Property Investment – How To Calculate Rental Returns

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!