Cashflow cashflow cashflow

Hey PC,

Im looking for a property in my portfolio to increase cashflow. My current properties aren't generating enough 'cashflow'.
Anybody care to share some cashflow suburbs or cashflow types of investments.
Where to buy? Regional? What yields should I be looking for?




Matt

 

Shouldn’t buy property for cashflow; there are far better ways of generating cashflow.

 

Where are your current properties that deliver underwhelmimg cashblow?
The only one in my pocket thats positive cashflow is in the Central Coast. 4.5% yield before fees. The rest are negative cashflow by 5 figures each year. They make up that sad story from their capital gains.

 

Care to share Kieran ?

 

Southwest Sydney is about 5% gross
Hunter region is 5.8% gross
North brissy 4.5%

I came across a free standing house on realestate.com for $175k which was previously rented for 285/wk or so. Sounded too good to be true

 

Oh dear.. . Here we go ... that's a very cliche comment.

There's many variables to generating cashflow from real estate. Deposit/ Equity, Buying below local median, Location desirability, Dual occupancy, multi occupancy, short term rentals, Depreciation, Resi vs CIP etc... just to name a few. These variables & many others can be useful individually or collectively to create a sound cashflow outcome from RE.

There's no golden honey pot of cashflow RE in a particular location that I'm aware of though..... As for yields just remember that there is generally a correlation to risk so chasing higher yields may also create exposure to higher risk. Just a consideration.

 

You really need to catch up with investors in some of meetings who have achieved five, six and seven figure cash flows.
Chatting to investors who have built up these cf+ portfolio will give you a better insight.

 

A few years ago was Bankstown and surrounding areas, by looking at 100s of units for sale you can easily pick up one that has the best cashflow (positive) out of the bunch. Now not too sure.

 

At the very least, whatever you choose to purchase it should be able to handle ( or go close to handling) P&I repayments. If it cant, you will very likely face a significant shortfall that you'll have to make up from your own pocket, because the probability of being able to operate with IO for the medium -long term is remote.

If you choose to try and build some sort of portfolio that ignores this consideration, you'll need very deep pockets to make up the shortfall across multiple properties. The reality in the post APRA era has become that there is little to no chance ( for most people anyway) of holding onto a multi property portfolio if each one is costing you thousands in shortfall each year after the debts revert to P&I.

It's a very different scenario to that faced by investors who enjoyed a prolonged pre APRA environment of credit expansion - which allowed for IO to be used for as long as they needed...

Any business plan today really needs to factor in P&I being probable . And thats before we even talk about how cash flow aids debt reduction, which aids borrowing power, which determines whether you can continue to purchase ...

The whole equation around building and holding onto a portfolio now requires a completely new attitude to the role cash flow plays. Ignore anyone telling you any different if you want to be able to hold onto a property portfolio for the medium - long term. They have either made their money pre APRA or they dont have a proper appreciation for whats changed post APRA, or they have deep pockets - making their advice redundant for most readers in todays credit environment.

 

I have written about this many times on PC and some of my posts are very detailed. I would suggest you do a search and read mine and many others on this topic.

But I will provide a couple of hints:

1. Shares - our share portfolio has achieved 9%+ pa growth and 6.22% pa income (need to gross up for dividend imputation) since 2002 (last 16years) and includes GFC and last month’s correction. This portfolio requires no time/work on our part. These shares are in our SMSF and is what live on (done so for last 8 years). Over the same time, our property portfolio would be lucky to achieve 4% gross income. Then one has to reduce this PM fees, rates, maintenance, renovations, land tax, ... This is before one pays interest on our loans. We also put a lot of effort into managing this portfolio including rent review approvals, maintenance requests approvals, ...

2. Start a business or get a second job.

 

Sounds like we are in agreement. There are better ways ...

 

Hey Matthew,

There have been a lot of valid points stated above, though not thoroughly explained.

This may be because, like most things, there are many ways to skin a cat.

Unless you are dealing with commercial, at a higher starting point (think $M’s), it is unlikely you will stumble across positive cash-flow.

More than likely, it will have to be manufactured, and there you enter into a conversation that would take many many threads to answer.

I’ll rattle off a few things I learnt prior to stating examples of creating positive cash-flow.

1. ‘Positive’ cash-flow created from paying a mortgage down is in my opinion, a poor way of creating this, as inherently you have money sitting idle that could be working for you elsewhere. I calculate ‘positive’ cash-flow based on 105% LVR.

2. ‘Positive’ cash-flow created using depreciation schedules, can lead people down a very dangerous path, as depreciation is due to the asset, house, fittings, losing value. They will eventually need to be replaced or maintained. Living of THIS type of cash-flow, will mean a few decades down the track, you now own that house with weeds growing through the walls because you can’t afford to maintain it – I learnt this one from @Beano and highly agree.

3. Capital is very important, as much as, perhaps more-so than cash-flow. Due to lending restrictions, unless you’re on a great income, you will not be able to save deposits fast enough, thus the issues with point 1, to grow a portfolio large enough to retire on. Many investors here have been able to grow a large portfolio in 20 or so years. There are economic reasons why this was possible. It’s important to read the market, not just use assumptions that property doubles every 10 years. Learning to manufacture growth is incredibly important, always has been, even more-so in this day and age.

