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Hi there Ms Trump,
You have posted a very good question, and one that many people chew over when they first start thinking about investing in property.
I am a total advocate of positive cash flow. Obviously capital growth is very important as well. But to be able to hold the properties long enough, you have to be solvent, IE. be able to afford to service the debt over a long enough period of time to benefit from the growth in Value.
You need to be able to build a sustainable portfolio with a mix of CF positive properties, as well as some properties better located for capital growth. The idea is to purchase, what I like to call a 'cashflow base', then as you build up a portfolio of say 3-4 CF + properties, that give you a cash surplus. You can then purchase a High capital growth property (that will need topping up of course) but the surplus from your CF+ base will do this. (You keep repeating this as many times as you want)
By building a 'balanced portfolio' you have a sustainable model where you get the benefits of both positive cash flow and capital growth. And remember that just because you are getting +CF from a property doesn't mean you are not going to get any Capital growth. Some of the cash positive properties I purchased in New Zealand back in 02/03 have actually tripled in value since.
When I started investing in property I had an extremely average income, and not a lot of capital to play with either. I was single so couldn't benefit from a partners income for debt servicing. However by purchasing very well, and gaining more equity in each deal than I was using up (for the deposit) on each purchase, I was able to substantially improve my equity position with each new purchase.
Also by purchasing properties with strong yields to begin with, this made it easier to qualify for more mortgages moving forward for even more purchases.
When building your portfolio, it is a continual balancing act between equity (Loan to value ratio) and yields (debt service ratio) to keep the balance.
Also another little tip, on buying the cash-flow first, even if you are on a higher income. You may not always have your high income, particularly in the current climate. Also when banks look at your income to allow for debt servicing, they generally only take 35% of personal income to put towards their debt service calculations, whereas they generally take 75-85% of any rental income into account for the same debt service calculations – From this you can easily see that your rental income very quickly becomes far more powerful for qualifying for further mortgages.
I hope this has helped shed some light on the question in subject. Of course we cover all of this stuff in far greater detail, along with everything else in our e-Coaching online property mentoring program
hewlett25 wrote:there is a company offering brand new homes in tassie for $450k with govt guarantee for 10 years returns $700 per week.
With an 8% gross yield (which would be around 6% net after expenses are deducted) I would hardly call that a positive cashflow property!
Ok I am well aware you can borrow short term money for less than 6% at the moment, but what happens when you have to start paying 7-8% or more not far into the future?
This is a trap that many people fall into all the time, it can be bad enough finding the cash to top up one property (that you bought thinking it was positive cashflow) but you can only imagine what happens if you have bought several like this – You are a goner!
This is exactly what happened to many new investors, over the last few years when they bought properties with net yields only slightly above the then very low interest rates. As soon as their floating rate moved up, or low fixed rate expired they were in a position of not being able to service their mortgages.
At this stage in the economic climate I recommend when doing your analysis (prior to purchase) you allow a contingency for interest rates increasing at least 1-2%, if the deal still works for you and you are happy with the cashflow position, or lack of it, then by all means go ahead and purchase – But please make sure you do some forecasting before going ahead.
If you call that a CF+ property, I can now see why so many Aussies have been purchasing REAL positive cash flow properties here in New Zealand, with much higher yields
Scott No Mates wrote:I was discussing a similar issue with a potential client earlier today. One of his suppliers had provided some top quality product recently from Qld which cost about double what he was previously paying for local goods, then given another kg of a chinese sourced product. The first being the best he had ever tasted, the second left a bitter aftertaste but was acceptable (and less than the original product).His supplier acknowledged that you don't make your profit in the sale, you make it at the time of purchase. Real estate & development is not different, if you pay too much for the property, you will never make it up.
Yes Scott, exactly! ,some people are prepaired to wait for capital growth over time, I prefer to get mine up front
Hi Vicky,
Hope you are well.
Just to clarify, In my post about small towns and vacancy issues I wasnt refering to the Hawkes Bay being too small to invest in, but moreso Tokoroa and the like
Cheers,
Clint
Hi guys thanks for sharing your stories. It is always awesome to see and hear from others that are out there doing it too.
It has been really interesting over the last 12 months or so, seeing the effects on some investors. People who were either too highly geared and when values have come back they have gone into negative equity and their lenders have tipped them out. Or others who just didn’t have high enough yields/cashflows to support the interest rates we saw at the peak, and eventually got sold out at Mortgagee.
I have also seen a few people who took large punts on a number of top end (negative cashflow) properties not too long before it all started to correct. Where were HOPING to make a nice capital gain. Once the market turned, they were unable to support/fund these properties for the longer term, and either sold them for a large loss, or got sold out at mortgagee.
Conclusion:
After witnessing all of this, It has really reinforced to me the benefits of good old buy and hold 'Cashflow Investing'. Where if you own a portfolio of good quality assets, that you have either bought well or have renovated etc (to create equity) and lower your Loan to Value ratio. And you have a sound cashflow from the portfolio to more than service your debt; there is no issue, even if the values have come back a little.So while many of the over committed, and speculative type investors, have had a few issues and fallen by the wayside fairly quickly into the correction. I am more or less unaffected by the correction. I only have one of my properties where the rent has gone down, and that was due to me having the whole 10 flats leased to the one organisation. And they lost their contract with the DHB. So I had all 10 units in this one property vacant for a little while, until we relet them too private individuals (and we had to lower the rent a tad to get them fill. However this is only 1 property of a larger portfolio, where the other rents have been moving up, so it all balances out.
If that 10 flat property had been my only property, then yeah I would have struggled to support them while they were vacant. But this is one great example of how the risks actually can reduce with the more properties you own.
Oh well enough for now, that was only going to be a few words, but got carried away
Hey thanks for posting your story Kylie – Awesome!
You are right so many people do tend to give up before they reach that 'Critical Mass' point, because they think things get too hard. You are a great example of someone that has 'pushed thru' the challengers and has acheived success
We actually talk alot about this in the first module of our e-Coaching Program.We have just made a new Blog Post – Motivate to Activate. Check it out > http://www.propertyinvestorcentre.co.nz/blog.php?blog_id=6
(part two coming soon)
Hi Guys,
Well after posting my Introduction post back in March, I have had many messages and enquiries if I offer any form of mentoring. In the past I have not, as my sole focus was on Investing for myself and building my own portfolio.
Well after many requests to make my experience available to others, I have joined forces with a fellow Kiwi Property Investor, and we have put together a unique ‘web-based Property Investment Mentoring Program’ that we call ‘e-Coaching’. This enables you to learn how to be a successful Investor from the comfort of your own home and at a pace that suits you. – Very affordable as well
We actually talk alot about this in the first module of our e-Coaching Program.
