Many investors will attest to the abundance of positive cash flow deals in the markets of Australia, but did you know that you can also create these deals simply by crafting a good strategy? Property strategist and investor Sam Saggers tells us how.
According to Mr Saggers, a positive cash flow serves as fuel for the continuous growth of an investment portfolio, especially for those facing serviceability issues.
While there are several factors to consider when chasing cash flow, the simplest key to finding and creating deals that will succeed in is practice.
The property professional explained: “Practice makes perfect. 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.”
Properties with the best potential for good cash flow are those you can add value to through cosmetic renovations or subdivision, Mr Saggers said. By purchasing this type of real estate asset, you can also enjoy the benefits of good rental returns.
The best types of properties for generating good cash flow include:
This will be best for first-time buyers, those who are working with little to no deposit, or those who have poor serviceability.
While it’s less likely to get excellent discounts when buying this type of asset, you can build equity and get great returns when you strata the block.
Purchase a property with a great discount, then do renovations or subdivide the land in order to increase rental returns and the value of the property, thereby, increasing the equity.
For more seasoned property investors who have enough experience and savings, you can move on to developing a site to generate good cash flow.
Moreover, the property professional encouraged seeking properties sold below market value which could further improve your cash flow position.
Investing in diverse locations that have strong market drivers, including demographics, infrastructures, economics, supply and demand rates, rental yield and population growth, can also help you achieve your wealth-creation goals.
Once you have found a good property, you can determine its actual potential for cash flow by calculating its gross percentage yield and net yield.
Gross percentage yield is calculated as:
Weekly Rent x Weeks in the year = Annual Rent/Purchase Price x 100
For example: $320 per week x 52 weeks in a year = $16,640/$200,000 = 0.0832 x 100 = 8.32 per cent gross yield
Meanwhile, net yield is calculated as:
Annual Rent - Property Expenses (management fees, strata fees, utilities, insurance; excluding interest) / Purchase Price x 100
Mr Saggers advised investors to get their net yield as high as possible if their goal is to generate positive cash flow and ultimately fuel the growth of their portfolio.
“Strive to find a property with a yield in excess of 5 per cent. There may be some situations where you can accept a lower percentage, knowing that adding value will boost your yield," he said.
Finally, before jumping into a purchase, Mr Saggers strongly encouraged seeking the help of property professionals in order to make the best decisions for your wealth-creation journey.
Seek out real estate agents with a good reputation in your desired investment area and ask for vital information about property values as well as their recommendations on ways to increase the rental yield on the property you want to purchase.
You can also discuss renovation options with trusted builders and property managers to determine other strategies that can help you add value to your asset.