the land on which
the rental property is built.
Accountants Fees - payable for the administration of legal
structures if a property is owned by a Trusts or Company.
Miscellaneous - again, this will include a contingency
should some of the above costs be more than anticipated.
Once all of these costs have been factored into your
calculations you will be able to determine whether a property will be cash flow
positive or not.
In closing, it is imperative that you seek professional
legal advice before you make any investment. This will clarify the process
according to your own personal situation and the county you are investing in.
Happy investing!
Tim Wright is a property investor and 'Green' renovator. For
more information check out Greenscape Homes [http://www.greenscapehomes.com.au]
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