4. Manufacturing growth, done consistently, is a business. You enter the ‘business-of-real-estate’. As @kierank has stated, business is where the big money is at, when done right.

Eg. A $300k house in Logan purchased at 80% LVR means you have paid $75k including stamps. Say it is ‘positive geared’ $10k. That means, you are making $10k, on a $75k investment, or a 13% cash-on-cash return.

What about capital growth. Roughly, say the house doubles in 10 years. So $10k positive * 10 years + $300k. So $400k profit on $75k investment, over 10 years, is about 50% cash-on-cash return per year (someone please check my math).

Now, if you manufacture growth say you do a development. 20% deposit etc. Leverage with 80% LVR. Say you make 20% profit (on the leverage amount). So your cash on cash return is 100%. It takes you 2 years. So 50%. Same as the first example.

But… You now have your capital to do 2 developments in years 2-4, then 4-6, then 6-8, and 8-10. So by year 10, you have made how much more? Now if you retained every 3rd property, you will also achieve that capital growth.

Thus why being in the business of real-estate is significantly more profitable than basic buy-and-hold. I personally aim for 200% cash-on-cash return (on relatively small sums), however this is less risky in my mind that buy-and-hold, as market growth is out of my control.

So, was to manufacture cash-flow:

1. Buy, renovate, uplift rent.

2. Build 4, sell 3, keep 1. You have built an asset at a discount.

3. Commercial real-estate, get a large site, cut it up into smaller pieces and rent. Say you purchase an underperforming 500sqm lot, but can maximise rent on 100sqm lots.

4. Buy a large lot, subdivide block, retain a piece, you now have a discounted site.

5. Invest in high-end commercial, borrow funds at 5% ROI, rent for 6.5% net, keep profits of 1.5%.

6. Start a business. Make your 200% cash-on-cash returns.

7. Vendor finance, uplift rents, keep profit margin.

8. NRAS.

9. Build a granny-flat.

10. Build / rent and run a boarding house/back-packer hostel. Understanding there are different densities between one built on the 1995, 2005, and 2015 state legislation. Not all back-packer hostels, or caravan parks are equal.

11. Buy a mediocre, run of the mill property. Add no value. Pray.

These are all manufactured growth and cash-flow methods. Hope it helps.

 

If I was you, I'll sit down with investment savvy accountant and broker to first review the existing portfolio and the end game before pulling the trigger in this market ...

 

Based off @kierank and @NHG's posts, we are still largely finding our feet with what may be possible with our incomes and risk appetite (also lack of experience). At present we currently have the majority of our 'wealth' tied up in 2 properties and have 2 incomes, 7/10 risk appetite.
We are working overseas and are hit with a further 30% reduction in assessable income for foreign currency risk and have consequently hit a borrowing capacity despite being able to service a lot more debt.
End game to have approx. 130-150k passive income in 30 years time. (requiring approx. 3M @ 5% return)
I'm not sure if we should be storing cash in offsets to save and perform reno's/development or into shares/ETFs etc.

I like @Rolf Latham's concept of the 4 lanes for multiple cashflow streams which we would generate by diversifying asset class and building a decent capital base receiving dividends +/- growth. However, at this early stage of our investment path, I feel we should be using leverage to our full advantage.
I agree that a 'buy and hold' strategy has its own downside (long term), however at this stage we are not in a position to manufacture equity for another 12-24 months as any works via correspondence I feel would be a nightmare.

I know this is an incredibly vague question, but I want people's opinion anyway;
If you were 31 years old, dual income for another 1-2 years, 2 properties in QLD (neg geared) 79% LVR, super, and 30k in ETF, what would you direct your 200k savings to?
TIA for opinions and responses.

TC.

 

Is one of the IPs your future PPOR?
Do you have a separate PPOR or none at all?
What are you housing plans on return from abroad?
Do you have any non deductible debt?
Do IP loans have offsets?

Too many unknowns to even contemplate a plausible hypothetical for savings . ... unless I missed something.

 

How long are you overseas for?

If the properties you own have any easy ways to manufacture equity or cashflow eg. Renovation / granny flat I would consider that a worthwhile use of your savings over the next 2 years.

You could get approvals for a GF while overseas and plan to build when back, or take advantage of renovating a bathroom or kitchen between tenants - asking the property manager to source and coordinate the builder.

 

Nope. I wouldn't tie up more capital unnecessarily &/or without genuine reason that stacks up from ROI point of view.

If @TomC doesn't own a PPOR then committing more capital to IPs already below 80% LVR is not really wise.....that cash may be needed to avoid or minimise non deductible debt on return from overseas.

my 2 cents

 

Just wait property prices are falling

...

 

One of the IPs was our PPOR - 3 more years for the CGT free period expires.
On return we would be happy to rent to increase tax deductibility, or borrow more to purchase PPOR. I think the tax advantages look more appealing for renting.
No non deductible debt.
1 loan has offset account.
1 loan fixed for 2.5 more years. Both P&I.
Looking at being overseas for another 2 years.
Regarding the IP with improvement potential, if we went down the reno path, I would want to do a knockdown and build or knockdown and develop. Not keen on doing that type of work without being onsite. I don't believe that BCC allow granny flats?
I just want to make the best choice for our cash to work the most effectively as I believe small changes today, will be magnified in 30 year time.