Assuming your rental grows by 3% per annum and assuming expenses at 8.5% total per annum.

You get the following over 10 years

10% growth 5% yield
Cash flow: – $55,361
Capital Growth: $318,748
Net Gain: $263,387

5% growth 10% yield
Negative cash flow: $59,277
Capital Growth: $125,778
Net Gain: $185,056

Note if you are in the top tax bracket the -$55,361 in the 10% growth model could be cut in half, and if you get deprecation it could be wiped out all together. If you actually “knew” you would get one or the other the 10% growth model is far superior.

The other thing to keep in mind though is with the 10% cash flow and 5% growth you could actual own an unlimited number of properties, with no serviceability issues, this could far outweigh the growth model if you take advantage and own a much larger number of properties.

Slum Lord

alwayscurious,

I couldn’t possibly service all my loans without refinance. I do have a number of cash + properties, nearly all of which I have now made cash – by refinancing. But I just keep going and going. I have such a huge equity buffer now it doesn’t much matter, at any time I can sell a handful or properties and turn the cash flow around.

Just something to think about (fictitious numbers):

$50,000 of negative cash flow (sounds big)

On a portfolio of $5,000,000 in property

You only need 1% growth per year to refinance and be break even!

If you get 5% growth you have $250,000 in growth – $50,000 (negative cash flow) = $200,000 up.

Of course the banks don’t like this concept so you need to be somewhat creative in your loan applications.

Slumlord

Refinance and use the money to pay the negative cash flow.

Example:

Negative: $500 per month x 12 months = $6000

Refinance: $250,000 (paid) – $350,000 (current value) = $100,000
$100,000 x 80% (loan) = $80,000

Now this will make the property more negative, but you can use an interest offset loan to only draw down as you need. So you should be able to float the negative cash flow for the next 10 years or so.

And if the property doubles in value in 10 years time you are up $350,000.

Also keeping in mind rent should increase so the negative cash flow will reduce over time.

I refinance to float the negative cash flow all the time.

In this example if the property is losing $6000 per year and is worth $350,000 at the moment, it only needs to increase in value by 1.7% per year to be break even. $350,000 x 1.7% = $5950.

If the property value increases by a very mild 4% per year your property value will be going up $14,000 per year compared to your $6,000 in negative cash flow.

Although some people freak out at the idea of refinancing to pay negative cash flow, I find when you really do the numbers it often works out well.

I’m a strong believer in never sell, although I do sell on occasion.

Slum Lord

Niki

If you email me the location, price you paid, how many bed bath (ie 3×1 house, 2×1 unit) for your properties I may be able to buy them all off you, fully covering your original costs inc stamp duty, legal fees etc.

email me: [email protected]

Thanks

SlumLord

If you think the rent is right, switch agents. do it sooner that later. I can’t tell you the number of times I have held on and then finaly swap agents as a last resort and get it rented next day.

Slum Lord

Tycoon,

1. Keep your job, you will need it to get loans.
2. Do a duplex first. You can get normal residential finance, 3 unit site you will need commercial leanding.
3. Just do it. The experience will be worth more than the profit.

Slum Lord

Westen,

Just a note on your comment, your Morwell property had not gone up any more. Dunno if its just that property or not, but I have a house in Morwell and had thought the same, but when it was revalued this month (by the same valuer that valued it 6 months ago) it was up from 120k in January 2004 to 134k in June 2004.

Maybe they had just been conservative on the first valution, not sure. Also the stats in REI Mag show the area up about 19% over the past 12 months, from memory.

Slumlord

Lets stop talking cashflow and start talking rental return. Rent devided by Price of the property. I know there is more to cashflow than that, ie rates, vacany, interest rate on loan, but this at least gives a more subjective starting point.

I have bought houses in VIC in large regional centres with 8% rental return (bought in the last few weeks). Have a mate that has found 10% in small regional vic towns. Stuff still out there. easier to buy now than 3-4 months ago.

Slum Lord

The sad fact is, it is better to switch agents than to expect that complaining to your current agent will generate better results. With the “S” agent I had a house that was vacant for a while and the agent said they had someone looking at my house and another house they have, but they were pushing them towards my house because they didn’t like the other land lord. I would suggest this means if you complain they wont like you and your service will get worse. I will probably move my rentals in the near future.

Slum Lord

fullout,

This company that is letting you down. The agency doesn’t happen to start with an “S” does it?

I have had problems with the “S” franchise in the area.

Slum Lord