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4 properties, $11k in holding costs: This strategy could save your cash flow
As preserving cash flow becomes critical following the federal tax changes, one novice investor has paid only $11,000 out of pocket for four properties in five years. This is how she did it.
As interest rates rise and cash flow becomes even more crucial after this year’s tax policy changes, cutting holding costs will become increasingly important.
NSW Central Coast investor Jamie Kerr said that by leveraging rental growth, carefully budgeting and adopting a long-term approach, she and her partner held four investment properties while paying just $11,000 out of pocket over five years.
Kerr said a calculated strategy to cut holding costs helped the couple own their home outright and build a foundation for retirement.
“I don’t really want to be in the position where I’m relying on the government to pay our wage. So that was the reason for my interest in investing in property,” Kerr said on The Pure Property Podcast.
This is how they did it.
Long-term perspective
According to Kerr, minimising holding costs required a long-term strategy that included planning carefully and forecasting potential rental growth.
Due to rent increases over the years following COVID-19, Kerr said she didn’t have to make any major lifestyle sacrifices to afford to hold their properties.
“Yields didn’t start off at 8.9 per cent, they started off at 5 per cent – it’s just over time that the rent has increased to where it is now.”
Kerr also said it was essential to consider costs over a long period of time and how much they could be offset by returns.
“We’ll look at it over five, 10, 15 years. You’re not paying that much out of pocket if you’re investing in the right assets,” she said.
High yields don’t automatically equal positive cash flow
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According to Pure Property Investment buyer’s agent Aaron Findlay, investors shouldn’t assume that high yields were equivalent to strong cash flow, and that it was essential to consider all costs of holding a property.
Kerr’s second property was a house in Deception Bay for $290,000, but it required extra renovation costs, bringing the total to around $350,000, including stamp duty.
Findlay said the $600-a-week rent enabled a gross yield on debt of about 8.9 per cent, but interest rates needed to be factored in.
“Since the rate was going to 6.57 per cent, you were probably still slightly negative on that property,” he said.
According to Findlay, investors needed to factor in interest, management fees, insurance, council rates, maintenance and vacancy, as all would affect the actual cash position.
“Although if it’s only going to be a few thousand dollars a year, it’s not going to be something that’s going to be disastrous,” he said.
Holding costs v cost of holding
Despite the ability to reduce expenses, Findlay said investors shouldn’t be too deterred by high holding costs and instead weigh them against the risk of being priced out if they delay buying to save a deposit.
He said investors paying $10,000–15,000 a year to hold could view that shortfall as the cost of securing an asset at the current market price, rather than spending several years saving a deposit while property values potentially rose.
“What I have to say to them is you’ve bought the property at today’s price and what you’re paying in that premium each year is you’re saving the deposit in reverse,” he said.
“If you tried to save that deposit over five years, 10 years, how long is it going to take you to save that deposit and what is the price of that property going to be in five or 10 years?”
When to stop buying?
After recently purchasing their owner-occupied home, Kerr said the pair had reached maximum borrowing capacity and would have to sell one of their investments to pay off the property.
“I’m just being conscious of timing there so that when we do sell down, we can actually pay off a big chunk of the home rather than selling now,” she said.
She said that before investing again, their next step was to pay down their principal residence as quickly as possible, but they needed to strategise first.
“We will eventually sell down to hopefully pay off the home at some point, so then we’ve got a home that’s paid out. And then we would recycle that money out of that home to then reinvest again,” she said.
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