Our Portfolio

Cash flow is king

By Phillip Tarrant
Port Kembla property investment

In this month's column, I'll detail how we're balancing our need for properties with good cash flow with our desire for properties which offer up instant equity.  

I finished up last month’s column discussing our purchase in GlenroyGlenroy, NSW Glenroy, VIC, which is a northern suburb of Melbourne. The overall theme of the article was around flexibility – and the ability to capitalise on a buying opportunity, even if it might not exactly meet your current investment strategy.

For us, the Glenroy purchase was an equity play. The property was purchased well under market value, and it was an opportunity we couldn’t miss.

In that article I spoke about our current buying strategy and the need to add more cash-flow positive properties to underpin a number of lower yielding properties we have in our portfolio.

The Glenroy purchase does not deliver the rental returns that our current strategy dictates – with a return of around 5.2 per cent – however, we did not want to miss out on an immediate $53,000 in equity on a $322,000 purchase price.

We know the property was purchased so far under market value because we undertook a bank valuation prior to purchase.

We’ll sit on this property, and over time it will become a better performer in terms of yield, however the equity sitting in that property will come in handy to help fund a purchase in the future – and to allow us to continue to grow our portfolio.

At only three years old, there is a depreciation component to this purchase – which I planned to write about in this month’s column. However I wanted to shift focus to our most recent purchase, and how it fits into our overall buying objectives. I’ll leave the follow up on our Glenroy purchase – and how it’s tracking – for another time. 

The laidback lifestyle of the <a href=https://www.smartpropertyinvestment.com.au/data/nsw/2500/west-wollongong>Wollongong</a> region is a big drawcard to renters
The laidback lifestyle of the Wollongong region is a big drawcard to renters

Cash conscious

We’ve got a great performing portfolio with substantial equity. Yet one area of improvement is its cash position and the need to operate it at a neutral, or if possible, at a positive position.

Our last few purchases have helped add some good equity to our portfolio, yet as we’ve re-financed our properties to help underwrite additional purchases it’s placed pressure on our cash-flow position considering the increased mortgages that need servicing.

While increasing rents is an option to help alleviate this, it’s not an immediate proposition and it will take time to slowly increase yields in line with market conditions.

It’s important to remember that while refinancing offers cash to finance additional properties, it also impacts your ability to service your portfolio. Refinancing means higher mortgage repayments, and unless you have great yielding properties to service this increase, or surplus cash to help sustain your portfolio, you may find yourself in trouble.

It’s a balancing act that requires planning, modelling as well as constant awareness. If you’re unsure of your ability to take on additional debt through refinancing – and how it might alter your investor profile – speak with your mortgage broker. They’ll be able to run through all the different variables for you.

Considering our goal to increase the cash-flow position of our portfolio, we’re seeking higher yielding properties at the moment, and our most recent purchase is firmly focused on this. We have a pretty diversified portfolio now, with properties in Sydney, Brisbane and Melbourne.

We also have exposure in the Central Coast market of NSW.

Our latest property purchase adds another level of diversification – the regional area of Wollongong.

Wollongong is an established coastal city around 100 kilometres south of Sydney. Positioned within the Illawarra region of New South Wales, it has a population nearing 300,000 and is the third largest city in New South Wales after Sydney and Newcastle.

The area’s beaches stretch from Stanwell Park at the foot of the National Park to Windang, offering many recreational activities and a quality of life the area is famous for. But Wollongong is also noted for its heavy industry and has a long history of coal mining.

Much of the area’s infrastructure is geared towards the heavy manufacturing industries, with a large working port and associated mining assets generating much of the area’s employment opportunities.

Wollongong’s Port – Port Kembla – is now the single largest concentration of heavy industry in Australia which includes steelworks, a fertiliser plant, electrolytic smelter, grain shipping terminal and an industrial gases manufacturing plant.

The main drag of Port Kembla
The main drag of Port Kembla

The area has experienced steady population growth over the years and has a multicultural atmosphere; however land is becoming restricted in more established areas considering the narrow belt of land the area occupies between the Illawarra escarpment and the sea.

