Most seasoned property investors tend to look for a more specific type of property after their acquisition phase—real estate assets that have the “X factor” or those properties which they can extract secondary incomes from by rebuilding as a duplex, building a granny flat, or by doing other major renovation projects.
Smart Property Investment’s Phil Tarrant has personally opted to buy properties with a potential for additional value since the beginning of his property investment journey to ensure that his portfolio will stand the test of time.
After all, property investment is a long-term game—for many, it’s more about the time in the market than timing the market.
According to the avid investor: “The assets that we have acquired over the years, most of them have a bit of an X factor. Some of them are just going to be good sort of assets that we never need [to] touch … but some of the other stuff [are more special].”
So far, he and his financial team have yet to tap into the opportunities carried by his investment properties because the need to improve their cash position isn’t deemed urgent at the moment.
He explained: “You only really need to improve your cash position if it's really hurting you. We are still able to acquire assets while covering the cash flow shortfall.”
“But at a point in time, that trigger will happen where we go, ‘We don't want to cover the [loss … whatever it is that’s the] rationalisation of our strategy'. We [are] going to go, ‘Let's start fishing the cash position more often now,’ ” Phil added.
Striking a balance between equity and loss is necessary to achieve success in property investment, but it’s easier said than done according to accountant Michael Johnson.
He said: “You got these equities in this portfolio and, every year, we have a loss or cash outflow that's obviously ... draining out that equity. Obviously, having a neutral cash position is great [but] it's ... easier said than done.”
Essentially, most of these properties start out at a negative cash flow position, then it goes up in value over time so the cash you can generate from it also increases.
Phil refers to that transition from a negative cash flow position to a positive cash flow position as the “inflexion point”—the time when your portfolio goes from costing you money to actually putting money in your pocket. However, determining the “inflexion point” often takes more than hard work and good education.
Right Property Group’s Steve Waters explained: “A lot of people’s strategies out there is to hold that property to a point in time where the rent continues to go up, so it goes from being negative to positive cash flow … [and they] talk about, ‘Well, that should only take a couple of years.’ "
“For me, that's a really dangerous strategy because nobody knows. If everybody knew when their portfolio would turn negative to positive … then … you could passively sit back and just wait or control cash flow at [any] point in time.
“Reality is a different kettle of fish. No one knows when your property will turn positive to negative because you can't project rental growth just like you can't … be certain about asset value growth as well,” he added.
The other factor that affects a property’s cash flow position is the “people leverage”. Property investors tend to increase their debt level as they tap into their asset’s equity in order to buy a new property.
As a result, it may take more time before the property gets to a neutral or positive cash flow position, and when it does become positive, it might be at around $5 to $20 only per week, which is generally insufficient to live on or be a main source of income.
Steve advocates being an active investor instead of just “buying and hoping”.
The property professional said: “You've got to hustle. You've got to make things happen—that might be via adding value [through] renovation, [and], obviously, buying well all the time … [and having] a control in the cash flow along the way.”
While a positive cash flow is every investor’s goal, it has to be supplemented by a general financial end goal, according to Phil. At the end of the day, the property is just a tool to achieve the ultimate end game—creating wealth.
Steve advised property investors: “You need to understand [the end game] but you also need to be able to survive it. I think people have this real disconnect between wealth [and] cash flow."
“[Phil’s] at the moment … [has] a couple of million of equity—wealth, so to speak. [However], you can't live off the wealth because there is a debt attached and you got a negative cash flow even if it was positive by $20,000 a week.
“[It’s] not going to quite work, so you need to actually have the combination of both [wealth and cash flow]. The cash flow is just enabling you to hold it while the wealth goes up to the point for us where you actually pay down [debt],” the property professional explained concluded.
Like in business, any asset is worth nothing unless you sell it—the cash flow you haven’t got translates to a wealth you can’t touch. One must be willing to consistently find ways to generate cash flow in order to sustain his property portfolio and keep it growing until he achieves his goals.
“Everyone can invest in property if they have the cash flow to be able to do it [and the willingness to] make sacrifices,” Phil concluded.
Tune in to Phil Tarrant’s property 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.