What sort of % return would you need to consider a cash flow postive property/deal?

Discussion in 'Investment Strategy' started by cberg86, 7th Apr, 2020.

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  1. cberg86

    cberg86 Active Member

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    I'm always curious to understand how people think about investing when it comes to cash flow vs. growth.

    I sometimes see properties in my local area and places that I've lived in the past(Sydney, Lismore & Brisbane) that pop up for sale & then rent that I can estimate the numbers on quite easily and some are highly cash flow positive on these numbers.

    I've seen comments before pooh pooh the idea of $10/week cash flow positive property which is fair enough, that won't move the needle much especially if there's unexpected repairs that pop up or an extended period of vacancy.

    So here's a question, at what point would you throw away "growth" prospects for a cash flow positive return? When I talk cash flow positive I'm talking all expenses & the principal part of a P&I loan but I realise others only look on an I/O basis. Net cash I guess is what you could call it.

    Model criteria: 25% deposit + rough closing costs(stamps, building & pest, depreciation schedule etc).
    1) Required % return after all expenses on a I/O loan
    2) Required % return after all expenses including principal on a P&I loan

    Me I'd be happy with:
    1) High single digits: 7-8%
    2) Mid single digits: 3.5-5%
     
  2. Barny

    Barny Well-Known Member

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    Over 10% minimum and that includes the whole price including stamp duties/legal etc etc. Also not under under current circumstances(virus).
    I have bought in the past for a lot less return, never again when I could just buy the banks instead without headaches from crappy renters.
     
  3. euro73

    euro73 Well-Known Member Business Member

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    Depends how you measure the return I guess.

    If you were putting 150K of cash into the share market and getting 15K NET that's a 10% NET return.

    If you contributed 150K towards deposit and stamps and legals to buy a resi property, and it produced 40K of rental income and ultimately produced 15K NET after tax, would you also consider that a 10% return even if the asset you purchased was worth 650K rather than 150K? Or would you consider 15K a 2.31% NET return on 650K, or would you consider 40K a 6.15% GROSS return on 650K ?

    I value what reaches my bank account as a result of what has left my bank account . So I think that if I was contributing 150K cash to either of those asset classes, and one was buying me 650K of assets because of leverage, rather than 150K of assets, I'd very much prefer the 650K of assets . It will generate the same net cash flow , but the asset base is significantly larger.

    Others may feel differently
     
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  4. cberg86

    cberg86 Active Member

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    I guess I think in terms of all things in a profit loss/balance sheet/cash flow frame of mind or a business perspective so in that sense the only thing I'm interested in is net return on equity if that helps people understand the question better. People get confused between profit & cash flow very easily.

    Net out all expenses bar principal from gross rental for question 1.
    Net out all expenses including principal from gross rental for question 2.
     
  5. Omnidragon

    Omnidragon Well-Known Member

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    Surely you’d have to include repairs, and any other outgoings (insurance, agent fees etc).

    Realistically should be able to get cashflow positive at 4%+ net in this market
     
  6. cberg86

    cberg86 Active Member

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    Yes - return after all expenses e.g. agency fees, advertising, insurance, repairs. Not sure how this is getting mixed up.

    Edit: include depreciation or whatever other expense I've missed. I mean net return AFTER ALL expenses.
     
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  7. euro73

    euro73 Well-Known Member Business Member

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    If that's the measurement, our Dual Occ's , which generate @15K NET after all expenses in "vanilla mode" would be providing an 11% NET return on a contribution of @ 136,200 ( 20% + stamp duty ) With "NRAS mode" added to the 4 bedroom house until June 2026, the return is closer to 23.5K, resulting in a 17.25% NET return on $136,200 for the first 6 years or so. It would then exit NRAS mode in 2026 and return to vanilla mode which generates the miserly and abysmal 11% thereafter..... although it's important to note that an investor would have recouped 100% of their 136,200 by then so they could go again ( borrowing capacity permitting) and buy a 2nd Dual Occ using the initial $136,200 which they've now got back in their pocket , and effectively be generating 22% NET from $136,200 within 6 years or so.

    Or, an investor might decide to contribute closer to 170K to do 2 of these types of deals at 90% INC LMI. ie @85K per deal. That would get them 30K NET in "vanilla mode" which is a return of 17.65% NET on their 170K contribution. In "NRAS mode" it would be closer to 47K NET, a return of 27.65% NET on their 170K contribution until June 2026. That should return the investor approx 282K NET by 2026, enough to fund 20% deposits + stamp duty for 2 more purchases ( subject to borrowing capacity ) and leaving them with 4 properties generating @ 15K each. 60K NET return on 282K contribution is 21.28% NET ongoing

    Nice work if you can get it ;)
     
    Last edited: 8th Apr, 2020
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