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API APRIL 2014
APRIL 2014 API
Published: January 2014
¿ MANAGING FINANCE
QHow do you juggle your finance
commitments and the cost of your
development project? I’m worried about
overextending myself. Any tips?
AIn regards to juggling financial
commitments, I’d say it’s a skill that
you build over time. When I was young,
I read the book Barefoot Investor, which
gave me a great strategy for saving
money – it’s about splitting out savings
first before spending.
The second thing was to build a team
around me of both business people and
like-minded friends. Having a good
team can really pay dividends when it
comes to keeping up with market-related
information and keeping costs down in
regards to maintaining your properties.
Last of all, it’s about being aware,
building a routine and always doing
your due diligence. I always make
sure I pay my bills on time or before,
forecast spending 12 months ahead
and always keep a look out for good or
better deals on things such as interest
rates on mortgages or good investment
opportunities. I believe all the things
mentioned above help in freeing up cash
flow for the next big project.
For me it all comes down to two things
current financial status and most
importantly whether the numbers stack up
in regards to the development or purchase.
I have a current rental yield of 7.3 per
cent, which translates to positively geared
properties. If my yield was around the
three to five per cent mark, I’d have been
a bit more cautious and most likely more
concerned about how I could increase the
yield on my current properties without
inflicting financial strain. The purpose of
me looking into development or purchasing
another property was to reduce the amount
of tax I had to pay without impacting my
yield and taking a hit to capital gains. This
was the calculation I used:
> Option one – keep the current
house. The value is $400,000 with a loan
of $240,000 and a weekly rental income
of $300. That’s approximately a 6.5 per
cent yield. There’s also equity of around
> Option two – subdivide and build at
the back. The new development would
be valued at $360,000, require a loan
of $196,000 and deliver a weekly rental
income of $320. That’s approximately
an 8.4 per cent rental yield. The existing
house would then be valued at $330,000
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with a loan of $240,000 and a weekly
rental income of $300.
Option two would deliver a total average
rental yield of 7.39 per cent, which is an
increase of 0.89 per cent thanks to the
development. The project would also
result in a net value increase of $94,000 or
56 per cent. If the numbers are showing
a minimum 20 per cent profit and you’re
committed to building wealth, you
should be able to convert that worry into
motivation and getting the job done right!
Jon and Debbie Cole
Published: February 2014
¿ YOUR TOP TIP
QWhat’s the single most important piece
of information that tells you upfront
whether a location is worth your time?
AThe most important single piece
of information for me is the rental
vacancy rate. All things being equal, if
a suburb has a low vacancy rate then
there’s upward pressure on rents. If rents
rise then capital growth will follow. You
can get information on vacancy rates from
the back of API magazine. Generally, if a
suburb has a rental vacancy rate greater
than three per cent, I wouldn’t go near it.
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