Can anybody achieve cashflow positive ?

[jaycee]

Hi, jaycee

I really appreciate critical and analytical thinking, because these are fundamental skills we need to possess before diving into property investment, wrong decisions could cause life time disasters. I am not saying there is anything wrong with Nathan, do not get me wrong. I appreciate people can set real life example for us. Being through some motivational seminar, I have suspicious attitude toward something sounds too good to be true. nice to discuss ideas and thoughts here. very helpful.

Not alone there buddy.. and we often see repeated right here, "if it looks too good to be true, it probably is" also

Often though it's directed to someone who asks somehting like "Hey, this new company, who's not a normal builder, they do the finance and investment management for you too ! are offering these apartments, right in the city, great hey ? with 12% return guaranteed for 5 years ! Man, I don't know but this sound great, don't ya reckon ?!".. sometimes, you don't even get the "if it's sounds too good to be true" reply until they give more details which STILL didn't stack up !

Luckily , with the Nathan's and everyone else, we get to hear what others do and how and you can actually learn something from it.. no one's doing any hard sell here like at those seminars....so we can get to figure out for ourselves how much it suits, after looking into it at our leisure first if we want...

 

[Mom]

The topic is about cashflow but off course property is not only about positive cashflow, there is capital growth that I will need to consider when making purchase decision. I need to have reasons to justify my believe that my chosen property will have a sound capital growth especially if I do start with negative cashflows/negative gearing. Plus other variables such as my budget constraints or the purchase limit I set before looking for property. This 'wisdom' comes after my first 2 ip purchase.... a bit late.

Btw, I admire Nathan's work . I read his posts along with other long timers on this forum with a grain of salt. They don't necessarily fit my situation but they give me fresh ideas and fresh pair of eyes in looking and in dealing with my own situation. Many 'seasoned' investors here, including Nathan are very generous with their tips, advice, experience, success story and pitfalls. All I need to make sure of is that I set my own set of goals/game plans and forget about the Jones's.

 

[Deltaberry]

I disagree.
Many times a property will start out as very small CF.
It certainly doesn't need to take long for this to turn around.
If the property value increases in a short time, of course the gearing will go down, unless you keep accessing the equity.That doesn't make what anyone says "cr@p". Whether an investor decides to keep accessing their equity is a personal choice.
We have lots of properties that are 0-50% geared.

I think you're not following what I'm saying.

Basically all I'm saying is I consider 7% ROE to be decent cashflow for property. So if you want to do 10% gearing, that's fine, as long as the ROE is 7%.

Generally speaking ROE gets higher as D/E gets higher provided your ROA is greater than your cost of debt though... so that's why a low D/E helps facilitate higher ROE if your ROA is lower than 7% (current interest rates) and vice versa.

 

[Belle]

Wow just browsing Nathan’s website. Very inspirational!

Can anyone tell me which Melbourne suburbs would be comparable to Sydney’s west?

Anyone? Would it be like buying in Dandenong, Frankston, Coburg, Werribee type areas in Melbourne?

 

[kathryn d]

I think you're not following what I'm saying.

Basically all I'm saying is I consider 7% ROE to be decent cashflow for property. So if you want to do 10% gearing, that's fine, as long as the ROE is 7%.

Generally speaking ROE gets higher as D/E gets higher provided your ROA is greater than your cost of debt though... so that's why a low D/E helps facilitate higher ROE if your ROA is lower than 7% (current interest rates) and vice versa.

I must be having a blonde moment I have no idea what you just said.

 

[Ridin-High]

I must be having a blonde moment I have no idea what you just said.

that makes the two of us

 

[Belle]

^ Leverage = ^ Risk = ^ Return on Equity

The more you leverage the greater the risk and the higher your return on equity should be. Equity being your deposit or the actual cash you put into the investment.

Low risk = low return. High risk = high return.

 

[Deltaberry]

I must be having a blonde moment I have no idea what you just said.

All I'm trying to say is that the important criteria is ROE, and not gearing (while you seem to think I am having a go at people with low gearing).

Low gearing is fine as long as your ROE is high... if not, it's a dud of an investment and there's no two ways about it at least as far as cashflows are concerned.

It is not, as you said, an issue about personal preference. Everyone's objective should be to maximise ROE... Honestly if you have a low ROE @ low gearing, the fact of the matter is your ROE will be even lower at higher gearings. All it means is that it's not a very strong investment. Hopefully you get it, if not prob not much more for me to say as I've tried my best to simplify it...

 

[Deltaberry]

^ Leverage = ^ Risk = ^ Return on Equity

The more you leverage the greater the risk and the higher your return on equity should be. Equity being your deposit or the actual cash you put into the investment.

Low risk = low return. High risk = high return.

Only if your return on asset is greater than your cost of leverage. Otherwise, the higher the leverage, the lower the return on equity.

