Feedback with how I find cashflow positive property

[Ryan Cortez]

Advice on how I find cashflow positive property

Hi Everyone,

Learning so much from everyone posts.
I'm new to the forum and I?m interested in your feedback on my plans. I am very new to property investing, having only read some books and the internet.

I plan to buy and hold. While I save, I?m trying to refine how I research for property and need your feedback. This is what I am doing to research:

• 
  Look at suburbs with median price range within 10% above and below my budget - has to be mortgage belt suburbs ? currently can only afford to loan around $300k
  Look at 10 year Growth > 6% (I?d be happy to see my property double in 12 years)
  Rental yield higher > 5.2%
  Vacancy rates below 3%
  Estimate cashflow (Preferably CF+ or Neutral)

I will then research the council plans, infrastructure, demographics, employment and income, owner occupier %, renters %, opinions on good and bad areas in suburb etc.

If I like what I see I will then go and look for the type of property I think most suits that suburbs for property not on a main road, close to schools, shops, PT etc, find comparable sales data and look to buy below market value.

Should I consider anything else when researching?

What?s the best way to look at 12month/3 yrs/ 5 yrs Growth data if my time frame is longer than 10 years?

Would it be better to consider 5yr Growth instead of 10yr Growth?

Since CF+ property is so hard to find, is it worth considering property with a negative cashflow (if I think the cost is within my means)?

Thanks for your help guys!

 

[vaughan]

Hello and welcome.

All that criteria -- growth >6%, yield > 5.2%, vacancy <3%, buy below market value -- will likely mean you don't buy anything. Very few properties will match.

Growth figures show what has happened in the *past* and is not always a good indicator of future performance. Property markets often have a spurt of hight growth, then a period of flat or negative, then growth again. If you find an area that has just enjoyed a period of growth then you could be buying at the top of the market. (I'm thinking 2770 here.)

Positive cash flow properties are usually the result of an astute investor seeing opportunity in a poor performing property to renovate or develop it to increase the capital value and improve the rent. Candidate properties usually look sad because they need work -- that's why they can be bought below "market value". The harder and more expensive something is to do, the more value it is likely to add. Increasing the number of bedrooms in a house adds a lot of value and rent. Kitchen and bathroom renos also add value but not as much (but hardly any if the existing kitchen and bathrooms are not too bad). Decks, carports and sheds also add value, but not much. Adding air conditioners is dead easy but might not add any value.

A budget of $300k will not get much in Sydney, dunno about Melbourne. Units are cheaper but they are MUCH harder to do anything with to add value, other than paint and reno the kitchen and bathroom. Houses offer the best opportunity to add value, which includes the possibility to dual occupancy and sub-divide, which add the most value.

As fas as negative gearing, it's like Dirty Harry says: are you feeling lucky? Do you think that the property you buy will increase in value fast enough to cover the buying, holding and selling costs, and make more money than just putting the cash in the bank?

Remember, negatively geared properties can only be geared against other income: if you stop working, the strategy stops working. (Hey I just made that up... Thats my quote!)

 

[Peter_Tersteeg]

Overall I like your criteria. Tricky to find, probably not locally, but it is achievable interstate. Long term it's a formula that will likely work reasonably well.

Don't kid yourself though, 5.2% rental yield is not even close to cash flow positive when you consider all the holding costs (property management, maintenance, rates, body corp, etc). You probably need closer to 8% yield.

 

[norwoodman]

Also need to consider what will happen once interest rates start rising. Even a lot of those properties yielding around 7% will no longer be cash flow positive.

You're probably not going to find what you're looking for in Melbourne. You might have a lot more luck looking a bit further afield, even within a 150km radius of Melbourne.

I'd personally take a balanced perspective. There's no point looking for a CF+ property if it doesn't have some other potential (strong CG, below market value, reno, subdivide), because a change in conditions could easily affect your cash flow. The potential gains from capital growth and equity creation far outweigh what you could get going CF+.

 

[vaughan]

... The potential gains from capital growth and equity creation far outweigh what you could get going CF+.

Agreed.

Of the two, only equity creation is something I have control over.

 

[Ryan Cortez]

Hello and welcome.

All that criteria -- growth >6%, yield > 5.2%, vacancy <3%, buy below market value -- will likely mean you don't buy anything. Very few properties will match.

Growth figures show what has happened in the *past* and is not always a good indicator of future performance. Property markets often have a spurt of hight growth, then a period of flat or negative, then growth again. If you find an area that has just enjoyed a period of growth then you could be buying at the top of the market. (I'm thinking 2770 here.)

