THE INVESTOR > PROPERTY
GO WITH THE FLOW – PAM WALKLEY
Investing in real estate to gain cash flow guarantees involves
comprehensive research.Some financial advisers recommend investing in real estate for cashflow in
preference to capital growth, yet one leading property professional says
it’s plain bad strategy.“Positive cashflow is gaining popularity because of the perceived benefits
associated with an immediate income, the fear of debt that dogs many
investors, and because we live in an era of instant gratification,” says
Monique Wakelin, a director of Wakelin Property Consultants.A firm believer in good asset selection being the key driver in achieving
long-term wealth, she says: “The positive cashflow approach to investing in
residential property reduces asset selection to a one-dimensional
mathematical equation.”But it’s not that cut and dried, according to a book released this month,
From 0 to 130 properties in 3.5 years, by Melbourne-based accountant Steve
McNight. As its title suggests, the book outlines McNight’s experience of
buying 130 properties since May 1999, a portfolio that delivers an income
of more than $200,000 each year.The first step to selecting cashflow positive properties recommended by
McNight is a mathematical one, which he calls the “11-second solution”.
Under this simple test, you divide a property’s weekly rental income by two
and multiply the result by 1000. If this figure is more than the asking
price for the property, it is likely to be cashflow positive. For example,
if the rental is $200 the calculation ($200 divided by two multiplied by
1000) gives a figure of $100,000. If the asking price is less than that,
the property is worth further investigation.Not surprisingly, McNight and his business partner, tax expert Dave
Bradley, found no properties that passed the test in the Melbourne
metropolitan area. McNight turned his attention to country areas and
Ballarat, about an hour’s drive west of Melbourne, came on his radar.Certainly, he found properties that passed his test, but before he put down
his money, he researched many other factors about the former gold-rush
town.The main ones were future population trends, transport infrastructure,
unemployment levels, average household incomes and the nature of housing
occupancy in the area. When these came up trumps, he visited the town and
bought his first property for $44,000.The partners’ portfolio is mainly in major regional areas where rental
yields are high, including Victoria’s Latrobe Valley, Albury in NSW,
Nambour on Queensland’s Sunshine Coast and Tasmania. “Cashflow, cashflow,
cashflow not growth, growth, growth is my investing mantra,” McNight
says.Wakelin reckons it should be the opposite. “Immediate positive cashflow may
deliver a short-term income benefit, but as the years go by, substantial
after-tax capital injections are required to maintain rental appeal, making
such a property more and more of a liability,” she says.“By contrast, properties in prime locations with higher capital growth do
not require as much money spent on them. This is because rental values and
demand are underpinned by the property’s inherent scarcity and ongoing
capital growth, which stems from the high land value, not investor-driven
expenditure.”Using an example of a $300,000 property purchase giving a total return of
15%, Wakelin also uses maths to show that not all returns are created
equal. A $300,000 house with 10% capital growth a year and 5% rental return
is much more valuable, even after only five years, than one which has a 10%
rental return and 5% capital growth, as the table shows.I respect both views and both people (Steve & Monique).
So why choose? Investors can have a combination of positive cash flow and capital growth properties.
“Everything in Moderation”
I have never found an exception to this rule. One sided investment strategies (i.e. totally positive cash flow) are a lot weaker than a diversified investment strategies (in my opinion). Why put bet all your resources into one strategy? Steve doesn’t! He earns business income (books, website, etc.) and property income.
My plan is to have a combination of:
– business income.
– Positive cash flow.
– Capital growth properties.
– Commercial properties.Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auit’s the old argument isn’t it? cg v yield… yield v cg… blah blah blah, horses for courses, it’s what you can afford, and what gets you to where you want to go…
from what I’ve heard from Ms Wakelin, the only IPs worth buying are the ones in inner city Bris, Syd and Melb… I can’t afford to do that just at the minute, as I’m sure a lot of people can’t, and if I could, I don’t know that I’d be willing to load up with massive loans when so many places are sitting vacant… I’d much rather look for regional areas where the prices are cheaper, yields are higher and rental vacancies are lower… sure, they mightn’t show the cg of the cities, but over time, if they’re well selected in the right places, they’ll chug along nicely.
In time I’ll get some more of the other types (I picked high growth first off, now CF+)… as Stuart says, diversification is a good option, and one I’m already following.
my two cents…
cheers
ris there a link?
would like to view the table. i made my own and got a different result.
this might come out as a mess, worth a shot. it is a table comparing negative geared (capital growth) vs positive geared (yield). hmm, just previewed it, yuk. ok, end result is that on a $100k investment after 10 yrs, the yield based investment comes out $75k in front all things considered.
Condition Positive Geared Negative Geared
Income = $35,000 $35,000 $35,000
Rental income $10,000 $6,500
Interest expense -$7,500 -$7,500
Depreciation deductions -$0 -$4,000
Assessable income $37,250 $30,000
Tax payable $7,555 $5,380
Net Proceeds $29,695 $24,620
Difference $5,075
Property Sale after 10 years @ 10% capital growth $260,000 $260,000
Equity $160,000 $160,000
Savings $50,750 $0
Return on savings over 10 years $15,492
Net worth $226,179 $160,000
Capital gains tax liability on sale $260,000 – $180,000= $160,000 x 0.5
= $80,000 $260,000 – ($100,000 – 10 x $4,000)
= $200,000 x 0.5
= $100,000
Capital gains tax to pay $34,932 $44,332
New net worth $191,247 $115,668
Difference $75,579As can be seen, the positive geared scenario is better at all stages. In fact, even if the positive geared property grows in value to only $175,000 over 10 years, (5.75% annual growth) you still come out in front. Also, it’s not necessary to fund a shortfall over the 10-year period, allowing for a less stressful life and flexibility in career.
well done crashy
crashy,
I don’t understand your figures, it appears you’ve given both the +ve and -ve properties the same growth figure. Doesn’t this defeat the purpose of the exercise?
