Investment Analyses Software
Investment Analyses Software will quickly and easily uncover the the real costs of buying the wrong property and identify the hidden investment gems... by computer in 60 seconds or less!
Buying your home is definately not like buying an investment. In fact if you use the same rules for both you will severely hamper your accumulation of wealth and will very likely hate yourself for being ignorant of how investment works (when you find out the hard way), simply don't let it happen to you.
You must let the numbers, not the heart, do the talking when assessing an investment. That means:
Buy Your Home with Your Heart and Buy Your Investment Property With Your Head
Certainly you want your investment property to have that WoW factor for your future tenants, but not at the expense of not running the figures of that property through some investment analyses software.
So what is this investment analyses software going to tell us about your proposed property purchase?
It will input and calculate variable such as:
(A) Property value
(B) Upfront costs
(C) Mortgage amount
(G) Yearly property expenses
(H) Construction costs
(I) Value of fixtures and fittings
(J) Your TAX rate
(K) Pre tax cash flow before depreciation and Tax benefits are taken into account.
(L) Pre tax cash flow
(M) Building allowance
(N) Fixtures and fittings
The investment analyses software will then provide you a Financial Summary displaying all these variables and give you a final weekly cost figure.
So how do we practically use this Investment Analyses Software?
By the way, a good investment property specialist should have this software program. Put another way, if they don't have it go to someone that does because to try and compute these figures by hand will not only take you an incrediable amount of time, but possibly cost you thousands in getting it wrong.
If you'd like to purchase your own Investment Analyses Software, you can check out the different versions from
the seller and copyright holder here
Using the figures obtained from the Investment Analyses Software program, let’s have a look at a $300,000 property investment model to illustrate the workings of an “average affordable” investment.
To calculate the weekly cost of holding a property, we will look at:
• The costs of buying the property
• The income and outgoings
• The allowable tax deductions
• Interest rates
• Weekly benefits in cash of tax deductions
It is important and prudent when planning to:
1) Under-estimate rent compared to market rate
2) Over-estimate the interest rate compared to current rates
3) Know the Stamp duty
4) Have a good approximation of property expenses
5) Have a good approximation of construction costs
6) Have a good approximation of the value of fixtures and fittings
7) Apply the appropriate depreciation to each amount
8) Use your personal tax rate
9) Use a conservative occupancy rate or alternative rental adjustment
Under-estimation of rent, over-estimation of interest rates, and a reduced occupancy factor are your safety margin should Murphy’s Law knock on your door. The degrees of safety that you feed into your Investment Analyses Software, is your choice. And yes, things can go wrong but common sense should prevail. This is what the figures look like in the tables below.
MODEL PROPERTY IN FIGURES that your Investment Analyses Software will calculate
(A) Property value $300,000
(B) Upfront costs $15,000 This includes solicitors’ fees, mortgage stamp duty, Stamp duty, searches, disbursements, application and valuation fees, bank legal fees.
(Upfront costs amount to about 5% of purchase price and this figure will be used in this example. It is recommended that at least 5% be considered to allow a cash contingency for unforeseen expenses.)
Add these two (A+B) = C
(C) Mortgage $315,000
(D) Rent $300/wk This is arrived at by local comparisons and is prudent to err towards the minimum rents expected.
(E) Interest Only Rate 6% It is prudent to err towards a higher interest rate to factor in a safety margin above current market rates interest rates will rise just when you don’t want them to.
(F) Your TAX rate 40% Your marginal rate may differ from this example and, of course, the higher your rate the greater your benefit. Conversely the lower your rate the less your cash benefit from deductions and greater the bottom line, i.e. greater cash cost to you.
(G) Yearly property expenses $3,900 This includes property management, body corporate, water and council rates, insurance (fire and damage, landlords extra protection plan) PS: A rule of thumb of 20 to 25% of gross rent return is used as a guide to estimate these costs.
(H) Construction costs $130,000 Remember there is a 2.5% building depreciation allowance allowed on post 15/Sept/1985 buildings for 40 years, giving you ultimately a 100% write down.
