Answers to “Where to Find CF+ Deals”

Speaking as a complete novice here but could someone elaborate on that?

I would guess that "rental income + capital growth" is the tripple bottom line.
So if you're getting 20% yeild by rent (somehow) why would you care if your growth is negligable?

Also I have heard some quality anecdotal advice that rent doesn't depend on the capital value, but more importantly the "ability for the tenant to pay rent" or something like that. Yeah I was like whaaaaaat when I heard it too.

Anyway in other words the buying market is somewhat differnet to the rental market. Even though related they seem a bit distant when trying to work out a corelation and future predictions… Yes/No?

Whilst considering the growth potential of an investment is of course important. I think you miss the more important point here.

Building a successful property portfolio is more about the ‘balance’ of cash flow to stay solvent, and the growth potential of the portfolio.

The way we do this, is to build what we call a ‘cash flow base’ first. These properties are bought pretty much for there ability to generate a positive cash flow surplus. Of course we endevour to create an instant capital gain with each and every purchase, by buying below the true market value. This locks in a capital gain from day 1, and gives us an extra safety margin as well. So for the cash flow base properties, we get that cash flow surplus, plus an instant equity gain at purchase (around 20%) which also enables us to recycle our deposit out, by re-drawing against the higher valuation (so 100% financing the property) and re-using our initial deposit again and again to purchase subsequent properties.

Once we have built a ‘cash flow base’ of properties, all producing a positive cash flow surplus, we can then go out and target properties that are better located to return us a higher rate of capital growth. Of course these types of properties don’t return as higher yields, so normally end up running at a cash flow deficit and costing us money each month. However the surplus from our ‘cash flow base’ will take care of the cash shortfall on the high capital growth properties.

Its all about the balance of the cash flow and the capital growth. We see so many people that get this so wrong, they go out and buy the high capital growth, low yielding properties first, and due to their surplus personal income being used up to service 1-2 properties like this, they are no longer able to qualify for mortgage finance, and hence their property portfolio has come to a screaming holt! Or due to their very stressed debt service position they are unable to hold these properties long enough to realise any capital growth anyway.

By using our ‘cash flow base’ investing strategy and keeping a check of the balance of cash flow and growth, and keeping a close eye on the portfolios overall debt service ratio, you never run out of borrowing power to keep building the portfolio, and you are in a much stronger cash flow position than doing it any other way.

Von Krum

There is a clear correlation between commercial property return and capital value. ie. the yield determines the value. No tenant and the value drops. Just as with equities, there are growth stocks and other stocks which are purchased for yield or income.

Most properties fall into one category or the other. With reduced prospects for capital appreciation over the next few years, it makes sense to target high yielding property or to 'manufacture' growth through careful renovation projects.

The danger with the Aussie DIY culture is that everyone thinks they can add value through renovating themselves, and Fixer-upper properties are selling at inflated values. Personally I am also over renovating myself and recommend using professionals.

In my opinion, there is not a clear correlation between purchase price and rental return generally. (Residential).
As discussed, this can be different with blocks of units. But I'm talking about houses/units here.
And I'm not talking about specialised areas eg mining towns. where there is a definite correlation between rents and purchase price.

Purchase price depends on how many buyers there are, in relation to sellers, in a given area.
Obviously more buyers causes prices to go up. This is affected by many different factors, eg employment rates, interest rates, confidence in the economic climate, etc.
The rental price in the same market depends on the rental vacancy rate, and how many investors are buying in that area.
eg an area with lots of rental units, unless it is very popular with tenants, the rents may not increase because there is no shortage of rental properties for tenants. If too many landlords flood that market, they may be competing for tenants.

In difficult economic times (eg recent and continuing) purchase prices do not tend to go up, even if interest rates drop, because the confidence of the buyer is reduced and the seller has to take the price offered, or not sell. However, if less people are buying (including investors) and some investors are concerned their capital growth will not be very good, there may be less properties available to rent. This applies if the investor is negatively gearing, as the only incentive is capital growth, and if that was minimal, why would they bother?
So it is conceivable that prices may go sideways or down, and rents may go up due to shortage of places available to rent.

