Another dumb question from Harriet

[Harriet]

Believe me, I have loads of them. signing up to this board has made me realise how little I know! It's made me more nervous than ever.

But anyway . . . here's my question:

What is actually meant by "positive cash flow" and "negative cash flow"? Does postive cash flow mean that once you make loan repayments and pay all other expenses on your IP (rates, agent fees etc etc) that you still end up with money in your pocket?

If yes, how on earth do people manage this - especially starting out with a first IP? Unless you have a heap of money lying around for a big deposit, or get an amazing bargain then charge very high rent - then i don't see how it's possible.

I have been advised ONLY to buy a cash-flow-positive property . . . but I don't see how I could do this for years. I want to get my IP portfolio going now!

Yours in confusion, harriet

 

[peelsman]

Harriet

not a dumb question at all but try using the search function at the top of the forum and inserting the string "positive cash flow" or "negative gearing" and you will be astounded at the results returned.

cheers
HT

my first post on the new forum!!!

 

[Kevmeister]

It's possible to find +ve cashflow property, just rarely in metro suburbia. A work colleague of mine has one property in Woodbridge QLD (I think that's spelling) earning 15% gross Yield.

That more than covers the cost of bank interest on the property, property management fees, rates, body corporate, insurance etc. It puts money in his pocket every month (except it's vacant right at this minute).

The "rule of thumb", though not always correct, is that high-Yield properties will have poor capital growth, and vice-versa. So when someone says "ONLY buy +ve cashflow" properties you really want them to explain why they have this opinion, so you can make up your own mind.

 

[Luke]

A quickie summary

Here's a quick Summary

Positively Geared:
Rent > interest + all other costs (rates, insurance, PropMgmt etc)

Positive Cashflow
Rent + Depreciation > interest & all other costs

Positive means you get more out than you pay in.
Negative versions are the same as above, but the > changes to <
In other words, every week/month/year you hold the property you pay in more in costs than you get back in rent or tax deductions.

Hope that helps,
Luke

 

[see_change]

Kev

It's Woodridge , which is part of Logan ( postcodes 4114, and 4127 ) , which has been the subject of much debate over the last year.

You can probably still pick up cash flow positive properties up there, but you would have to look harder than before . We bought our last of seven in Oct last year , and it's moved about 30 % cap growth since then.

Most of the cash flow positive buys I've heard of recently are in regional areas.

see change

 

[brains]

Harriet,

Or you can look at it this way:

Cheap properties are available mostly in cities outside of major cities, eg: regional cities, but sometimes on the outskirts of major cities.

The properties are cheap in these areas because of lack of capital growth.

If you buy these cheaper properties you will usually have the rent covering interest payments and expenses (positive cashflow).

But you will not get a lot of capital. growth and thats where the moneys made in property investing. (anticipating correction )

Some people are willing to negative gear (or negative cashflow) for the benefit of high cap. growth. Its usually a riskier strategy and beneficial to high salary earners for the tax benefits.

The holy grail (in my opinion ) is positive gear AND good capital growth. I spend too much time researching to find this (with a bit of success so far).


Good Luck

 

[see_change]

Harriet , today Brains is not using his ...

The property cycle is a cycle . There are times during the cycle where cash flow properties go up in price.

I bought seven IP's in logan for around 70 K each . They are now worth over 100k each . I expect that their price will continue to increase until a point where they will stop , and in a few years time they will be less than they were at the peak.

Ten years ago they were selling for 80 K , In the cycle before that they sold for 40 K and in the cycle before that they sold for 20 K ( I have seen sales data going back for the last thirty year for every street that I have bought a property in in logan ) and with each cycle properties have roughly doubled from the previous peak.

If you 'd bought at the top of the cycle ten years ago you'd be pretty dissolusioned as you would only have been able to get you money back in the last few months

BUT if you'd had the forsight to buy in logan two years ago ( when you could buy a typical property for 50-60 K ) , in the last two years you would have doubled your money and be returning 15 % gross rent .

The Line that Cash Flow Properties don't have good Cap growth is B*** S****. You just have to pick you timing , but if you are serious about property investing , that's not hard .

