What’s going on guys It's Jordan de Jong here and today I want to talk about how to calculate your outgoing expenses when it comes to analyzing the cashflow on your property, there are a number of costs that many forget about and I want to cover them here today. It’s pretty easy to figure out the income side of things, generally just being the rental income, sometimes two sources of income if you have a granny flat, even the complex models are pretty straight forward such as short-term rental stays or renting out individual rooms. Let’s dive straight into it, first and foremost your biggest outgoing expense is going to be the repayments on your loan, these can vary pretty dramatically depending on the loan package you go for, and whether you choose a principal and interest or interest-only loan. Well take a $400,000, 30 years, 4% interest rate variable mortgage, if we decided to pay P&I our monthly repayments would be $1,909.66, if we went IO our repayments would only be $1,333.33, that’s a massive difference $576.33 per month. Although going P&I you are actually paying down your loan, and some don’t consider this to be an actual expense, where to me, it's all included in the holding costs, on top of this there’s variable rate changes, the use of an offset account and many other factors that come into play. Just remember that if you do decide to go Interested only, its generally only for a certain term, typically 5 years and after the 5 years, you’ll either have to refinance to go on interest only for another 5 years or the loan will switch over to principal & interest. The second expense I take into consideration is the management costs, this is for a typically rented out scenario and can again range drastically depending on the service you choose to use. There are self-management online tools that allow you to go as low as 3% and some actual property managers can charge upwards of 10%, however, this rate is negotiable so I would always have that conversation with a property manager before employing them. We can calculate the outgoing expenses by taking this rate and timesing it by the rental income amount, so let’s say we had a property being rented for $400 a week, times this by 48 weeks and our total rental income is $19,200 per year. We factor in for 4 weeks of vacancy per year here, so that’s why we don’t calculate 52 weeks of the year, this is just a good buffer when calculating your rental income. A good rule of thumb for management fees is 7.7% so we times this by $19,200 and our total management costs per year is $1,479 or $123 per month, on top of this a monthly admin fee of say $30 should be factored in for good measure. Don’t forget a property manager “leasing fees” are generally one week’s worth of rent plus GST and should also be considered alongside any leasing advertising costs, although this doesn’t amount to much if you have the same tenant for 10 years, it does add up if you changing tenants every one or two years. The fifth cost I like to factor in council fees, obviously, this is going to vary between council to council but the absolute minimum I factor in here is $100 a month, if your not sure where you find the council fees you can ask the real estate agent and they will be able to tell you or check the contract of sale. Next up is Strata, now strata only apply if your purchasing in a strata building so if you’re buying a free-standing dwelling then you can skip this one, again, I like to factor in at least $75 dollars here but strata fees can start to get enormous. Especially if you’re paying for multiple lifts in the building, pools, outdoor garden maintenance ect, these costs can be found in the same way as council fees, however, sometimes get calculated into quarters or per year so make sure you break this down to a monthly fee. Insurances are super important to factor into your expenses, at the very minimum you want to account for landlords insurance and this should be on top of your strata building insurance premiums. There are many insurances other investors factor all or part of into their expenses, these include life insurance, Trauma Insurance, total and permanent disability insurance, and income protection. Maintenance is another big one that a lot of people miss out on, it’s not something that is a regular monthly cost, it generally all comes at once such as a hot water service breaking down. I always factor this into a monthly cashflow expense just so I’m prepared for when issues come up, and trust me, they do, and then I don’t feel so bad when they do because I’ve already accounted for them. the absolute minimum is $2,000 a year here or $167 per month, and this should scale with larger and more prestigious properties, note this is also not to be confused with the maintenance and repair costs stated in a strata budget, this should be separate, specific for your property. Land Tax is another big cost depending on the value of land that you hold, and which state it is in, you’ll have to check out the local state governments land tax calculation tables to figure out an exact cost, however, this could range anywhere between a few hundred dollars to a few thousand. Water, drainage, and sewer costs are another expense you will have to factor in on a case by case basis, this cost varies depending on which water provider the dwelling sits under and in some cases can be charged to the tenant if the property contains the proper water efficiency methods. If you were going down a different strategy such as short term rental accommodation you would want to factor in the full cost into your expenses, which if you ask the agent or check the contract of sale it should give you the previous year's total costs. Speaking of some other additional expenses you should factor in if you are using a different strategy that requires you to pay the day to day bills include electricity, gas & internet at a minimum of $80 each per month. Accounting fees are something that can creep up too, it’s very important to seek professional taxation and accounting advise, at the very minimum I would be adding in the costs of doing your tax return here, and I always break these up in into a monthly cost that goes into my cash flow, even if it’s just $20. Another rare expense for some investors is ASIC Fees, if you hold property under another legal entity such as a trust, there are initial and ongoing expenses that should be factored in as holding costs, this could be as small as $40 a month but it all adds up. Overall, if you don’t have the exact figures for a few of these expense items a good rule of thumb is to calculate your holdings costs at 1.5% of the purchase price of your property, and if your forecasting future expenses, increase this base amount by 3% per Annum. So if you had a $500,000 property, your 1.5% calculated holdings costs would be $7,500 per year or $625 a month on top of your loan repayment expenses, and I think this is the bulk of the expenses many forget to factor in, it’s not just rental income minus mortgage repayment amount. I want to know what other expenses you guys also include in your holding cost calculations, leave them down in a comment below. As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

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