How Is The Cash Flow Calculated?
So how is the cash flow calculated on our Positive Cash Flow
Search Tool.
Positive Gearing and Positive Cash Flow are two different things. One refers to
you are in a better cash position on paper when the cash flow is tied with a loan
or finance, the other just simply refers to actual cash in your pocket each week
or month after all associated costs.
Holding Expenses
Some people calculate positive cash flow based on your rental income minus (-) your
mortgage repayments (even worse by suburb median rental and listing prices), but
this is hardly accurate. There are numerous costs to holding a property such as:
- Rental Insurance
- Mortgage Repayments
- Utility Rates
- Council Rates
- Home Repairs / Maintenance
- Property Management Fees
- Building Insurance
Calculating Costs
The Property Domain uses all of these costs to calculate the average holding costs
on a property.
Building/Rental Insurance
Building and Rental Insurance is normally combined into one package with most insurance
companies. When you buy house and land the cost of the house to land is normally
50%-50%. As time goes on the price of the land increases and the price of the house
decreases but the price of insurance for an older house also increases. It is therefore
appropriate that 50% of the total house price be used for calculating the insurance
on that property.
Insurance varies between states, due to emergency services response and prone to
natural disasters, for example darwin with yearly cyclones. While the ratio's vary
slightly between more expensive homes here are the percentages used, based on quotes
received for each state. (note: this may not be appropriate if a suburb has a very
high crime rate or other special factor that puts the cost of insurance up). Another
factor is that the percentage drops as the value of the property goes higher. So
below are the averaged percentages used for all properties.
- NT - 0.5% per year
- WA - 0.27% per year
- NSW - 0.28% per year
- ACT - 0.21% per year
- TAS - 0.23% per year
- QLD - 0.3% per year
- SA - 0.27% per year
- VIC - 0.28% per year
Mortgage Repayments
Mortgage repayments are a standard calculation but do vary slightly between banks
due to payable interest calculations on certain pay schedules. While the below will
provide a fairly accurate reading its best to contact the actual bank for an exact
amount.
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Results
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Monthly Repayments
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$0
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Fortnightly Repayments
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$0
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Weekly Repayments
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$0
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*These results are not guaranteed correct and actual repayments may vary between
banks.
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Water / Sewerage / Drainage Rates
These again vary every state and even within the state. To keep things simple a
standard is applied for each state.
- WA - $180 base charge + 0.097% of the estimated gross rental value
- QLD - $550 base
- SA - $550 base
- NSW - $650 base
- VIC - $650 base
- TAS - 0.1% of the value of the property
- NT - $500 base
- ACT - $570 base
As you can see WA and TAS rates can become very high with high valued properties.
Council Rates
Council rates again vary from state to state but by only a fraction of a percent.
A universal rate of 0.05% of the value of the property is applied + $150 recycling
program that most states run and on average the 0.017% to the value of the property
for emergency services.
Property Management Fee
It is assumed that a property manager will manage your home. 10% of the expected
rental income is taken into account as a cost.
Home Repairs / Maintenance
Home repairs again vary for each type of house, as to the type of general house
and the value of the property. For a standard 4x2 home at $400,000 (in todays dollars)
repairs and maintenance generally comes to $30,000 per decade as some big expenses
don't appear until each decade. Based on this and the ratio between the house cost
its approximately 0.75% of the house property per year.
Vacancy
With all of these calculations there is one thing that is not taken into account
and that is vacancy rate. You can put an average of 5% of the rental income but
can vary that much it would only skew some results. Therefore you must determine
the possible vacancy rate yourself and apply it. Vacancy rates can be change due
to rural or metro areas, you could have a long term tenant or a bad streak of many
tenants, which means while you are advertising your property will be vacant.
Income
This only includes the rental income expected for the house
Rental Income
Rental income is NOT taken for the median of the suburb. It is taken for the average
of the similar type of house. For example if we were calculating the cash flow of
a 4x2 house in the area then the rental income would be the average of rents for
the 4x2 properties in that suburb. This gives a much more accurate expected rental
income.
The Final Calculation
Based on all of the above, these are the steps taken to calculate the final cash
flow:
- Add all the costs of the property together
- Divide by the appropriate amount to ensure these are weekly costs
- Get the expected weekly income
- Expected Weekly Income - Total Weekly Property Costs = Expected Weekly Cash Flow
If you have any queries about this process or any suggestions for improvement please
contact us via the Support Page.