Positive cash flow properties are usually the result of an astute investor seeing opportunity in a poor performing property to renovate or develop it to increase the capital value and improve the rent. Candidate properties usually look sad because they need work -- that's why they can be bought below "market value". The harder and more expensive something is to do, the more value it is likely to add. Increasing the number of bedrooms in a house adds a lot of value and rent. Kitchen and bathroom renos also add value but not as much (but hardly any if the existing kitchen and bathrooms are not too bad). Decks, carports and sheds also add value, but not much. Adding air conditioners is dead easy but might not add any value.

A budget of $300k will not get much in Sydney, dunno about Melbourne. Units are cheaper but they are MUCH harder to do anything with to add value, other than paint and reno the kitchen and bathroom. Houses offer the best opportunity to add value, which includes the possibility to dual occupancy and sub-divide, which add the most value.

As fas as negative gearing, it's like Dirty Harry says: are you feeling lucky? Do you think that the property you buy will increase in value fast enough to cover the buying, holding and selling costs, and make more money than just putting the cash in the bank?

Remember, negatively geared properties can only be geared against other income: if you stop working, the strategy stops working. (Hey I just made that up... Thats my quote!)

Thanks for your input. I had the same thoughts about looking at past performance. I can't remember which a 'guru' suggested looking at a 3 year growth trend for a suburb when researching, and selecting locations that are on the up trend in the last 2 years with the assumption a cycle last 7 years eg yr 1: 1%, yr 2: 3%, yr 3-5: potentially more increase before a possible downturn in yr 5-7. Seemed like a good idea to me in theory and might explore it rather than just looking at 10 yr growth figure.

I understand reno and development can help but its not something I'm interested in yet, especially as I'm seeing more properties fitting (close to it) my criteria in my range being available outside of Melbourne. Definitely in future I'll do it.

Better trademark that quote. Might get stolen

 

[Ryan Cortez]

Overall I like your criteria. Tricky to find, probably not locally, but it is achievable interstate. Long term it's a formula that will likely work reasonably well.

Don't kid yourself though, 5.2% rental yield is not even close to cash flow positive when you consider all the holding costs (property management, maintenance, rates, body corp, etc). You probably need closer to 8% yield.

Definitely a challenge (starting to think its impossible) to find cashflow positive property. I completely agree I'm needing at least 8% yields if I was just focused on CF+.

Also need to consider what will happen once interest rates start rising. Even a lot of those properties yielding around 7% will no longer be cash flow positive.

You're probably not going to find what you're looking for in Melbourne. You might have a lot more luck looking a bit further afield, even within a 150km radius of Melbourne.

I'd personally take a balanced perspective. There's no point looking for a CF+ property if it doesn't have some other potential (strong CG, below market value, reno, subdivide), because a change in conditions could easily affect your cash flow. The potential gains from capital growth and equity creation far outweigh what you could get going CF+.

I use an interest rate 1-2% above current rates in my calculations.
I've also looked at rural towns with population over 10000, staying away from mining towns though.
I agree with a balanced perspective. As much as Id prefer CF+ or neutral, I'd go with a CF- that I can afford for a property with good growth potential in the long term.

Thanks again guys!

 

[vaughan]

Definitely a challenge (starting to think its impossible) to find cashflow positive property.

Similar 4-bedders to this place rent for $350 to $400 per week, so this is +cf right from day 1.
http://www.realestate.com.au/property-house-nsw-goulburn-115354171

The property below just sold for $172,000 (yes, above the asking price) and although needs some work, will rent for around $300 per week. If you can renovate to budget this will be a good deal and could probably be flipped for a profit.
http://www.realestate.com.au/property-house-nsw-goulburn-115905751


If you are serious about making money in IP, get interested in reno and development. You can see why: 4 bedroom places get (roughly) $400 per week, which is $50 to $100 a week more than 3 bedders get which is (roughly) $300 a week. 2 bedroom places only get $200 to $250 per week -- I don't look at 2 bedders other than to see whether there is development opportunity. Adding another bedroom to a house GREATLY increases its value and rental return, as long as another room (like lounge) hasn't been sacrificed in the process.

 

[Colin Rice]

Don't kid yourself though, 5.2% rental yield is not even close to cash flow positive when you consider all the holding costs (property management, maintenance, rates, body corp, etc). You probably need closer to 8% yield.

7% at a minimum.

