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

yeah that's the point I was trying to make but failed.

 

hehe your funny

 

@The Y-man I have a feeling you will be looking at much pricier places than me! I'm struggling to find 2 bedders in my budget (walking distance to the station).

@Leo2413 and @HUGH72 It's our first IP, but our house is completely paid off, so our risk is somewhat lower than most people when purchasing their first IP. At least compared to other people my age.

 

That's really great mate. Sounds like you have been really disciplined to have your place paid off too!

 

Good on you juzzy, you're also in a better position than most people when looking to buy their 1st IP.

 

Good job, sounds like a nice solid base to grow some assests. It looks like you must have a good ability to budget and save which is half the battle.
Keep in mind if you purchase several properties with similar cashflow you might find the banks slowing you down with the significant changes in serviceability criteria even though your personal budget might show that you can afford more.
Just a thought..

 

The worst one (so far) for us, is $14,000 per year before tax/depreciation etc

Mainly because we converted our PPOR into an IP, didn't want to sell the PPOR. Manageable at the moment because this amount is less than 10% of our combined after tax household income.

 

Disciplined is a nice way to put. Most people just say boring!

I guess that's why a lot of people adopt the strategy of alternating between negative and positive cash flow properties?

Would be a good way to build a diverse portfolio too I guess.

Yeah this is exactly what we plan on doing. Although it looks like your after tax income is more than our pre-tax income.

One day!

 

Living a life most people have is boring I say. Well done to you!

 

Personally I don't see the point of an investment losing that much money a year. In my mind anything that is losing you money and hoping on capital gains isn't an investment but speculation.

 

I see where you're coming from, but I've always looked at it the other way.

If an investment is cash flow positive, it's because people don't really want to buy there, so you're speculating on future capital growth. If you buy in a proven area, the reason it is cash flow negative is because it's expensive, and it's expensive because everyone wants to buy there. Therefore, capital growth is all but guaranteed, you just need to be patient during the rough times.

That's my view anyway.

 

If only it were that simple.

 

No thats not the case, it could mean many things including buying at the peak of the market where valuations have greatly increased relative to rents.
Capital growth is never guaranteed, at least over the medium term.

 

This is exactly true!

I would suggest you start with the end in mind. If you want to live off the rents, then you will need to acquire a serious portfolio, and have a low LVR. In order to GET the serious portfolio, you will have to look carefully at your yields. If you are losing THAT much on one property, how many more can you afford to buy? How long will it take to turn them from negative to positive? How long was the last boom in the area? Recently? Or ten + years? What happens if you lose one income? Or interest rates rise? What will you do if you have a vacancy for a few weeks?

You are assuming that you will get the best CG by buying in an already expensive area with low yields, yet in the recent boom in Sydney, the best performing area was Western Sydney, a low socio-economic area with a large amount of welfare recipients and much higher yields than closer to the City.

 

I think it about time we start a Property Chat Mentorship Program.

 

If you were buying in an "unproven" area, I would agree with that statement. Where I grew up is a negative cash flow suburb, but I wouldn't be betting on strong capital growth there over the short to medium term.

If you stick with suburbs that have consistently grown well over the decades, I think negative gearing is a less risky strategy than looking for positive cash flow properties over the long term.

I understand what you guys mean about low socio-economic areas performing higher than "blue chip" suburbs during the boom, my house has outperformed the areas I'm looking in (Coburg and Brunswick) over the past 5 years. I'm just not betting on that happening again over the next 5-10 years.

Hope that makes sense. In short, rather than trying to pick where the next boom suburb is going to be, I'm opting to go for a suburb with strong (higher than average) growth over the long term (20 years). My next IP may be different, not sure yet, depends on cash flow.

 

Hi Juzzy
I wasn't suggesting a low socio economic area necessarily or positive cash flow as these are not always easy to find. It was more the idea of if you are looking to expand rapidly as it sounds a couple of very negative CF purchases might slow you down.

 

I agree its unlikely in the medium term as there currently appears to be no catalysts.
I don't necessarily think that the RBA would be concerned about people going bankrupt when you look back to the 1990s recession. Several large Building Societies went under as unemployment increased to over 10%
https://en.wikipedia.org/wiki/Early_1990s_recession_in_Australia

 

I know a couple who, at one point, was bleeding to the tune of about $48K negative cash flow a year. This was barely manageable as it was while they were working, but both ended up suddenly retiring within a year of each other for health reasons with this burden still on their plate. There was a rush to liquidate all money sapping IPs, which resulted in capital losses for some of the properties.

After their 10 year investment property journey, where they started out owning their PPOR outright and progressively bought five IPs under 'the plan', they ended up with no IPs and a $100K LOC against their PPOR, which they have no hope of paying off. Needless to say, negatively geared property investment is not a topic they wish to discuss any more!