opinion
Paul Glossop

Why positive cash flow is imperative

By Paul Glossop
1

The combination of falling cash rates and rising interest rates means it’s imperative that investors look for affordable, cash flow-positive properties with an upside for capital growth.

Blogger: Paul Glossop, director, Pure Property Investment

If you haven’t seen the headlines yet, rest assured: you will!

Headlines such as ‘Why home loan interest rates are headed higher’ and ‘Funding time bomb set for property investors’.

What is changing in the lending space and how will that impact on the property market and investors’ capacity to borrow?

First, the reason we are in this predicament of a falling cash rate coupled with a rising interest rates is because the big four banks are trying to cool the overheating Sydney and Melbourne property markets. ANZ and CBA have announced this week that they will be raising their investor variable rates by 0.27 per cent and fixed rates by 0.30 per cent and by the time this blog is published there is a good chance others will have followed suit. The ultimate goal for these rate rises is to slow the investor pain growth to 10 per cent of their total loans. On the flip side, markets are pricing in a cash rate cut before the end of 2015 and possibly one or two more in 2016. This move by the big four makes this cash rate cut prediction much more realistic.

There was a startling figure published in The Australian Financial Review recently, stating that mortgage brokers estimate there are 90,000 apartments being constructed in Australia that have been sold off-the-plan, but not yet settled. The purchasers of about 20 per cent of those have paid a deposit of just 10 per cent of the full purchase price, according to the analysis of statistics for Corelogic RP Data.

To put it simply, if these investors don’t have another 10 per cent to tip into the off-the-plan investment before settlement, the bank will not be lending them any money. The concern here is that many of these investors will not be able to fulfil their financial obligations and will inevitably lose their deposits.

This brings me to why now, more than ever, it’s imperative for investors to look for affordable, cash flow-positive properties with an upside for capital growth.

These interest rate moves and deposit rate increases will change both the serviceability for investors and the up-front deposits needed. I have put together a case study for investors looking to buy in both south-west Sydney and south-west Brisbane.

 

South-west Sydney average house price is approximately $550,000

South-west Sydney average rent is approximately $450 per week

20 per cent deposit required would be $110,000

Cash flow per week based on $440,000 loan at 5.75% interest only, $450 per week rent, 7% management fee and $3,000 per year rates/insurance etc would be negative $6,538 per year (negative $126 per week).

 

South-west Brisbane average house price approximately $315,000

South-west Brisbane average rent approximately $350 per week

20 per cent deposit required would be $63,000

Cash flow per week based on $252,000 loan at 5.75% interest only, $350 per week rent, 7% management fee, $3,000 per year rates/insurance etc would be negative $564 per year (negative $11 per week).

 

The take-home message from these two case studies is quite obvious. If your investment goals are to accumulate properties over time to create capital wealth and ultimately a passive income stream, you really need to do your homework. There are growth opportunities all over the country, though where you invest today may define whether or not the bank will lend money to you again in the future.

You need to think not just about the capital growth upsides, but also the cash flow provisions of your property. For these reasons you should be strongly focusing on low entry level investments in growth areas with strong cash flow to ensure you can afford to hold your investments, but more importantly to ensure you are not investing yourselves out of the market.

Always think three investments ahead and realign to your original rationale for initially choosing to invest in property.

Contact this Blogger Immediately

About the Blogger

Paul Glossop

Paul Glossop

Paul Glossop is the founder and director of Pure Property Investment. Paul has built a substantial property portfolio, focusing on the fundamentals of property investing. He founded Pure Property Investment to enable investors to experience a truly holistic approach to property investment. From the initial consultation to the acquisition of the property, Pure Property Investment is a true partner for its clients through the entire journey. We specialise in sourcing properties Australia wide that are below market value, positively geared and primed for capital growth.

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