Purchasing Positive Cash Flow Properties

Discussion in 'Investment Strategy' started by dynasty007, 17th Oct, 2009.

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  1. dynasty007

    dynasty007 Member

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    Hi All,

    I am a 25yo who is looking at purchasing my 2nd IP. After buying a 3 bedroom negatively geared property at a very good price, I am now trying to learn more about positive cash flow properties like apartments either in or close to the Melbourne CBD. If all goes well with my first positive cash flow investment, I would be keen to buy another in late 2010!

    The main reason why I am looking at positive cash flow property is;
    1. I am still young & need to build instant cash flow.
    2. The bank will only lend me so much if I keep purchasing negatively geared properties which require some of my income in order to service the loans.

    Is there anyone out there who has a positive cash flow portfolio or can comment on the advantages / disadvantages in using them to build a quality property portfolio?

    Thanks,

    Michael.
     
  2. Chris C

    Chris C Well-Known Member

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    The biggest problem with positive cashflow properties is you pay MORE tax. But as my accountants always says paying more tax is not a bad things and is what everyone should be aiming for - it's just what you have to do when you're making money.

    Personally I'm a big fan of a property being as positively geared as possible, and fortunately at there moment there are a few positively geared properties out there if you're willing to do a bit of hunting around.

    However the gearing of a property with a variable loan always comes back to interest rates given that interest costs for most investors make up the bulk of an IPs costs. So whilst obtaining a positively geared property today in Australia's major capital cities might be possible, it's unlikely to remain like this over the next 12 months if rates do trend upwards like most experts are projecting.

    At the end of the day if you are looking for positively geared properties in major capital capital cities you are probably going to have to be looking in the low to middle part of the market because your rental yields tend to be higher. Also units and townhouses also tend to have better rental yields than houses though this needs to be weighed up against the fact that many units and townhouses can come with exorbitant body corp fees that can really cut into yield, especially at the low to middle end of the market. Avoiding complexes that have things like elevators and pools will normally help with avoiding places with high body corp.

    Of course you could always look into rural and mining towns, they tend to have better yields, but they can also come with their own problems.

    You can also look at other options like buying a place near a university and then renting out individual rooms rather than renting out the place as a whole. This obviously increases management costs but this is normally more than offset by the increase in yield as a result of renting out rooms individually.

    One thing to be wary of is places that listed for sale with tenants which are playing an unusually high amount of rent. As the old rule of thumb goes, if it looks too good to be true it probably is, and you need to make sure you find out what the reasons are for those tenants paying above market rate, in my limited experience there was almost always a reason that suggested that maintaining those rental yields weren't sustainable.

    The place that I have now is very slightly positively geared, but this is the result of buying well, having a townhouse with 4 bedrooms, pushing for higher than market rent and very low body corp ($600/year).

    Best of luck in your search for a positively geared property.
     
  3. Wendy Bergsma

    Wendy Bergsma New Member

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    I am currently researching Positively geared properties on the Gold Coast and have found that I can achieve good positive returns if I purchase a 2 bed townhouse, convert the garage into a third bedroom and rent out the rooms indivudally to students. I am still researching and have so far found quite a few properties where I can achieve a positive return.
     
  4. Jacque

    Jacque Jacque Parker Premium Member

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    Hiya Wendy :)

    Agree with you that research and plain hard yakka is the key to finding value add projects such as these. After all, positive cashflow investments aren't likely to fall into your lap, as you know :)

    Michael,

    If cashflow is important to you, start off with smaller first projects ie: cheap homes that are close to neutral as possible. Depending on area and demand for your type of property, value adding can be a worthwhile strategy in increasing yield. Remember too, that over time, the theory is that rents will rise sufficiently to cover and surpass your mortgage repayments. It takes time, that's all.
     
  5. Chris C

    Chris C Well-Known Member

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    I agree with Jacque, at the end of the day some good old fashioned smarts and hard work are going to reap the rewards, but this is true of anything in life.

    :D

    Though while on the topic, with the speculation that interest rates are going to go up by another 50 basis points in November, it's hard to see the possibility of finding positively geared property being around for much longer...
     
  6. Jacque

    Jacque Jacque Parker Premium Member

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    Ah yes so true. Only going to make the job all the harder. Then again, if rents continue their upwards path then it might all even out, depending on where you buy obviously.
    Still glad I've fixed some of my loans back when I could for 5.89%. Takes the heat off for some of the debt anyway:D
     
  7. D&K

    D&K Well-Known Member

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    Hi Wendy,

    Just note that positively geared and positive cashflow are not the same. You can have a negatively geared property (expenses (loan) is more than revenue (rent)) but due to depreciation and other tax claims, can actually be positive in cashflow terms - you just have to balance outgoings with tax returns.

    Dave
     
  8. Chris C

    Chris C Well-Known Member

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    I'd put this move in the "being smart" part of the success formula.

    ;)