I will buy "Cash Flow positive" property when the time is right and in some areas it is probably still OK ( I'm not looking at the moment so I'm not certain ) . But there will be times in the market when it will not be the best thing or that practical .

Mt Druitt which is a similar area in sydney has already started to pull back from it's highs ( IMHO ) and it may be a long time before we see growth there.

People who cling to one view to the exclusion of other views are only limiting them selves.

see change

 

[brains]

SeeChange,

My post was correct in a general sense, remember Harriet hasnt even bought an IP yet, so i was keeping it simple.

I did the same thing as you but in Caboolture/Morayfield but it doesnt apply everywhere hence the general nature of my post.

I did state tho that you could find positive cashflow and growth if you looked hard enough or lucky enough to time the market.

ps: I wouldnt buy an IP in the Mt Druitt area, problems with tenants and low or no growth there for a long time (till the next cycle).

I wouldnt hold them in Logan for too long either.

 

[Captain_Picard]

Hi again Harriet!

I guess it was me who advised you, and opened this, well not can of worms, but friendly debate. The others pretty much explained it all. Just a word of advice though - dont go by yields, but cash on cash return. For example, a good question to ask is not

"What is the yield?"

but

"If I put $10,000 into this property, how much money will I receive from my investment each month? (not including depreciation!)

You answered your own question before - a postive cash flow property is a property that still puts money in your pocket even after ALL expenses (interest, rates, body corporate, etc) have been taken into account. And yes, I would agree that these properties are getting harder and harder to find, and are usually on the outskirts of cities,( like Woodridge on the outskirts of Brisbane, where I live) or in smaller towns. Unfortunately, I have to say in a nutshell that now is not the best time to buy property. The best time to buy is when the market is in a deep slump, and everyone is getting out. The reason for this is that during this time you get lots of bargains. Everyone is panicking and selling, and you can get property for insane prices (like in the early 1990's). Its really strange - at the supermarket, when they have a big sale on, everyone rushes in and buys all they can. When the property market has a big sale on (a market slump) everyone runs away. When the supermarket raises its prices, people shop elsewhere because they dont want to pay too much. When the property market raises its prices, (like the ridiculously high market we have now) everyone starts buying.

I must be one of the few people who are actively looking forward to the huge bursting of the bubble of the property market that will come sooner or later. In the meantime, if you dont want to wait until then, search out the small, positive cash flow deals that can still be found in the lower class areas of the major cities, or in regional towns. I know it is hard to resist jumping on the bandwagon like everyone else, but I wouldn't recommend it. Also, once again, read "Real Estate Riches" by Dolf De Roos, and "Rich Dad, Poor Dad" by Robert Kiyosaki.

Good luck

 

[Fester]

Hi Harriet. I have some "positive cashflow" properties but they are "negatively geared". The rent plus taxation deductions is greater than the outgoings. The taxation deductions include interest on the loans, council rates, body corporate fees, insurance, property agents fees, quantity surveyors fees, repairs and maintenance, depreciation etc. As an example, one of my properties: rent income = $11,000 interest on the loan = $13,000 my claimable expenses were $18,000. On my tax rate of 48.5% I can claim $8730 as a tax deduction. My tax deduction plus my rental income minus my outgoings (rates, interest etc) leaves me with about $20 per week in my pocket. Then of course there is "positive gearing" where you are not relying on taxation deductions to make your positive cashflow.

 

[gailh]

Hi Harriet,

I think everyone has just about covered it. But I would say, beware the people who say 'only every buy cashflow positive'. Another cliche is 'only buy if it makes financial sense NOW'.

Many of these mantras are derived from gurus in the US, where the benefits of negative gearing are not as pronounced. I certainly wouldn't buy a negatively geared property in a hot or overpriced market. But the truth is, many people in this country have made significant sums of money through negatively geared property - that is a reality. It does have its risks, but it is beyond me how anyone can say 'only ever buy cash flow positive'. I know some very wealthy people who would beg to differ. Horses for courses.

Frankly, my belief is that negatively geared properties in high growth areas bought at the right time in the cycle are more likely to make you wealthy, but it is not a strategy that everyone can afford due to the weekly drain on your income.

Anyone, good luck Harriet.