(I) Value of fixtures and fittings $30,000 This (total) value is prepared by a Quantity Surveyor on your property after settlement and can vary substantially with quality of individual fit out. The percentage amount of depreciation allowed on every item is itemised by the Tax Office on the depreciation schedule.
Remember, this is an example and is not necessarily the ideal. Changing the variables changes the result, sometimes significantly.
Any change should be evaluated after tax is considered because our aim is to evaluate an investment using all that we are allowed in minimizing our expenses and accelerating our progress to our goal of building real wealth through capital growth through investment in properties.
Your aim is to purchase a capital growth product with minimum holding costs. Therefore use every tax allowance that you can. Understanding what the numbers are, and how they affect the outcome will certainly give you an edge in evaluating an investment.
Financial Summary (Brackets mean outgoings) no brackets mean incomings.
1) Repayments $(19,100) This is $318,000 @ 6% Interest Only
2) Expenses $(3,900) Yearly property expenses from (G) above.
3) Add these two (1+2) =
Total $(23,000) This is your outgoing commitment to the bank before any assistance from the taxman or the tenant.
4) Rent @ 48 weeks P/A $14,400 Note 48 wks is a built in safety factor should there be four weeks vacant time between tenants.
5) Pre tax cash flow $(8,600) Take the rent (4) away from the repayments and costs (3) and this is what you would have to fund out of your pocket before depreciation and Tax benefits are taken into account.
OK, let’s take a look at those allowable cash and non-cash deductions.
6) Pre tax cash flow $(8,600) From (5) above. (Cash deduction)
7) Building allowance $(3,250) This is 2.5% of $130,000 construction costs from (H) above and is allowed as a constant depreciation percentage for 40 years. (Non-cash deduction)
8) Fixtures and fittings $(3,600) This comes from the depreciation Schedule, from (I) above. (Non-cash deduction)
9) Loans cost $(1000) Your up front costs (B) minus your property stamp duty (except ACT) can be claimed over a period of five years or term of your loan. (Mortgage insurance may add 0.5% to 1.5% of loan value to this)
Total (6,7,8,9) $(16,450)
Remember, the paper cost of the building depreciation, and fixtures and fittings depreciation allowances, are a cost to you because one-day they will wear out. However, for all intents and purposes they are a non-cash cost that is claimed as a tax deduction at your marginal rate.
The resulting cash increase to your weekly take home pay is a fantastic catalyst in the affordability of buying a new dwelling.
So all costs, either out of pocket or non-cash, total: $(16,450).
By submitting a 221D form (a tax variation that consistantly changes its name) you are given a weekly TAX credit using your marginal tax rate.
The Tax benefit is a real cash income.
$(16,450) @ 40 cents in the dollar equals about $6,580 per annum.
So, add your cash TAX benefit and your pre-tax negative cash flow figure.
$(8,600) remember, amounts in brackets are negative and out of your pocket!
PLUS $6,580 remember, a PAYG tax credit is an extra weekly cash income.
Equals $(2,020) per year. Divide this by 52 for a weekly holding cost of; $(38) out of your pocket to run a $300,000 property with a $315,000 loan.
This shows that you, the property owner, will pay $38 per week, to receive a forecast capital gain of about 7% to 10% of $300,000 per year compounding.
Breaking this figure down into dollars per week, this can be expressed as paying $38 per week to make $403 per week compound capital growth.
When and if you eventually sell, you pay less than 25% tax on this. It sounds ridiculous, but for a $38 weekly cash cost now, you will receive over $300/weekly after tax benefit later.
Certainly as property valus rise and subsequent returns fall in certain parts of the market, such figures wil have to be evaluated on a case by case bases.
There is one CAUTION with any investment analyses software however. While it is this is one of the best programs on the market and gives you an extremely accurate annalyses with the automated default figures, your figures should only be relied on if you know them to be true and you have received appropriate financial advice.
At the end of the day this is what I call building real wealth, and this is exactly why average income earners can build great wealth. This is the meaning of doing more with less.
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