Question about CF+ properties

[Radicals]

After reading a few books on property investment, and a few magazines about it, I've got a question about cash flow positive properties.

Basically I see article after article about house-hunters saying they can't find CF+ properties anywhere. Also articles about "Where to find CF+ properties" etc...

My question is; Isn't every single property potentially cash flow positive?

I mean assuming you pay off enough of a deposit, wouldn't the rent income always have the potential to overlap the mortgage repayments? (Netting a positive cash income)?

If this is true, all these people saying they can't find cash flow positive properties, what are they talking about? Do they simply not have that much of a deposit?

Thanks in advance.

 

[D.T.]

NO

Always assess cashflow the using the payments 105% finance because its the only fair way to compare them. It's the only way to incorporate opportunity cost as well.

Saying that, they're definitely still out there

 

[strongy1986]

Why would you pour all your money into one property just so you can say its cash flow positive?

Say you did that with one property worth 500k and mAde it positive - equity put in 150k

The market grows 5% - you make 25k and lose nothing because your neutral / positive

Or

You could buy 3 properties worth 500k - which you lose 5k a year on

Market grows 5% - you make 75k less 15k in holding costs , add back 5k in tax benefits and you've made 65 instead of 25 with the same amount of cash

Save your cash for deposits

Property investing is all about leverage, the returns are lower bit you can multiply them by 10 in real money terms

 

[natedog]

With interest rates where they are right now I don't think it's impossible to find a cash flow positive (after tax) property.

Cash flow is just one facet of the whole equation though, future growth prospects is obviously another big one.

A good balance of both the above is a good thing to aim for if possible (it's always possible)

 

[Azazel]

Or

You could buy 3 properties worth 500k - which you lose 5k a year on

Market grows 5% - you make 75k less 15k in holding costs , add back 5k in tax benefits and you've made 65 instead of 25 with the same amount of cash

I'd prefer 6 x 250k properties @ 10% AND CF+

 

[D.T.]

I'd prefer 6 x 250,000 properties @ 10% AND CF+

This. Except I'd prefer if they had develop potential as well

 

[albanga]

D.T and Strong answered your question perfectly. You do not invest large sums of capital into one property so it becomes cash flow positive, your far better of buying more property.

One thing to consider though is at some point you are going to need more cashflow to show the lenders you can afford all these properties. That can be a wage increase at your normal job, a business venture OR by paying down some of your existing debt.

A strategy I think works well is buying a property on a decent parcel, subdividing it and selling the vacant lot. The cash you earn can then be invested back into the existing loan, therefore reducing it and likely making it CF+. The big benefit to this strategy is the single entry cost (stamp duty once).

 

[strongy1986]

D.T and Strong answered your question perfectly. You do not invest large sums of capital into one property so it becomes cash flow positive, your far better of buying more property.

One thing to consider though is at some point you are going to need more cashflow to show the lenders you can afford all these properties. That can be a wage increase at your normal job, a business venture OR by paying down some of your existing debt.

A strategy I think works well is buying a property on a decent parcel, subdividing it and selling the vacant lot. The cash you earn can then be invested back into the existing loan, therefore reducing it and likely making it CF+. The big benefit to this strategy is the single entry cost (stamp duty once).

That's exactly our strategy/ plan - still in buying mode though , don't want to waste capital just yet on a lengthy subdivision process

Bit of shor term pain but should be worth it

 

[albanga]

That's exactly our strategy/ plan - still in buying mode though , don't want to waste capital just yet on a lengthy subdivision process

Bit of shor term pain but should be worth it

Don't get me started! I am currently pulling my hair out trying to get a second crossover approved. My amendment documentation is coming up to about 20 pages now. Even took it to an independent town planner yesterday who said no use paying for their services as I have done all the work and still as strong as my argument is that I'm 50/50.

I believe it's one of the best strategies to use. Homes depreciate, land appreciates. I know that in itself is simplistic and there are lots of other considerations but it just leaves the door open to many ways of manufactured growth whether subdivision, development, renovation of the existing and development of the rear, granny flat.etc.

A property on a small lot really only has renovation potential. Ofcourse you need to pay more for land if your comparing same suburbs but I would much rather pay a similar price for a run down home on a big block than a brand new unit in the same suburb. Happy to wear the loss of rent, depreciation.etc for the future potential benefit.

 

[Radicals]

NO

Ok...Why?

I hate to be pushy, but I'm trying to learn. The point of my thread is not that I would EVER do this 100% purchase strategy, I am just trying to wrap my head around a concept.

In what situation would a 100%-105% deposit not result in a cashflow positive property?

 

[hugh72]

Ok...Why?