Areas surrounding Dapto offer the greatest prospects for further population growth, as do developments around Albion Park, Shell Cove and Kiama.

Well-resourced by localised transport links including road, rail, bus and air, there’s good gateway infrastructure to connect the Wollongong region to Sydney – with many choosing to live in the area and commute to Sydney each day.

The lifestyle offered by the area will continue to attract families as well as professionals, however it is local opportunities, in particular around industry and associated support sectors, which will sustain growth over time and put positive pressure on property prices plus rental yields.

While in essence a regional city, the level of industry diversification is a factor that attracted us to the area, as well as the sustained population growth and opportunities for employment within the heavy industries and elsewhere.

With a thriving retail sector plus employment prospects in health, government and tertiary education, it’s an area that’s well set for a sustainable future – and an area in which we wanted to invest.

But like all areas, there are markets within markets, and there are areas of Wollongong that are well worth avoiding.

Pick of the bunch

Like all investment opportunities, a number of factors need to be considered when locating an area that will deliver returns over time as well offer strong capital growth prospects.

For us, by investing in Wollongong we wanted to keep consistent with our overall strategy of identifying affordable properties in the $250,000–$350,000 range that offer the potential for adding value.

Moreover, central to our strategy is to purchase these properties under market value. As I mentioned earlier, an added focus to our buying strategy in the Wollongong area was to find a property that delivered good rental yields to give us a better cash position.

These were the parameters that dictated our purchase in Wollongong, and the property we found definitely ticks all these boxes.

The area has experienced steady population growth over the years and land is becoming more restricted

Located in the established suburb of Port Kembla, our most recent purchase offers numerous opportunities; most significantly it’s an established duplex that offers multiple rental streams.

Purchased for $320,000, we secured the property approximately $30,000 under the asking price. (Note: the actual contract price is $325,000 however through negotiation another $5,000 will be deducted from the price at the time of settlement.)

Notwithstanding this, the property had massive potential for adding value. The term ‘ugly duckling’ really doesn’t do this property justice. It’s an eyesore, however with our experience in renovations I’m not concerned about our ability to elevate this property and turn it into a great performer.

Traditionally rented at around $250 per week per two-bedroom unit, as it sits right now the combined property will deliver a yield in excess of eight per cent, but I’m confident we can boost rental returns and the overall capital value of this property.

Port Kembla is an interesting suburb of Wollongong. Often overlooked because of the close proximity of the port as well as the infamous Port Kembla smokestack, the suburb is going through a period of gentrification.

The smokestack fell to demolishers earlier this year, and that marked a turning point in the suburb and was a milestone in its ongoing gentrification.

The suburb is still deeply linked to the history of the port and many of the families that have worked in the port for generations still live in the area. It offers a real community feel, and the locals are passionate about their suburb.

It also has what is arguably one of the best beaches on the south coast, if not all of New South Wales. Port Kembla beach has a great Olympic Pool at the north end, with good surf, fishing, and swimming along its stretch. A beautiful beach, it complements key infrastructure, including a local West¬field, train station, hospital as well as other essential amenities.

I’m very bullish about this property – and not only the opportunities presented by the property for renovation and adding value, but the long-term prospects for capital growth as the area develops.

Port Kembla is a hidden gem and I’d imagine as more and more Sydneysiders become aware of the suburb, more will chose to have holiday homes in the area.

The actual buying process of this property has been an interesting one, with our buyer’s agent the Right Property Group working closely with us to identify this property as well as secure it via private treaty. It’s a good story which you can read about here.

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  ["title"]=>
  string(72) "Mortgages in a tighter lending economy and why Brisbane is a good option"
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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    Whether it\u2019s building a successful property portfolio or investing in one of their Development Funds, Open Corp can help you through every stage of your investment journey. The team has 40 property specialists who collectively have been involved in over $4 billion worth of property transactions and the acquisition of more than 8000 homes and investment properties.<\/p>\r\n

    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:\u00a0<\/p>\r\n

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Mortgages in a tighter lending economy and why Brisbane is a good option
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making
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  ["title"]=>
  string(75) "Regional Victoria showing up Melbourne in price performance, new data finds"
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Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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