After growing a multi-property portfolio and achieving 39 per cent compounding growth from an initial investment of around $250,000, Smart Property Investment’s Phil Tarrant and his team are looking into minimising the $46,000-per-annum negative cash flow on the portfolio. Which strategy should they implement?
In over seven years, Mr Tarrant has successfully built a $2.49 million-portfolio with 17 properties, including units, townhouses and freestanding houses, spread across New South Wales, Queensland and Victoria. He shells out $46,000 a year to hold these assets—a significant decline from last year’s $57,000 negative cash flow.
While the results of his wealth-creation journey have been brilliant so far, having to pay $46,000 every year is no small feat. In the next six months, the investor aims to amend the cash flow position of his portfolio so he can continue growing his asset base.
According to him: “We can all sit around here and pat ourselves on the back but it's about what we do from here going forward."
One of the most common options for investors looking to minimise negative cash is reassessing their interest rates and consequently adding value to the properties through renovation and development. However, this strategy may prove to be a challenge, particularly finance-wise.
“Obviously, that will have a capital cost that we'll need to finance in one way or another, whether it's through cash or through refinancing. If it's refinancing it is going to be detrimental to our cash flow position. There's a couple of moving parts there,” the investor highlighted.
How can Mr Tarrant improve the cash flow position of his portfolio without overcapitalising?
Experts strongly encourage investors to run their portfolio like they would run a business. Every property serves a different purpose and entails varying financial and administrative responsibilities but, at the end of the day, all of these 'products' must complement each other to help you achieve your ultimate financial goal.
Before implementing the 'Add value' strategy to improve your portfolio's cash flow, take time to review the overall position of your portfolio. How much value can you actually add to your portfolio considering your current financial position?
Moreover, Keshab Chartered Accountant’s Munzurul Khan recommended going over the performance of each property in order to determine how much it costs to hold them and, consequently, pinpoint which of your assets need the additional value most.
The accountant explained: “Phil’s net asset has increased to $2.49 million. What we do, ideally, is we go through and analyse each property. How much out of that $2.49 million comes from property one, property two, all the way to property 18? More importantly, what are the prospects in the future for all of those properties?”
“Some properties are costing a little bit more, some properties are costing you a little bit less. If a particular property is costing you a little bit more, then there needs to be a strong justification why we're holding it, like a good potential for capital growth,” he added.
Dedicating time to reassessing your portfolio can also help you identify other strategies you can implement, like selling a property or offsetting the loss through different means.
“The business by itself is profitable, but it doesn't necessarily mean that all the individual components of the business are profitable. There could be a component of it which is a loss-making entity, but what’s important is that the overall is profitable. It's about understanding the information [in] your portfolio,” according to Mr Khan.
Having reiterated the importance of understanding the performance of your assets, Mr Khan highlighted the value of being surrounded by reliable professionals and property experts when looking to implement a complex investment strategy.
Improving a portfolio’s cash flow position by adding value to the properties through renovation and development entails a variety of factors to consider, including the cost of renovation, the demand for dwelling and the movements of the market.
Being able to review your portfolio through the eyes of experts will give you a chance to see more wealth-creation opportunities and improve your risk management.
Mr Khan said: “It is amazing what you can't see about your own numbers when you're heavily involved. Having someone look at it from the outside in will often give you a new light, a new direction on that portfolio.”
Get in touch with your financial team as much as you can, even if you are not looking into making a big decision for your portfolio.
According to Mr Tarrant, having a regular catch-up with the professionals and experts he’s working with helps him realign his goals and ultimately keep his passion for property ignited. Moreover, getting the chance to discuss property investment with people who do it for a living actually helps minimise the pressure that often comes with big financial commitments.
Property investment could be a simple wealth-creation venture once you learn to do your due diligence, educate yourself continuously and seek the guidance of the right professionals, where appropriate.
Once you have your finances in order, you can now determine the best way to add value to your portfolio. Do you subdivide, build a granny flat or build a duplex? Do you sell and buy another asset?
Ideally, every single property in a portfolio must have a potential for manufacturing growth. "Properties with development potential, whether we develop or not, is a sellable asset," Mr Khan explained.
However, for Mr Tarrant, the accountant encouraged keeping the assets and utilising all their potential until they reach their full value instead of selling down. Being situated in what many consider as 'prime markets' make the properties the perfect avenue for manufacturing growth.
Alternatively, the investor can opt to add a property to his portfolio, provided that it has development potential. It's also advised to look into investing in other markets to diversify the portfolio.
According to Mr Khan: "We're going to be very opportunistic. We'll be looking for something that we can add value to while, at the same time, creating cash flow. By doing so, we're not going backwards in terms of the cash flow position and it's also giving us opportunities in terms of multiple incomes."
"Phil is now at a level where the portfolio is quite sophisticated and we need to step up in terms of the types of deals that we do.
"A really good example of that would be the block of units at Lorton. That was the next level stuff—a block of five individual titles and multiple strategies that we could carry out as time goes on. That sort of stuff is what we'll be looking for," he highlighted.
To determine the best way to improve the cash flow position of your portfolio, review the growth potential of the property in line with its associated costs. Consider selling the properties with no great potential and high cost. If growth potential is present, consider adding value through minor renovations or major developments.
At the end of the day, the goal is to 'balance' the portfolio in terms of profit and loss. How much value can the development, renovation or new property add to the portfolio? On the other hand, how much cash flow will it cost?
"Creating the portfolio, to begin with, is actually relatively simple. It's about controlling the opportunities and giving yourself longevity," Mr Tarrant concluded.
Tune in to the Phil Tarrant’s latest property portfolio update on The Smart Property Investment Show to know more about the strategies he plans to implement in order to improve the cash flow position of his portfolio and ultimately continue growing his asset base.