If you’ve been wondering where to buy an investment property that offers positive cash flow but haven’t had any luck finding one, I suggest a simple adjustment to your mindset. We all have preconceived ideas about investing in property – what to expect, how to do it, and we act according to those beliefs.
Blogger: Sam Saggers, CEO, Positive Real Estate
What if I told you that while it’s true that positive cash flow deals can not only be found, they can also be made. In fact, I’d say that the best positive cash flow deals are those that have been created as a result of a good strategy.
Positive Cash Flow is Your Investment Portfolio’s Fuel
Practice makes perfect, as the saying goes, and there are few places it is truer than in property investing. The more you get out there, toss out your offers and do your due diligence, the more comfortable you‘ll be when it comes time to sit down and negotiate. In fact, a key factor in your success at finding and creating positive cash flow deals is your ability to learn how to negotiate terms in your favour.
If you face serviceability issues, you will need to create positive cash flow properties. In other words, for the sake of your investing future, you must have positive cash flow to keep moving forward.
An ideal kind of positive cash flow scenario would be one you could add value to, with either cosmetic renovations or using strata on a duplex or small block of units. This strategy can improve not only your investment property’s value, but your rental returns as well.
Strategies That Deliver Results
Strategies that encourage positive cash flow include:
• strata or subdivision
You can do each of these things separately or create a combination of them to really boost your cash flow.
Each of these strategies works well with the following types of properties:
A single unit - This is a great place to get your feet wet - especially if you have a small deposit or even no deposit and poor serviceability. The goal is to buy a property with great renovation potential at an excellent discount. Once you’ve added value through cosmetic renovations, you’ll see your rents increase and your property value rise, which adds equity to your property investment portfolio.
A duplex or small block of units - While getting a discount is fantastic, if you can strata the block and build equity your returns will be much, much greater – in a relatively small amount of time.
A house - Obtain a discount, do some minor renovations or even subdivide the land to increase your investment property’s rental and drive up the value - increasing your equity.
Land - If you’ve been investing for a bit and have a good amount of cash set aside for investing purposes, it’s possible to get some great positive cash flow returns from developing a site. As this is a capital-intensive venture it’s not for the faint of heart - or the light of pocket!
When you’re researching where to buy investment property, don’t be afraid to invest in property markets outside of the region where you live. If you’ve found a market which fits with your property investing strategy (e.g. capital growth and/or positive cash flow) and all of the market drivers are good, don’t eliminate it as an option simply because you’re not familiar with the area.
Just as your investment broker advises you not to put “all of your eggs in one basket”, so too should you choose property investments in a diverse number of locations which are positioned for growth.
What to Look for
Your strategy will differ depending upon your particular situation. For example, if you already own an investment property in a location that’s growing, you may have enough equity which can be used one of at least two separate ways:
1. You can use the capital (your equity) to continue growing your investment portfolio by purchasing positive cash flow properties or
2. You can put your positive cash flow into an offset account to cover any potential shortfalls when the property market changes, keeping you cash flow positive!
If you are purchasing your first investment property don’t be discouraged by friends or family members who either try to discourage you or tell you they know where you can buy investment property that will deliver great returns. Unless these individuals are professional property investors, be certain to take their advice with a grain of salt and do your own due diligence.
Look for areas with strong market drivers:
? Supply and Demand
? Rental Yield
? Population Growth
Does it Math Out?
Calculate your gross percentage yield to quickly determine a property’s potential for positive cash flow:
? Weekly Rent x Weeks in the year = Annual rent/divided by purchase price x 100
? $320 pw x 52 weeks in a year = $16,640/$200,000 = 0.0832 x 100 = 8.32% gross yield*
*Strive to find a property with a yield in excess of 5%. There may be some situations where you can accept a lower percentage, knowing that adding value will boost your yield.
To calculate net yield on a property use the following formula:
? Annual rent - property expenses (excl. interest)/divided by purchase price x 100 = net yield
Examples of expenses:
? Property management fees
? Strata fees
Your net yield is less important if you’re in a higher tax bracket as you have access to tax savings that will offset any losses you might incur. If, however, you need positive cash flow to fuel your property investing career, then try to get your net yield as high as you possibly can.
A perfect scenario would be to obtain a discount that is equal to your deposit, but this isn’t always possible. Property values of the surrounding area will determine the discount you can expect to get. For example, if the property you are looking at is valued at $350,000 while similar properties are valued at $360,000 and up, it’s very unlikely you’ll get a sizeable discount - or perhaps not even one at all.
If your due diligence has led you to believe that the price is good and that you can add value through renovations or strata (subsequently boosting your yields) then go for it - assuming you can afford to hold the property until it can be re-valued.
Note: some banks require a minimum of 6 months time between valuations
Ask the Pros
Don’t discount the information that agents in a particular area can provide about property values. Seek out agents with a good reputation in the area you are researching to get their opinion on what improvements - if any - could increase the rental yield on the property. Not every agent will respond to your queries, so don’t limit yourself to just one individual or firm. Sometimes, if you dangle the carrot of a property management gig when you find a property, you’ll get a quicker response.
Renovations don’t have to be complex. Simple things such as air conditioning, new floor coverings, and paint, are relatively inexpensive and can be done fairly quickly, reducing the time your property will be vacant. Discuss the options with your property manager to spend your money adding value where it will do the most good - increasing your yields by a few percentage points!