I hate to be pushy, but I'm trying to learn. The point of my thread is not that I would EVER do this 100% purchase strategy, I am just trying to wrap my head around a concept.

In what situation would a 100%-105% deposit not result in a cashflow positive property?

DT is talking about finance for the purchase of 105% of the properties value

 

[Duff]

Ok...Why?

I hate to be pushy, but I'm trying to learn. The point of my thread is not that I would EVER do this 100% purchase strategy, I am just trying to wrap my head around a concept.

In what situation would a 100%-105% deposit not result in a cashflow positive property?

They meant borrowing 100-105%
Cheers

 

[Radicals]

They meant borrowing 100-105%
Cheers

Oh, right, oops.

Still, say I purchased 100% of an investment property with cash (which I am not ever going to do) wouldn't virtually every property bought this way be CF+ ?

 

[WattleIdo]

yes, you get all the cashflow from that property except for tax which you give to the government.
But that's not what we call a cashflow property on this forum or in mags etc.
If it's cashflow @ 105% then it's making you money no matter how much you pay off or put in as a deposit, etc.
It's your own personal preference to pay it off. If that's what you like to do (I do) then it's a good idea to put in as big a cash deposit as you can.
If you don't have cash (I don't), you use equity - and then we're looking at 105% again.

 

[Peter_Tersteeg]

Oh, right, oops.

Still, say I purchased 100% of an investment property with cash (which I am not ever going to do) wouldn't virtually every property bought this way be CF+ ?

Simple answer is yes, it would be cash flow positive.

Cash flow positive or negative is not something you automatically get. It's simply a result of the numbers inherent in any particular property. In simple terms, these numbers are the price, the rental income, the holding costs, the current interest rates, how much you borrow to purchase the property.

How these numbers fall dictates if the property is positive or negative cash flow. Most people want positive cash flow properties because it means they're not out of pocket when owning the property.

Given unlimited cash, anyone with half a brain would not borrow a cent to buy property (or any other investment). You'd pay a bunch of tax, but you'd have even more income.

Most people don't have access to unlimited funds, so they adopt a lending strategy to make the most of what resources they do have.

 

[Angel]

Still, say I purchased 100% of an investment property with cash (which I am not ever going to do) wouldn't virtually every property bought this way be CF+ ?

Yes of course it would be positive.

I see where you are coming from. However by doing this one has not taken into consideration other income from using that cash for something else, such as shares, a commercial property, a business, currency or to offset other loans. This is what is referred to as Opportunity Cost and can sometimes be a better option than buying a resi property.

I cannot afford to buy a bank building or a medical centre, but if you have a spare $500K.......

 

[Blacky]

Ok...Why?

I hate to be pushy, but I'm trying to learn. The point of my thread is not that I would EVER do this 100% purchase strategy, I am just trying to wrap my head around a concept.

In what situation would a 100%-105% deposit not result in a cashflow positive property?

Cash flow, profit and revenue are separate things. Don't confuse them.

Cash flow is how much money you put into your pocket each month after cash expenses.

The revenue is how much income (before expenses) the property generates. Often people refer to %returns (ie gross 4%).

Profit in the most basic terms how much you claim on your tax returns (profit or loss).

You can have a -ve geared cashflow positive investment. Which to me is a pretty good deal.

DT is basically saying use the profit figure to calculate your returns. That is total cost (purchase+purchase costs) less costs (including depreciation) and assuming financing the TOTAL cost. There are different ways of doing it, but this is a perfectly reasonable one.

Blacky

 

[travelbug]

Oh, right, oops.

Still, say I purchased 100% of an investment property with cash (which I am not ever going to do) wouldn't virtually every property bought this way be CF+ ?

It seems you are confused by what investors mean when they say an investment is CF+.
They generally mean IF they had purchased it with NONE of their money it would be CF+.

ie, when you do your calculations you count 105% (to include buy costs). Multiply this figure by the interest and add all other outgoings (rates, strata etc) then if it less than the rent coming in THEN it is truly CF+.

Some fool themselves into believing a property is CF+ by paying a huge deposit. But what is the cost of tying up that deposit? If invested elsewhere it would be earning money so its not really free money.

 

[albanga]

I was halfway through typing scenarios but it started to get complicated so I stopped!

So instead what I reccomend is give Peter a call who has commented on this thread. Peter is based in Melbourne and IMO is one of the best brokers on SS. He will be able to explain this all to you and as part of that will be able to explain the all important lending.

 

[jpcashflow]

Hi

For me personally a positive or negative. I only for development sites now days.
I have a couple of investment properties that have become positive cash over the years.