8 Tips to understanding Cash Flows in Investment Properties

Buy­ing an invest­ment prop­erty is a big step in your over­all wealth cre­ation pro­cess. Like any other decision, a lot or research is required to ensure the invest­ment fits in with your cur­rent fin­an­cial plans. Most people look at invest­ment prop­er­ties to achieve some of the following:-

  • Long Term Cap­ital Growth
  • An Income Stream in Retirement
  • Tax plan­ning
  • Neg­at­ive gearing

To ensure that your long term plans are achieved, you need to look at the short term to safe­guard future plan­ning strategies. Basic­ally, the most import­ant con­sid­er­a­tion is to under­stand how the Nett Cash Flows are determ­ined. If you can­not fund the expenses and meet the interest pay­ments on any bor­row­ings in the short term, it will not mat­ter how good the poten­tial long term growth is. You could have to sell in the short term. To under­stand Cash Flows, you need to look at the issues that affect them.Rental Prop­erty Expenses – What you can claim NSW money house

Issues effect­ing Cash Flows

There are at least 8 areas to con­sider when assess­ing cash flows and whether this fits with your over­all fin­an­cial plans. Espe­cially whether you can fund it in the short term.

• Acquis­i­tion or Pur­chase Costs

When apply­ing for fin­ance you will need to have a very close estim­ate of the total cost of the pro­ject. If you are under fin­anced ini­tially, then need extra funds later, these funds may not be avail­able from the ori­ginal source. This could lead to either an incom­plete pro­ject or obtain­ing funds from other sources ( maybe fam­ily or friends ). The extra bor­row­ings then affect your planned cash flow and could require fur­ther per­sonal input.

• Rental Prop­erty Expenses – What you can claim

You can claim expenses relat­ing to your rental prop­erty, but only for the period your prop­erty was ren­ted or avail­able for rent. There are a long list of items that can be claimed against. To see what the ATO will allow you to claim, we sug­gest you visit the ATO web­site or dis­cuss with your Account­ant or Fin­an­cial Adviser.

• Depre­ci­ation

As a build­ing gets older the items within it wear out, so they depre­ci­ate in value. The ATO allows prop­erty investors to claim a deduc­tion related to the build­ing and the plant & equip­ment within it.

Prop­erty depre­ci­ation is made up of two main ele­ments: cap­ital works deduc­tions and depre­ci­ation of plant and equipment.

1. Cap­ital works deduc­tions are avail­able on the struc­ture, includ­ing items that are not eas­ily removed.Remember this is not the pur­chase price but the cost of the building.

2. Depre­ci­ation of plant and equip­ment is avail­able on mech­an­ical and dis­as­semblable fix­tures, includ­ing those deemed to have an effect­ive life set by the Aus­tralian Tax­a­tion Office.( ATO )

The rates are set by the ATO and are dif­fer­ent for Cap­ital works and Plant & Equipment.

To claim depre­ci­ation against income, it is advis­able to obtain a Tax Depre­ci­ation sched­ule from a licensed Quant­ity Surveyor.

• Interest Rates on Borrowingsproperty Cash Flow monopoly real estate

At present ( Septem­ber, 2014 ) interest rates are at a his­tor­ical low. As invest­ing in prop­erty is con­sidered long term, it would be prudent to sug­gest that some­time in the future, interest rates will rise.

When and if this hap­pens, who could pre­dict? But, as an investor, you need to be pre­pared and under­stand the rami­fic­a­tions it will have on your “Cash Flow”.

Remem­ber any increases in interest rates could mean your invest­ment would require extra fund­ing. If your prop­erty Cash Flow is neg­at­ive, this fund­ing would need to come from your per­sonal income.

• Occu­pancy Rates

For plan­ning pur­poses, don’t assume that the prop­erty will be occu­pied 52 weeks of every year. Check with Prop­erty Man­agers in the area to gauge what sort of occu­pancy rates can be expected.

• Lenders Mort­gage Insur­ance – LMI

Lenders Mort­gage Insur­ance pro­tects the lender against a fin­an­cial loss if you default on your loan and the prop­erty is then sold or repossessed.

This insur­ance cov­ers the amount owing on the loan if the amount recouped from the sale is not enough to pay off the loan in full to the lend­ing institution.

• Aus­tralian Tax­a­tion Office – E Variation

An E Vari­ation allows you to apply for vari­ation to your PAYG with­hold­ing tax. In essence you can receive your tax refund each fort­night or month depend­ing on your pay peri­ods. If you are not eli­gible for E Vari­ation you will need extra funds to meet out­go­ings until you receive your tax refunds. Check with your account­ant for fur­ther details.

• Prop­erty Manager

A prop­erty man­ager charges a per­cent­age of the rental income to man­age your prop­erty. This rate will vary from man­ager to man­ager. Don’t choose your man­ager by the cheapest rate. Do some research, check on testi­mo­ni­als and con­tact exist­ing cli­ents if possible.

Sum­mary

This is a gen­eral over­view to what effects Cash Flows in Invest­ment Prop­er­ties. For a detailed account of these issues and links to vari­ous import­ant web sites down­load your Com­pli­ment­ary Ebook now.

About 

Hav­ing spent 23 years in the Fin­an­cial Plan­ning Industry, Geof­frey was
look­ing for­ward to retire­ment. It was then that some friends asked him
how they should go about buy­ing a house.
This star­ted 3 years of research into all aspects of plan­ning and pre­par­a­tion when buy­ing real estate from an out­siders point of view.
All the research, hints & tips, ebooks and soft­ware pro­grams developed from this research are now avail­able at www.hobig.com.au
Con­tact Geof­frey dir­ect on 0448 843 214
or E: geoff@contentssecure.com
Home Buy­ers Inform­a­tion Guide

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Cnr Federal Road Prospect Highway Seven Hills NSW 2147 Australia