Rod.
Good work Crashy, hard to read but agree with your end result!
Also re the diversify philosophy, I’m not so sure.
Ever read any Warren Buffet books? He calls the Wall Street mantra of ‘risk reduction through diversify’ lazy and plain crazy. He’s more along the ‘pick your investment strengths and work it work it work it’ line and he’s the second richest man in the world (and greatest stockmarket investor ever) so he’s got cred. Also Steve came across a bit like that in his book too. Being thinly spread to try to capture all markets seems a bit naf to me, you simply end up level to the crowd – that isn’t going to get you ahead in any race to financial freedom. Mind you it’s better than doing nothing.
Now that I’ve taken nearly every side to this, I think I should stop. [
]Happy investing!
MelHi All
I dont think I can agree that Warren Buffet’s strategy can be safely used in property. Equities are much more liquid and thus one can move completely out of an investment in hours. When you buy into property you are generally stuck there for a long time. That means that to put all your eggs in one basket is a lot more risky. To diversify not only between yield and capital growth properties but also other assets is more prudent. Stuart seems to have the right idea.
my 2c worth!I think Warren’s strategy is actually 70% buy and hold, 30% arbitrage, and by buy and hold I mean he generally buys into about 20%+ of companies he believes in so that he has a seat on the board, and he’s held some of the same shares for 50+ years (he’s in his 70’s now, and interestingly backing Arnie’s bid for Senator of California – shame Arnie’s not eligible for President due to not being US born, not yet anyway)
I digress – what I mean is I think there’s lots of merit in being a specialist in up to three narrowly defined investment/income producing methods (ie managed funds DON’T count) than a player in several.
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MelHi Melanie
I am certainly not going to disagree with WB.
Isn’t “three narrowly defined investment/income producing methods” diversification? I think it is.
I agree in part – don’t spead yourself too thinly. However, I strong disagree with pinning your hopes on one stratgy. In my view that is not prudent.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auI agree with Stu’s strategy simply because mine is very similar. The only difference is that I also invest in shares, which from reading the forum, is also employed by many others. However, I would not be surprised if Stu has a share portfolio as well.
If Steve & Monique making money from property why on earth would anyone care. Just follow what they do and make money as well. If you don’t like steve way of making money then try the other like Monique.
Kind regards
Chandara
[Keep going, you’re nearly reach the end of financial freedom]Sorry, crashy,
I’ve got to go with RodC on this one. It is pointless to use the same growth figures for +ve yield vs -ve yield property. Unless the -ve yield is just a “dog”, then the main reason for -ve yield is a corresponding +ve growth curve.
Now, if you were to use 10% yield with 5% growth, and compare it to 5% yield with 10% growth, then I’d say “Yeah, OK” to your results
Benny
>Also re the diversify philosophy, I’m not so sure.
I totally agree, Robert Kiyosaki calls it ‘de-worsify’.!!!
it reminds me of those people who go to the casino and spread 20 chips all over the roulette table, when only one number can come up….i so don’t get that>Ever read any Warren Buffet books? He calls the Wall Street >mantra of ‘risk reduction through diversify’ lazy and plain >crazy. He’s more along the ‘pick your investment strengths >and work it work it work it’
Yep – i think so too.
I think I’m going to stick to my strategy of only buying income-producing assets that themselves go up in value, and that are tangible with an intrinsic value (rather than ledger entries on a computer somewhere.) Assets that can be improved in many creative ways. Assets that will always be in demand, due to an every growing user-base…as far as monique goes,
“perceived benefits
associated with an immediate income,”oh duh, doesn’t she realise that a dollar now is worth more than a dollar in the future? Especially if you put it to work straight away at X percent? The power of compounding interest, etc….
“Immediate positive cashflow may
deliver a short-term income benefit, but as the years go by,….”she doesn’t take into account that rents are indexed for inflation, the return gets better –
“substantial
after-tax capital injections are required to maintain rental appeal, making
such a property more and more of a liability,”well if you bought a dog of a property without a builder’s report you could get some nasty expensive surprises down the track, yeh…but there is such a thing as a ‘low maintenance unit’ made of stuff that lasts for donkey’s years – and a coat of paint doesn’t cost that much every 3 years or so
“By contrast, properties in prime locations with higher capital growth do not require as much money spent on them.”
I disagree
What I did to my IPs would have cost twice the price if I’d done it on my inner city Sydney house. For the identical same thing.
Make that four times the price in real terms, because it’s a different market with higher expectations as to quality of decor, fittings, etci.e. it wouldn’t be a good idea to put chinese hat lampshades in a Sydney house if you wanted to get good rent for it
>This is because rental values and
>demand are underpinned by the property’s inherent scarcity >and ongoing
>capital growth, which stems from the high land value, not >investor-driven expenditure.”disagree, renters don’t care about the land value as such – yeah, they want to be in paddington, but not in a scummy house
oh and PS, monique wakelin of wakelin property consultants would be happy to advise you (using the above arguments) as to what *would* be a ‘good investment’, while getting a nice kick-back from developers in the process of signing you up into an (probably) off the plan deal
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