What this calculator does
The gap between the rent and the mortgage is not the holding cost. Management takes a slice of the rent, the property is empty for part of the year, and rates, insurance and maintenance arrive whether or not anyone is living there. Counting only rent against repayments makes a property look considerably better than it is.
Doing it properly usually produces a number people have not seen before. A $650 a week property against a $600,000 loan at 6.2 per cent costs $307 a week out of pocket once everything is counted, and the rent that would actually cover it is $993.
The formula
Rent is collected for the weeks the property is let, so the vacancy allowance comes off first. The management fee is a percentage of what is actually collected rather than of the full rent. Interest is the loan balance times the rate, and the other annual costs are added whole. Subtracting all of that from the rent collected gives the yearly position, and dividing by 52 spreads it across every week of the year rather than only the let ones.
| Term | Meaning |
|---|---|
| Weekly rent | The advertised rent, before vacancy and management are taken out. |
| Vacancy allowance | Weeks a year you expect the property to be empty, including the turnover between tenancies. |
| Management fee | Charged as a percentage of rent collected, so it falls when the property is vacant. |
| Break-even rent | The weekly rent at which the property covers itself with no contribution from you. |
The inputs explained
| Field | What to enter |
|---|---|
| Weekly rent ($) | The weekly rent you actually achieve rather than the asking rent. |
| Loan balance ($) | Current loan balance. Interest is calculated simply as balance times rate, which is close enough for a yearly view. |
| Interest rate (%) | Interest rate on the loan. |
| Other annual costs ($) | Rates, insurance, strata, maintenance and anything else annual. A maintenance allowance of a few thousand is more realistic than nothing. |
| Management fee (% of rent) | Agent management fee as a percentage of rent collected. Letting fees and advertising are separate and belong in the annual costs. |
| Vacancy allowance (weeks) | Weeks a year empty. Two is a common planning figure for a single turnover; more if the market is soft. |
When to use it
Working out what the property really costs you
The weekly figure is the one to carry around. It is the amount that leaves your account every week to hold the asset, and it is what determines whether you can hold it through a rate rise.
Stress-testing a rate rise
Raise the interest rate by two points and watch the weekly figure. On a $600,000 loan that is $12,000 a year, or $231 a week, which is the kind of change that decides whether a property is kept or sold.
Seeing what vacancy costs
Each extra week empty costs more than one week of rent, because the fixed costs keep running. The break-even rent rises with every week of assumed vacancy, which is why a reliable tenant at slightly under market can be worth more than a higher rent with gaps.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
What does the interest rate do to the weekly cost?
Only the interest rate changes.
| Interest rate | Weekly cash position | Shortfall or surplus for the year | Weekly rent that would break even |
|---|---|---|---|
| 3% | $62.02 in hand | $3,225.00 | $580.65 |
| 4.5% | $111.06 out of pocket | −$5,775.00 | $774.19 |
| 6.2% | $307.21 out of pocket | −$15,975.00 | $993.55 |
| 7.5% | $457.21 out of pocket | −$23,775.00 | $1,161.29 |
| 9% | $630.29 out of pocket | −$32,775.00 | $1,354.84 |
What does vacancy actually cost?
Only the weeks empty change.
| Weeks vacant | Weekly cash position | Rent actually collected | Weekly rent that would break even |
|---|---|---|---|
| 0 weeks | $283.96 out of pocket | $33,800.00 | $955.33 |
| 2 weeks | $307.21 out of pocket | $32,500.00 | $993.55 |
| 4 weeks | $330.46 out of pocket | $31,200.00 | $1,034.95 |
| 6 weeks | $353.71 out of pocket | $29,900.00 | $1,079.94 |
| 8 weeks | $376.96 out of pocket | $28,600.00 | $1,129.03 |
Questions
Why divide by 52 rather than by the weeks let?
Because the cost falls on you every week of the year, including the empty ones. Dividing by the let weeks would understate what the property actually takes from your budget.
Should I include principal repayments?
This uses interest only, because principal is money moving from one of your pockets to another rather than a cost. If you want the cash flow your bank account sees, add the principal portion to the other annual costs.
Is this the same as negative gearing?
It is the pre-tax shortfall that negative gearing applies to, but the tax treatment itself is not modelled here and differs by jurisdiction. The figure shown is what leaves your account before any tax effect.
What about capital growth?
Not included, deliberately. This page answers what holding the property costs, not whether it is a good investment. Growth is the other half of that question and it is a forecast rather than a calculation.
Why is the break-even rent so much higher than the actual rent?
Because interest on a large loan dwarfs everything else. On these figures the interest alone is $715 a week against $650 of rent, so the property cannot cover itself at any plausible rent without a much smaller loan.
For the occupancy that covers your costs, see break-even occupancy, and for what the property must sell for there is break-even sale price. The purchase side is on stamp duty and loan-to-value.