 

[Ryan Cortez]

Similar 4-bedders to this place rent for $350 to $400 per week, so this is +cf right from day 1.
http://www.realestate.com.au/property-house-nsw-goulburn-115354171

The property below just sold for $172,000 (yes, above the asking price) and although needs some work, will rent for around $300 per week. If you can renovate to budget this will be a good deal and could probably be flipped for a profit.
http://www.realestate.com.au/property-house-nsw-goulburn-115905751


If you are serious about making money in IP, get interested in reno. You can also see that the 4th bedroom gets $50 to $100 a week more rent than 3 bedders. 2 bedroom places only get $200 to $250 per week. So adding another bedroom to a house GREATLY increases its value, as long as another room (like lounge) hasn't been sacrificed in the process.

Awesome. Love this! Would have never looked at Goulburn because of the restrictive criteria that I need to refine. Agree with Renos too but with limited funds and time I can't see that being possible for me.

Vaughn, what I really want to know is how did you narrow down to Goulburn, or any area, out of the thousands of suburbs in Australia? What is the process you take to narrow down to a suburb to research?

 

[Truly Exotic]

The property below just sold for $172,000 (yes, above the asking price) and although needs some work, will rent for around $300 per week. If you can renovate to budget this will be a good deal and could probably be flipped for a profit.
http://www.realestate.com.au/property-house-nsw-goulburn-115905751

wow, I had my eye on this one too, cant believe it fetched that much!

I dunno if the new owners know what they are getting themselves into, its a lot of work, with restumping needed
Land value at $130k ish, I valued it at $120-$130K

 

[Corey Batt]

I like your style Ryan. As mentioned already, bump up your yield to above 7% and you should be covering all costs and possibly a little left over without factoring depreciation.

Client purchases which are CF+ are generally in locations such as Orange, Albury, Wagga, run down properties in Logan and of course to beat the dead horse, Elizabeth(Playford council in general).

I would say the Australian market as a whole has a large number of CF+ properties, but the key is to filter out the high risk and low CG performing properties.

 

[Ryan Cortez]

I like your style Ryan. As mentioned already, bump up your yield to above 7% and you should be covering all costs and possibly a little left over without factoring depreciation.

Client purchases which are CF+ are generally in locations such as Orange, Albury, Wagga, run down properties in Logan and of course to beat the dead horse, Elizabeth(Playford council in general).

I would say the Australian market as a whole has a large number of CF+ properties, but the key is to filter out the high risk and low CG performing properties.

Thanks CJay. For a newbie, it's a good sign that I'm heading in the right direction when you more experienced guys confirm that I'm doing somethings right. I just really want to improve finding areas with potential and fit my plans. Any suggestions on how you narrow down your selection of suburbs?

 

[vaughan]

Vaughn, what I really want to know is how did you narrow down to Goulburn, or any area, out of the thousands of suburbs in Australia? What is the process you take to narrow down to a suburb to research?

I've already posted my criteria for buying in general. One thing I have not mentioned before is proximity to Sydney as a risk minimisation strategy.

Start at the CBD and work outwards radially until something hits the criteria (budget, yield and capital growth). All this data is really, really easy to find on re.com. In like 20 minutes you can work out roughly what places rent for and what they sell for in varius conditions (almost knock-down to fully renovated).

Two tips to find "bargain" properties in re.com:

1) set up re.com to e-mail you any new listings in the suburb of choice. These new listings rarely contain bargains: it's a long shot and they go really quickly so you have to JUMP on them fast, no low-balling (because lots of other people are also doing this).
2) Perform a search in re-com but change the sort order to display the "old" listings first. This is the "bargain bin" of properties, the ones that nobody else wants. These always need work but that's where the money is anyway. These are properties you might still be able to low-ball on, but you need to work out what's wrong and have a really goos idea what the costs are to fix.

Bonus tip: buy in winter.

My first IP is in Mount Druitt area which I bought DESPITE the dire warnings about how BAD the place is, the POOR prospects for capital growth, the TERRIBLE tenants... It's been cash-flow neutral (or slightly positive) since purchase AND has enjoyed over 20% cg in the 2 years I have owned it. LATWTHB!

I only wish I had bought more because the CG is actually a problem: I cannot afford to buy in Sydney again. So I had to widen my search. Liverpool, Central Coast are not cheap and have so-so yields. I've missed the boat on Newcastle, was told about it when I was buying Whalan. So I spread the radius out and looked at regionals. Two places came up, Goulburn is one, I am very impressed and I have just bought there (about to exchange).

I have not looked south to Illawarra and Wollongong, for no reason other than I cannot analyse everywhere at once.

wow, I had my eye on this one too, cant believe it fetched that much!

I spoke to the Agent Brett a couple of days ago, he was pretty pleased with the sale. We were hoping to inspect it that day.

BTW strike up a conversation with estate agents, they are really happy to discuss things.

For instance, 9 months ago Brett sold a property to investors for $260k. Their circumstances changed and he's just re-sold it for them, after doing nothing but holding it, for $272k which is 5% growth. It's not often the same property sells so quickly so it's a good indicator of the market.