Gail

 

[geoffw]

There are certainly ways that cashflow can be boosted- perhaps enough to turn a negative geared property into a postive geared one.

A run down property can be renovated. I'm doing that on a minor scale now. Repaint, refloor, new curtains- about $6K spent to increase the rent $30pw- that's about a 25% ROI. Many people in this forum have done a lot better than that. This can also boost the value of the property- it will then give you more borrowing capacity for the next one.

A garage of carport can be added. Perhaps it's just enough to clean up the outside .

Multiple income stream properties can be good. You might be able to convert a garage to a granny flat. Perhaps a large house can be split- I've seen a 4BR flat turned into 2 2br flats to give an excellent return. Evern just look for properties with existing granny flats.

Just a few ideas.

 

[Harriet]

Hooly dooly. What a lot of input and, er, spirited debate. Thanks everyone.

Re: whether to buy a positively or negatively geared property. Well, a couple of responses - but please remember, I am a novice. I got into this whole IP thing because I read Jan's books, and her strategy just made perfect sense to me - i.e. buy IPs, negatively gear them (if that's what's needed), then hang on to 'em for the long term. So I am not scared by the notion of negatively gearing, though - of course - I'd love to be making money instantly from my IPs. Bottom line: I am happy to negatively gear, if that's what it takes.

Re: timing. Again, speaking as a complete, blithering novice - I am not too concerned about the timing, either. Again, I plan to hold onto these properties long-term. So while buying at the right time in the cycle is ideal, I think I'd rather just wade in there and get started than wait around for the bubble to burst. Besides, I don't know enough about cycles etc. I fear I'd tie myself in knots trying to work it all out.

Anyway, that's my two cents so far.

Harriet.

 

[see_change]

Harriet

That , er , sprited debate was mild...

Remember that what you buy will be with you for a while.

There is another falicy that good properties always go up in value. Again this can be "........... ".

Most investment properties are bought at the peak of the cycle.

Imagine buying your negatively geared property at the peak of the cycle with the expectation that the capital growth will make up for this. After a a couple / few years of paying out to hold it , you find it is worth less than when you bought it. Sure in ten years time it will be worth a lot more but it's not necessarily the most encouraging way to start..

BUT .. what if you lose your job or suffer an injury and can't work. One very active member was faced with this situation and found that his negatively geared properties were a serious liability.

Now I'm not saying that don't buy negatively geared property.

If you're not sure what to do , spend some time reading / looking before you buy. It's not that complicated , and once you get past the egotistical opinions of the various members on the forum there are some basic rules about property investing.

I was lucky when I started looking about two years ago as there were several active memebers ( esp TW and GA ) who knew what they were doing , who were prepared to challange the standard lines that are trotted out add nausea, and make me think about what I was doing, and question every assumption I made. ( well if I didn't question it they did ) . They also didn't assume that as a Newbie I wanted to " Keep it Simple ".

The more effort you put in , the better your returns will be.

I spent 1 year reading and looking ( I was also busy doing other things so this delayed me ) before I bought my first IP. Admittedly I had done a subdivision but that was more by accident than by planned intent. I'm glad I waited that time because by the time I started buying ,

I KNEW what I WAS DOING , and I KNEW what the MARKET was LIKELY to do

So far every thing that I thought would happen , has happened.

Buying a property is different to shares. If you buy a dud share it's simple to sell it again , but if you buy a dud IP ( and they are out there) it's a lot more expensive and frustrating to get out of.

See change

 

[geoffw]

Harriet,

Good on you!

You're far better to go for it, than to wait patiently for the next cycle- which you will only recognise when it's passed anyway.

I'd just suggest that you do your research carefully. Spend time knowing what the properties are in your local (or chosen) area. Look out for properties which can be improved (WITHOUT structural improvements). Look out for properties which have, or can have, another income stream.

There's lots of opportunities out there.

By all means, don't do so much work that you never end up buying anything.

But if you can spend the time to do the research, it can be worth the dividends.

 

[Crystal]

Hi Harriet,
You've read Jan's books - they describe basic the strategy very well. Follow Jan's advice for your first IP and then refine your investment tactics as you gain experience and knowledge.
Good Luck,
Crystal