 

[BayView]

Anyone? Would it be like buying in Dandenong, Frankston, Coburg, Werribee type areas in Melbourne?

I don't know what constitutes "Sydney's West". I am guessing it is a "less desirable" type of suburb?

By less desirable, I mean it is maybe Housing Commission, lower income, maybe higher crime rate type areas?

Interestingly, my SIL bought her house off one of her friends in "The Pines" back in 2002. The Pines has always been viewed as a scuzzville area - full of bogans, hoons and losers and crime and front yards full of car wrecks that are at some stage of a rebuild and rusting away..

It still is (my SIL excluded).

Her house cost $92k, and is now worth about $250k, and she is about to finalise the sub-div of her block to sell the back yard for about $130k.

Noone could have predicted this growth; although looking back you can see why - close to lots of good amentities and transport, the beach, decent schools and cheap. It had to go up sooner or later.

So, there's a clue; look for similar areas that might not be in favour right now and look beneath the surface.

 

[BayView]

that makes the two of us

I think what he is trying to say is; whatever dollar amount you put into the property, the return on that money should be 7%.

This can be a combination of cap growth and nett rent return, or simply nett rent return should it be cfp (not easy to do).

So, say you put $40k of cash into the property to purchase, you should be getting a nett return of $2800 per year through growth and nett rent.

Is that what you mean DB?

 

[kathryn d]

I think what he is trying to say is; whatever dollar amount you put into the property, the return on that money should be 7%.

This can be a combination of cap growth and nett rent return, or simply nett rent return should it be cfp (not easy to do).

So, say you put $40k of cash into the property to purchase, you should be getting a nett return of $2800 per year through growth and nett rent.

Is that what you mean DB?

Thank you..I understand this.

 

[Belle]

Only if your return on asset is greater than your cost of leverage. Otherwise, the higher the leverage, the lower the return on equity.

Oh ok! I thought you meant your ROE = CF + CG. But you mean just CF? Net CF?

What is your strategy? How do you manage to find properties with such high cash flow? What sort of ROA do you look for?

When you say people who aren't geared at all should earn 7% ROE. What if they were earning 5% in CF but had an expectation that the capital growth of their property would be 7% per year? That would still be better than a term deposit? Or is it too much risk for return?

 

[Deltaberry]

I think what he is trying to say is; whatever dollar amount you put into the property, the return on that money should be 7%.

This can be a combination of cap growth and nett rent return, or simply nett rent return should it be cfp (not easy to do).

So, say you put $40k of cash into the property to purchase, you should be getting a nett return of $2800 per year through growth and nett rent.

Is that what you mean DB?

Yep.

However I was thinking of generating the 7% off just cashflow, not including cap growth. Not saying this is my strategy, but if your focus is on cashflow (as this thread is about), I'd want a 7% ROE to match my term deposit.

 

[Deltaberry]

Oh ok! I thought you meant your ROE = CF + CG. But you mean just CF? Net CF?

What is your strategy? How do you manage to find properties with such high cash flow? What sort of ROA do you look for?

When you say people who aren't geared at all should earn 7% ROE. What if they were earning 5% in CF but had an expectation that the capital growth of their property would be 7% per year? That would still be better than a term deposit? Or is it too much risk for return?

Well the reason I was only talking about cashflow was because this is what this thread was about.

But perhaps more importantly, cashflow has certainty. Not sure if you can bank on cap growth to help you deliver your ROE, because as much as capital value can go up, it can also go down...

 

[BayView]

Yep.

However I was thinking of generating the 7% off just cashflow, not including cap growth. Not saying this is my strategy, but if your focus is on cashflow (as this thread is about), I'd want a 7% ROE to match my term deposit.

The prob with the TD is the cash is always devaluing.

I look at what my investment dollar would return me after ai've kept it for say; 5 years and sold it.

The total amount of nett cashflow and cap growth would be the real return I think - much like if you took the cash and interest after your TD matured.

The beauty of property is you can buy one and put in no cash at all - all equity, and sell it for a tidy profit in 5 years. What is the ROI then?

 

[ericproperty]

Just provide a topic to discuss:


If I borrow 100%, by using equity, $300,000 for property. with interest rate of 7% (current rate), in order to be neutrally geared, the property has to be rented at $400/week. so where could we find property at price of $300,000, renting out for $400/week. this even does not include council rate, water, insurance, agent commission.

 

[Wunderbar]

The only way to achieve that is to rent out room by room

 

[ashalim]

How about mining towns?

 

[BuildingBlocks]

The only way to achieve that is to rent out room by room

Rubbish.

7% return, before paying other expenses such as council rates and property mgmt fees, can be found in many places. Look at the data tables with rental returns in the back of a copy of Australian Property Investor magazine for an idea on the areas where these can be found.

You will probably need maybe 9% to start seeing positive flow though after expenses, but will depend on depreciation etc.