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How costs are estimated
Provides details of the formulae and approach used by 'Sniffer'
A fixed formula is used to estimate costs. The estimates are based on the average values for a wide range
of properties in Australia. While the costs will vary for different locations and types of properties,
this approach provided a preliminary guide before going to the trouble of getting the full cost details.
Once you have selected a property that looks promising you can then chase up the detailed cost estimates.
The costs are estimated as monthly costs (annual totals are provided below)
COST ITEM
MONTHLY
ANNUAL
rates =>
$60 for each flat/month
$60 * number of flats
$720 * number of flats
management fees =>
7% of rent
7% of monthly rent
7% of annual rent
repairs & maintenance =>
$50 for each flat/month
$50 * number of flats
$600 * number of flats
grounds/gardens =>
$50/month
$50
$600
insurance =>
$50 + $5 for each flat/month
$50 + $5 * number of flats
$600 + $60 * number of flats
land tax =>
$40/month
$40
$480
other costs - postage etc. =>
$5 for each flat/month
$5 * number of flats
$60 * number of flats
Depreciation =>
$20 as income
for each flat/month
$20 * number of flats
$240 * number of flats
The total net costs for the property is the sum of the costs minus the depreciation.
These costs are displayed as 'Net Cost' on 'Sniffer'.
The cost estimates are fixed. The table below shows the net costs for various numbers of flats
TYPE OF PROPERTY
NET MONTHLY COST
NET ANNUAL COST
MONTHLY COST PER FLAT
Single Unit/ House =>
$299
$3,588
$299
Duplex - Two Flats =>
$419
$5,028
$210
Three Flats =>
$539
$6,468
$180
Four Flats =>
$659
$7,908
$165
Five Flats =>
$779
$9,348
$156
Six Flats =>
$899
$10,788
$150
Seven Flats =>
$1,019
$12,228
$146
Eight Flats =>
$1,139
$13,668
$142
Nine Flats =>
$1,259
$15,108
$140
Ten Flats =>
$1,379
$16,548
$138
This illustrates the merits of flats versus houses or single units.
The costs for a block of flats is higher, but the cost per unit decreases dramatically with multiple units.
There is one roof, one set of grounds, one set of external walls to paint, etc.
While the rent for flats in a block may be less than for a house, this is more than offset by the reduced
costs for carefully selected properties. The purchase price for flats may also be lower per unit
than for a house, and this adds to the higher returns for flats.
For example in Regional areas a house may cost $170,000 and return $190 per week in rent.
You may be able to buy a block of four flats in the same town for $275,000. The rent for each flat may
be $140 per week. However the rent for the four flats is $560 per week and the costs are lower.
The 'Sniffer' package estimates that the monthly cash flow from the house after paying costs
(including a mortgage of 80% of purchase price) would be would be a loss of $410 per month.
The return for the flats would be Positive at $126 per month.
Both estimates assume a mortgage with 6% interest over 25 years.
The house may be a better prospect in terms of capital gain due to the land.
This example shows the power of 'Sniffer' to compare returns for various deals and options.
It is very easy to try various scenarios. It teaches you about positive cash flow.
You can easily explore a whole range of 'what if's', for example -
- What happens if the interest rates rise?
- How much cash would be required to ensure the property had a positive cash flow?
- What are the benefits of increasing the mortgage repayments.
The package does not consider capital gain, tax benefits, negative gearing, interest-only loans
and a whole lot of other issues. These are well covered by other packages (see Links).
