Investment tip: How to influence cash flow
Cash flow is deemed as one of the most critical aspects of investing in properties—so much so that Right Property Group’s Steve Waters refers to it as “the second most important thing behind oxygen” for property investors.
Running a property portfolio is like running a business, according to Smart Property Investment’s Phil Tarrant, an avid investor who has successfully built a 17-property portfolio over the years.
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He explained: “You have seasonal variations. You have quarterly variations. You have land tax [that] might be due this month … [then you got to pay up] $20,000, [but on] other months, you don't need to have to do the same—it is a business.”
As in any business, cash flow forecasting is necessary in property investment to consistently track your financial situation, which is often affected by different factors. How much money is coming in? How much is coming out? Do you have enough dollars in the bank to pay for it?
According to Steve: “You don't want to be the bloke on the front of the Financial Review saying, ‘I'll have to sell my property because this has happened [and] I wasn't prepared for it.’ ”
“[Right now, rates are] going to [principal and interest] instead of interest-only … If you were caught in that trap and you haven't forecasted … well, then, woe to you,” he added.
Reducing cost and improving cash flow
One of the most common strategies to improve a property’s cash position is to adjust the rental fee. However, a property investor must be conscious about the timing of rent adjustment.
Phil said: “At this time of the year, I'd be suggesting not to touch rents at all. It's always a bad time of the year [when it’s] coming before or just off the back of Christmas.”
“You don't want to create any instability within the portfolio, so I'd be looking to ... do a rental [adjustment] around about … March.
“Speak to your property managers or, if you [self-manage] … test the market … [or speak] to some property managers [to see] what the appetite for rents is—what's the local dynamics in a particular market … [or] streets, etc.?” the property investor added.
Oftentimes, property managers are more reliable than websites like realestate.com when it comes to determining the necessary data for rent adjustment. After all, different streets attract different rents and no matter the abundance of information online virtually nothing beats local ground knowledge.
Aside from adjusting rental fees, preventive maintenance can also help a property investor in cutting costs.
According to Phil’s accountant Michael Johnson, the simple task of making sure that there will be no major damages to the property in the future means a lot to a property portfolio’s overall value and cash flow position. Minor fixes that cost a couple of hundred bucks is always better than spending thousands on major repairs.
Steve said: “Preventative maintenance really comes down to cash flow management … but try and time that when you have the capital available to do it. You don't want to be living in a two-minute noodle scenario just to do a bit of maintenance.”
“Always do the safety[-related maintenance] first such as lights—you don't want to be in a position where you jeopardise someone's safety,” he advised property investors.
“From a moral point of view, as well, don't be that slum-loaded. It will come back and get you,” Phil added.
Adding value through renovation
One of the properties Phil bought in Kingston last June was “poorly presented”, to say the least.
In order to accommodate tenants as soon as possible, he and his team only did preventive maintenance to ensure safety for those who will be living in the property.
Now that the tenants have moved out for a while, they will be adding features like a kitchenette to enhance its appearance and improve the property’s value.
Steve said: “When the tenants left ... we [did] not only [do] some essential work but also some work to value-add in terms of its [total] value … [and] cash flow position … There is [going to be] a bit of expenditure there.”
‘Run the numbers’
While property investors can definitely influence cash flow through several strategies, it is important to weigh the options carefully in order to avoid unnecessary costs or losses. When you decided to push rents up, think of the possibility of having the property vacant for a while because no one could afford it.
According to Phil: “You need to weigh up … potentially getting $10 more a week versus missing out on someone for two months when you've got a property vacated.”
“It's a lever that is a challenge to the pool. How else can you influence cash flow? Preventative maintenance—spend a dollar today so you don't have to spend two dollars tomorrow,” he added.
At the end of the day, it’s about being careful when running the numbers, Michael said. You don’t want to be shelling out $5,000 just to get an additional $10-per-week in rent, especially if you can’t withstand the loss in the long-term.
“If you are going to spend the money and it's going to create you 10 per cent or 15 per cent return on that initial expenditure, well, it's … worth entertaining then as long as you can withstand the capital that's gone from your kitty, so to speak,” the accountant concluded.
Tune in to Phil Tarrant’s property portfolio update to find out just how much it costs to hold his properties, considering interest rates, weekly costs, and taxes, as well as the metrics they utilise to improve cash flow and achieve continuous growth.
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