Determining the break even point for an investment property
During a recent discussion with a client we explored some ratio’s which helped them to analyse the risk associated with their investment property. These ratio’s were similar to those used to analyse the inherent risk of other investments.
One specific ratio I thought was worth sharing was the “break even point”. The break even point is where the income from the property covers the total expenses of the property including interest payments. It is designed to calculate the liquidity and risk associated with the property. The formula is as follows:
Break Even Point = (operating expenses + interest only debt repayment) divided by Gross Possible Income.
Example:
- A property has operating expenses of $10,000, interest only debt repayments of $16,000 and an expected income of $27,000
- BE = (10,000 + 16,000)/27,000
BE = 0.96
For a positively geared property the ratio will be less than 1 and should reduce over time. For a negatively geared property the ratio will be greater than 1.
Where to from here?
If you would like to discuss this topic or if you would like more information, speak to your financial adviser or contact Dan Smith of Plan 2 Prosper on 07 49265 570.
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Dan Smith is self employed and is for many families their trusted Financial Planner based in Rockhampton. He has clients in various locations throughout Australia but predominately in Central Queensland and specifically the geographic area encompassed by the Rockhampton Regional Council.
This information is intended to only provide you with general information and, while the sources for the material are considered reliable, no responsibility is accepted for any inaccuracies, errors or omissions. Before making a decision based on this information, you must consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain professional financial advice specific to your circumstances.
Dan Smith and Dancin Pty Ltd ABN 71 531 338 371 trading as Plan 2 Prosper are Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749 trading as MLC Financial Planning, an Australian Financial Services Licensee, with its Registered Office at 105 – 153 Miller St, North Sydney NSW 2060