What is the worst negative cash flow position you have been in with your IPs?

My Fiancee and I are very young, still a long way off having kids, so we are looking at buying in Coburg or Brunswick, despite being very negatively geared.

I reckon we will be around $15k negative cash flow if we spend around the $800k mark, which we can service at the moment because we are both working full time.

It just got me wondering how far you guys have gone in the past, or are at present. Especially since I saw another thread here where people seem to be going for positive cash flow IPs primarily.

 

I would say that is some SERIOUS negative cash flow and i think very few deals are actually worth it so be careful. Especially when building your portfolio it can be a real mistake. Just because you can service the debt doesn't make it a sound move and all on 1 property. I'm just saying to fully investigate your approach,goals, can flows before you contemplate it.

To answer your question i have been 25k plus a year negative cash flow on a deal but thats not on a normal ip. It was on a deal where the dwelling was going to be developed so profits were already accounted for and costs taken into account.

 

Thats based on current interest rates right? How would that look when rates return to 7%?
That $15k negative cash flow would become $31k?
I would either be looking to put some more cash into the deal or preferably buy a property with a better yield.
I have assumed that the negative cash flow figure is after depreciation and tax have been considered? If thats the case it might slow down future purchases, if you are looking at it for a future ppor then thats slightly different.

 

Largest? About 5k not considering depreciation/tax.

 

Rates aren't going to return to 7% though. Not in the next decade at least. Far too many people would go bankrupt for the RBA to allow this. The only way that I can see this happening is if there's an extreme event like WW3, and frankly then I wouldn't really be all that worried about interest rates.

 

Loans are now assessed by most banks ~7%

 

I have a $800k place that is too derelict to rent out but can't be developed yet as it's waiting on rezoning. That's about as negative as you can get.

 

Do you have a reasonable expectation of the rezoning in the near future?

 

Yes thankfully. It was passed by the local council for rezoning in November last year so waiting for state govt department to approve that then it's full steam ahead.
I'm using the time to do survey and plans.

 

That is not taking in to account depreciation and tax savings. I'm assuming that would shave off roughly $5k.

We would be ok up to about 8%, but that would mean nothing would be going in to the offset account.

This IP would probably be our PPOR until (if) we have kids.

Goal is capital growth. I figured best bet would be to invest in the best suburb we could afford to. Happy to listen to opinions to the contrary. I'm still learning.

 

Really depends on your goals and risk tolerance. If the goal is CG i would be spreading the 800k on 2 ips. Just depends how much deposit you have too. Spending it on 1 ip could be good too if your buying at a good price. Many variables to consider but generally i would be spreading it over more than 1 ip.

 

Is there any particular reason for that?

I assumed a more "blue chip" IP would be better for long term growth compared to two in an area further from the CBD, or two apartments.

 

Hi @juzzy,

There is really a lot to your question but just some points, from my perspective. Quite often 'blue chip' properties are in areas where the negative cashflows can be quite high (as you've realised) making it unsustainable to grow a large portfolio (if thats your goal) because your disposable income will disappear rapidly once you get 2-3 of them, especially if your not on 2 very good incomes. The notion that 'blue chip' properties will experience quicker or more CG is not really accurate anymore. Speaking from personal experience, it has been my properties that are not in commonly believed 'blue chip' areas that have outperformed my traditional blue chip properties. Some of the reasons for this is that they are in affordable areas but have very good surrounding infrastructure, amenities, shopping centres etc.

I prefer to buy properties with 'blue chip' potential and properties in the next suburb from 'blue chip' locations as your not going to be paying a premium for the location 'yet', able to negotiate a good price, less negative cash flows but has great chance for CG. This will also allow you to build a sustainable and larger portfolio otherwise you will hit the financial brick wall much quicker with too much negative cashflow. Also looking at long term growth is good, but its the short to medium terms of growth that will allow you to piggyback of their equity to keep building your portfolio and not coming to a halt, so thats important to remember.

Now this doesn't mean to go and buy in regional dumps either where there are no growth drivers evident. With some good Due diligence, there are many areas that have good potential for CG yet it doesn't come with the blue chip price tag. Also putting 800k in 1 property does increase your risk from my perspective on a few fronts. If that suburb doesn't have good growth in the medium term then you aren't exposed to any other market/suburb. The more exposed you are to different markets, the better chance you have for constant growth throughout different cycles, state and suburb cycles.

Those are just a few reasons from my perspective.

 

At the worst point around -$40k in total.

I'd like to go back in time and slap some sense into myself

 

This it is not black and white, we need to look deeper, not everyone is a buy and hold investor, it's totally dependent on the strategy/plan

And more important can you service this?

If you are holding property/land to develop the chances will be you are negatively geared until you develop where you sell off etc, if you are flipping, renovating it will be a short term situation. So these investors can go from negatively geared to positively geared, dependent on what they sell and income they produce

Hope this makes some sense

MTR

 

Agree with MTR. Also really depends on your strategy. For some strategies being NG for a period of time is quite expected.

 

Our income separate from our deals, treated as a business

I think buy and hold is a different scenario personal funds have to meet short fall and in most cases it won't happen unless doing something outside the square, Interest rates on the rise, something to be mindful of

 

Your situation is different to someone else's.

If your incomes can carry that amount and the deficit is factored into your strategy, then the amount is acceptable.

If it does not or if you have concerns then re evaluate your situation and strategy.

 

And rents are assessed at 80% or less. This doesn't mean that rents are likely to drop by 20% though.

 

Okay thats not quite as bad -10k, if you intend to hold long term without the ability to add value
you will need decent CG for it to work.