hi all, i’ve been reading here for a little while but this my first post.
i see many people sudgesting that cf+ properties are hard to find, and others saying they’re out there. there is one observation i’d like to add to the discussion and maybe those who are more experienced than i can confirm or refute this. from most posts on the topic it would seem that people determine a “cf+ property” as being one where the current tenant pays enough rent to beat the “11 second” test.
in my mind that means you have a cf+ tenant not a cf+ property. if you pay market value for the property and don’t value add then whether the property is cf+ depends on the yield in that area. if you have a cf+ tenant you should be very careful not to loose that tenant.
Craig Sillitoe
Hi Craig,
In a sense you are correct – however the key issue is to find a cashflow property (if that is your preferred investment strategy) where the tenant is paying market rent. This means that should this particular tenant leave then you should still be able to find another tenant paying the same rent (or better) to replace them thus helping to avoid the scenario you alluded to.
It is important that your research measure the validity of the stated or projected rent.
Investors have been ‘burn’t’ making investment decisions to buy investment properties based on artificial rent being received or projected to be received at the time the sale was made. In more extreme cases some dodgy back door deals have been made to paint a better picture in order to move a property.
Note this issue can be present in any property purchase and is not solely the domain of cf+ investments.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958thanks derek, what you’ve said is pretty much where i was headed. cash flow status of an uncompleted deal needs to be judged based on the yield prevalant in an area not by the rent the tenant pays (if onen inherits a well paying tenant then its a bonus).
this leads me to the conclussion that (for cf+ investing) its all about the valuation (after any value adding). so the next question is what is the best way to value a property for cf+ investing? is it using yield, comparitives or median values? in my mind dividing the likely rent by the current median yield would be most accurate because median values and comparitives are more in line with the home buyer market than the rent market.
while i’m on the topic can i assume that in the current market an area with a ten year yield thats way above its current yield is therefore one that has been over bought (in investment terms), regardless of how high the yield still is? and could using yield be a way of judging when the tide is turning (as in yield curve)?
Craig Sillitoe
Hi there,
I may have missed something. But CF+ to me means that the regular income less all the regular expenses must be greater than 0.In terms of how great it is, I just divide the figure above calculated for 12 months over the total cost to purchase.
eg Total purchase costs, includes deposit = 100,000.
Total income = 10,000
Total expenses (Rates, interest, maintenance, etc) = 5,000So this is a CF+ of $5000 pa, which means its yield is 5%.
Mat
Hi Craig,
There are a few points needed here.
While rental yields for an area can be a useful guide this does need to tempered with the fact that individual properties can have a rent outside the norm. This is where solely using median prices and rents can be somewhat problematic.
The key question that an investor needs to answer is whether or not the rent being received (or projected) is realistic. This is where conversations with REA who have no vested interest in the sale can be useful – this is part of your research process.
In essence the rental return is determined by the relationship between rent and purchase price. Around 10% seems to be the cashflow positive point.
Both of these items can be determined by comparing past sales in the area to determine fair market value. An investigation of rent rolls etc to determine fair market rent.
Steve Navra uses a rental reality formula to determine reasonable buying price. Steve’s formula is, from memory, based on five year rental yields. He uses this as a starting point when looking at purchasing prices and determining his negotiating position.
Not sure if that helps or not but…..
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958Thank you Derek it does help. I should be more clear because I was also refering to valuation using yields over a period of time for the suburb, rather than the yield on the investment property. In any case it sounds like we agree that it is more important to be happy with ones valuation and rental expectations, than to get a client that is paying big rent.
mathewc73, I agree that what you’ve described is the general definition of a net cf+ prop. What I’m sudgesting is an alternative definition that takes into account the risk that the current tenant may be overpaying, and that if they leave we may no longer have a cf+ investment.
Craig Sillitoe
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