How can I calculate my expected net rental income?
It is critical that, before buying an investment property, you do the numbers in order to determine what price you are prepared to pay. If you do them properly, you will realise that finding a good buy is harder than you expected, but that simply forces you to buy with your head and not your heart.
Here’s how I did it when I was in the buying mode of my property investment career.
You need a modicum of Excel skills because you must build a model into which you can plug the numbers, and see what happens to the monthly cash flow given different buying prices.
Essentially, the model needs to take the following factors into account –
- Expected rental income
- Transfer Duty (on properties above R1m)
- Vacancy (allow anything from 1/2 month to 1 month in every 12)
- Bond repayments
- Repairs before 1st tenant
- Repairs between tenants (allow anything from 1/2 month to 1 month’s rent in every 12)
- Outstanding Rates and taxes (if you’re buying on sheriff’s auction)
- Cost of improvements
- Additional rental arising from improvements
- Company tax at 28%, assuming that you are (correctly), buying via a company owned by your trust.
The more accurate your model, the better will be your buying decisions. Those of you who have bought my book “16 Steps to Wealth” will be pleased to know that I have developed a property calculator that will solve this problem for you. It is accessible by those who have bought my book, which is available here.