Great if you're an investor!

But the cycle then changes, as prices to buy are more favourable in comparison to rents for a tenant, and interest rates are dropping, so you get to a point when first home buyers come back into the market en masse. (ie some tenants become first home buyers). So then there are more buyers between investors and first home buyers, and prices for modest homes will gradually rise.
 Investors will not buy if their return reduces (due to higher purchase prices) and unless there is a shortage of rentals, the cost of rent will not increase just for the sake of the investors. 

Suffice to say, there is a relationship between purchase prices and rentals, but it varies depending on where we are in the economic cycle. its more about the demand and supply of houses to buy (for purchase price) and houses to rent (for rental cost.) 

Yes this is I guess the big one. Thanks for your words of wisdom.
And thanks graeme and clint, you've helped me quite a bit.

Thing is with interest rates going the way they are, you're probably better off putting money in the bank than aiming for a +15% yeild on a CF+ IP.

If you still haven't found the "top yeilding suburbs in australia", try google again?

I tend to disagree sorry Von. Its very hard to buy a $50,000 term deposit for a discount, or hard to polish up $50k in the bank and make it worth $60k

Read one of my recent blog posts on the topic of ‘Investing in property vs term deposits’ here http://propertyinvestorcentre.co.nz/blog.php?blog_id=106

There are ways and means of structuring your debt to minimize the interest rate risk Von. We are all about covering off as much risk as possible. Its not so much the interest rate on each loan we worry about, its more important to make sure that the terms of your loans are set so that only a portion of your total debt comes up to the whim of the market at any one time. IE. stagger the fixed term expiry dates of your mortgages.

And we keep an eye on our average interest rate across all of our debt.

Also doing proper financial analysis and forecasting before committing to each property purchase, by allowing contingencys for interest rate rises, and making sure the portfolio as a whole can sustain those. Starting out by purchasing properties with strong positive cash flow yields also helps a great deal.

Want to know where CF+ properties exist?

CAIRNS!
 
I have been doing some research and cairns has properties (1-2 bedroom units) that are CF+ straight out the blocks.
But there are many properties on the market, often cheaper than 2+ years ago and what's not to keep them from falling further…

I am lucky enough to have APM data nation wide and there is one property id like to discuss…

1 Bedroom apartment in cairns suburbs

Heres the price history:
1993: $83,000
2003: $49,000
2004: $87,500
2005: $106,000
Then it went on the market for $130,000 in 2009

Dropped in 2010 then again this year…
On the market for 2 years it finnaly sold private treaty for around $75,000

This has to be the time to buy something right?

My only concern is when it went back to $49k in 2003. Wow that's insane.

If its CF+, great! After you've deducted all your holding costs, rates etc (see above article too.)
If the value did go down (worst case scenario) but your rent return gave you the same CF+, then that's not a tragedy. You are still getting the same CF+ you were happy to buy it with. (Unless you needed to sell for other reasons.)

The trick is, how secure is your rent?
Is your unit likely to be vacant between tenants for a few months, for example?
You can usually rent out a place in a high vacancy area….. but only by dropping the rent to below market.
If you are only 1% CF+, it is a tight margin and your risk is higher, than if you were 4% CF+ and if the rent had to be dropped (I agree, worst case scenario again), maybe you'd still be CF+ 2% and feel safer with that.

Yeah this keeps coming back when doing my research and is probably one of the most important things to consider.

I have been reading one of Margaret Lomas' books and she says:
"Capital gain must take a back seat to cash flow", when buying for CF+.

The abundance of units for sale (potentially turned into rental properties) is concerning, but a stagnation or even deflation in unit prices should be a second priority, according to the expert not me.