Many novice investors mistakenly believe that deposit is the hardest part in the property equation, writes Victor Kumar.
While it’s always been difficult to save a first-time deposit for a home or an investment, you also need to have enough funds or cash flow to hold on to the property over the long-term.
So, in the second part of my series on the worst property investment mistakes, I’ll outline why a lack of cash flow can hamper your property dreams from the very beginning:
1. Thinking you have more money than you do
The very first thing that people get wrong is they don’t even know how much money is leftover at the end of the day – but they start investing anyway.
I can put my hand on my heart and say that if I seat 100 families and ask them to tell me what their expenses are, and how much they have left over at the end of the week or month, some 80 or 90 per cent would have to guess that figure.
So, if you’re looking to buy property, how on earth can your budget to hold on to it, and target the right property, if you don’t know what your maximum tolerance level is for negative cash flow?
That’s why a lot of people sell their investment properties within the first five years of ownership because of poor cash flow.
However, if you can comfortably save a certain dollar amount per week without impacting your lifestyle today, that could become part of your negative cash flow tolerance from the outset.
Strategy - How do you improve your cash flow?
One strategy is to find extra money within your existing balance sheet right now.
I bet that if many people looked at their credit card statements, they’d be able to find a few direct debits that they didn't even know were there.
It could be an old gym membership or an old subscription that you’ve forgotten about.
If you cancel those, that instantly increases your cash flow.
Another idea, if you already own property, is you could revert principal and interest mortgage repayments to interest-only, which can free up a sizeable amount of cash flow that you can use to help hold your portfolio.
As a guide, if you look at a $300,000 mortgage with an interest rate of 4.5 per cent, the interest only repayments per week would be $260 versus a principal and interest repayment of $350 – so that could free up $90 per week right there.
That’s just for a $300,000 loan – if your loan is higher, you can free up even more by simply converting to interest only repayments if that’s the right strategy for you.
2. Abdicating responsibility
Another mistake with too many investors, even if they’ve worked out how much negative cash flow they can sustain per week – and it really needs to be a weekly figure so it can match against the rent and it’s also a lot more tangible – is they abdicate responsibility for their properties.
Now, I don’t mean about using property managers, but they don’t even look at their rental statements every month. They leave them unopened or they automatically file them into an email folder.
If they’re not reviewing their statements, they may miss discrepancies such as being charged double admin fees or the opportunity to pick up very early that their tenants are falling behind in rent.
Another way to maintain cash flow is to undertake regular rent reviews, which doesn’t necessarily mean increasing rents.
It’s about ensuring you’re not falling so far behind the market that it becomes impossible to increase the rate back to where it needs to be without getting rid of the tenant.
Strategy: Cash flow opportunities
Some investors find switching to a fixed rate interest rate can help with budgeting for cash flow over a set period of time if you need that level of surety.
You should also review your insurances regularly, both for your portfolio as well as your personal ones (I would suggest every two years) to check what other deals might be out there.
A more advanced strategy could also be to bring forward a granny flat construction or additional small dwellings on existing properties to improve cash flow as well as capital growth.
Most of my suggestions are basic housekeeping, but many people get it wrong.
One of the fundamentals of successful property investment is that you have to know, to the last cent, how much spare money you have, how much capital you have, and whether there are any major changes to your income on the horizon either through job loss or a growing family.
A really good measure to understand your cash flow is if you’re not able to pay off your credit card balance every month in full and still have cash left over, then you are overspending. It’s as simple as that.
Investors have to be more ruthless in truly understanding their cash flow position at the beginning of their journey as well as over the entirety of the ownership period.
Otherwise, their property investment dream might end up looking like a nightmare, and no one wants that, do they?