G'Day ono
It's quite a big ask to find a property which will produce income after expenses from Day 1.
The concept of 'cash flow positive' sounds good, but it really depends on how you structure the deal.
If you are borrowing to eg 60%LVR then most properties with a 4.5% yield would come close to being 'cash flow positive'
But if you are using all borrowed funds, to 105%LVR, then 4.5% yield, and interest rates of 7.5%, well the two ain't going to meet any time soon.
Even using your own cash has an opportunity cost - you could have been earning interest on the cash but have instead put it into property.
It helps to keep your eye on the horizon, not on the ground immediately in front of your feet.
I have always considered that the act of 'buying' is an action which covers a number of years, not just the day of settlement.
So for me, borrowing to 105%LVR is standard practise, and I would not expect rent to be at 7.5% (plus outoings, so call it 8.0%) for a couple of years, or maybe even longer.
However, by buying the property I have frozen the purchase price.
So while rent is playing catch up, the property would usually be improving in value. Sure, I am continuing to invest in the deal so let us say that by the time rents are at 8.0% of purchase price, that means that rents are at 4.5% of market value. By that time I have usually forgotten what I paid for it and the property has become a member of the family.
So here are some quick sums to play around with:
Council & water rates, insurance, property management etc are all percentage based - except for garbage collection, which is a flat fee
but for the purpose of the exercise, let us assume that you buy a property for $100,000 and borrow to 105%
so the purchase cost (not price) is $105,000
Interest is 7.5%
Rent is 4.5%
that leaves a shortfall of 3.0% plus outgoings.
By the time that the $4,500 rent has increased to $8,000, if the yield is still the same, that would mean that the property would be worth about $177,000.
If my contibution up to that point has been 3% reducing to 0%, I doubt that I would have paid in the difference ($177,000 less $105,000) over that time.
This is not an exact science. I personally tend to not concern myself about shortfalls - I live in one property, so that doesn't earn any rent, and have one under renovation, so no rent there, and a Bomb Site which earns a pittance of rent, equally I have the Mission Brown Wonder which has produced cash flow from about 24 months after settlement (back during the Recession We Had To Have, 1996). It has also increased in value from $105,000 to about $420,000, so not bad going with that one.
So how do you know if a property will be a suitable purchase for you?
Well, it depends on what you want out of the deal. It also depends on what you are putting into the deal and how you are going to do that
You may want to put in 40% deposit and not put in any further cash, or you may want to trickle feed the 40% in over a number of years - buy with 105% and dribble in the short fall each month until the rents are paying for everything.
Or you may want to choose the middle path - 20% contribution, plus 5% costs, and a moderate amount of monthly contribution for the next couple of years.
Great property investments are made, not born. Buying a quality residential property (by quality I mean an habitable, readily rentable property in good condition, I don't mean a flash penthouse apartment) and presenting it well is the base point for growth.
What has your research of the area shown you? What are other similar properties renting for, and why is there a variance? Even in an area of ex-Housing Commission where the houses are almost identical, there will still be a range in the rents. Why? What would it take to increase the rent from $150 to $165 per week? $180 per week?
No, not a renovation. That may be appropriate at a later date but if done at the beginning will put up the cost of the cash flow, but would a good clean, and perhaps some new curtains from Spotlight, increase market appeal?
Cleaning is about the most cost effective renovation. After it is clean, there may be not much left to do.
Once you have profiled the property and seen where it sits in it's own market, you will have a better idea of whether this is a good deal for you.
Hope this helps
Kristine