Goulburn is bubbling along nicely right now. It's being used as a commuter city to Canberra so vacancies for reasonably priced properties are low and rents are reasonably good, about the same as Western Sydney. (Who'd have thought that "close to the highway" would be a positive selling point!)

It is just starting to get a wave of people buying and renovating so there is a lot of stock that needs work that's still going cheap -- but that seems to be ending about now. I reckon in 6 to 9 months the IP magazines will write about it, the mug punters will swoop in (I can imagine somebody at the M7 Mt Druitt exit wearing a chicken suit with an arrow-shaped sign saying "Bargain's (sic) Goulburn 90 mins") and start over-paying. Don't get me wrong, I WANT that to happen... but only after I've bought a couple.

I haven't mentioned the other regional I'm looking at...

 

[Truly Exotic]

I spoke to the Agent Brett a couple of days ago, he was pretty pleased with the sale. We were hoping to inspect it that day.

BTW strike up a conversation with estate agents, they are really happy to discuss things.

For instance, 9 months ago Brett sold a property to investors for $260k. Their circumstances changed and he's just re-sold it for them, after doing nothing but holding it, for $272k which is 5% growth. It's not often the same property sells so quickly so it's a good indicator of the market.

Goulburn is bubbling along nicely right now. It's being used as a commuter city to Canberra so vacancies for reasonably priced properties are low and rents are reasonably good, about the same as Western Sydney. (Who'd have thought that "close to the highway" would be a positive selling point!)

It is just starting to get a wave of people buying and renovating so there is a lot of stock that needs work that's still going cheap -- but that seems to be ending about now. I reckon in 6 to 9 months the IP magazines will write about it, the mug punters will swoop in (I can imagine somebody at the M7 Mt Druitt exit wearing a chicken suit with an arrow-shaped sign saying "Bargain's (sic) Goulburn 90 mins") and start over-paying. Don't get me wrong, I WANT that to happen... but only after I've bought a couple.

I haven't mentioned the other regional I'm looking at...

time will tell. I should have bought more in goulburn!

 

[fokas]

wow, I had my eye on this one too, cant believe it fetched that much!

I dunno if the new owners know what they are getting themselves into, its a lot of work, with restumping needed
Land value at $130k ish, I valued it at $120-$130K

Do you know it needs re-stumping by the fact that the floors are uneven and potentially not safe to walk on? Or did the agent tell you so?

 

[Truly Exotic]

Do you know it needs re-stumping by the fact that the floors are uneven and potentially not safe to walk on? Or did the agent tell you so?

absolutely, agent told me as well,

I can get the entire house restumped for $7k,so if its only a few stumps, far less too

 

[Brady]

It's not that hard to find what you're looking for OP.

These are some purchase in the last 2 years.

Elizabeth East, SA.
- Purchase Price $175k
- Current Rental yield 7.7% at purchase 7.1%
- 10YR Average Growth 10.84%
- Current vacany rate 1.5% at time of purchase 1%

West Bathurst, NSW
- Purchase Price $265k
- Current Rental yield 6.8% at purchase 6.5%
- 10YR Average Growth 7.74%
- Current vacany rate 4.3% at time of purchase 2.6%

Mount Austin, NSW
- Purchase Price $216k
- Current and at purchase Rental yield 7.6%
- 10YR Average Growth 9.79%
- Current vacany rate 5.5% at time of purchase 3.5%

(both NSW regional properties vacancy rates are for the whole post code, not just the particular suburb. Looked on RE.com and for Mount Austin 10 properties available for rent out of 404 in the whole post code. Bathurst NFI as they don't like to give away the address in Bathurst)

It's not hard to find properties that match your criteria, but it doesn't mean that they are going to perform in the future. But I do like that you're taking into consideration the yield so that you're not bleeding out cash for the property, it's also important that your long term focus is CG.

 

[Brady]

time will tell. I should have bought more in goulburn!

Got to leave some for everyone else

 

[Corey Batt]

Thanks CJay. For a newbie, it's a good sign that I'm heading in the right direction when you more experienced guys confirm that I'm doing somethings right. I just really want to improve finding areas with potential and fit my plans. Any suggestions on how you narrow down your selection of suburbs?

You want to make sure that besides having a strong yield, the CG prospects are there to keep up/exceed inflation.

Key things I look for are:

• Positive demographic changes - slummy areas becoming nicer over time.
  
• Higher than avg. population growth - creates more demand and higher prices.
  
• Private and govt investment infrastructure and development.
  
• Development potential/renovation potential is desirable.