The secrets of positive cashflow property
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In this episode we are very excited to share with you the best kept secret – positive gearing and positive cashflow property! This strategy is a great strategy for those who have limited cashflow and a great way for people to get started in property.
We have a good news listener story from John in Auckland who lets us know he’s on the way to his first investment property.
And in our quick tip we give you a great tip for finding positive cashflow property.
- Use some of the resources mentioned in this episode to find three areas that have a high rental yield).
- Find one property in each of the areas that you think might be positive cashflow and run some numbers (expected income and outgoings) to see how they stack up!
EPI008 | The secrets of positive cashflow property
This is Everyday Property Investing episode 8. The show empowering everyday people to create wealth and financial freedom, so get on board! Anyone can be a property investor. It just takes a little knowledge, a little support and some action. So get started with us today!
Den: Hi and welcome I’m Den, and this is episode eight of Everyday Property Investing. In this episode we’re going to find out all about positive gearing and positive cashflow property investment. We’re going to talk about what it is and what the pros and cons are. And this episode’s Quick Tip we’re going to help you find positive cashflow properties. I’m here with Kaz and we’re here to help you develop your knowledge and ours, and to share experiences within our Everyday Property Investing community. How’s it going Kaz?
Kaz: It’s going fantastic Den, how are you today?
Den: I’m great, thanks. So tell me Kaz what’s news with you this week?
Kaz: Well this week I thought I’d share with you just a good news story actually. I had a conversation with a guy from my office, I work part time for a software company. And there’s a guy from our office in Sydney. His name is Ben, a little shout out to Ben!
Den: Hi Ben!
Kaz: I just wanted to say how great Ben has been doing. He became interested in property not that long ago, probably it would only be maybe one or two years ago. And he and I actually had a conversation over the phone once and that’s when I found out Ben was actually a little bit of an entrepreneur. He had bought himself a small business that he ran on the weekends as well as being a software developer during the week. And he being interested in property and I was talking to him just again the other day, and he’s up to four investment properties.
Den: Oh my goodness!
Kaz: I know and not only has he bought gone out and bought investment properties, he’s a real go-getter. He’s actually gone, he’s bought a big block of land, he’s subdivided, he’s developed, he’s renovated, this guy is trying it all on and he’s doing great guns so good on you Ben!
Den: Oh fantastic!
Kaz: So what’s happening with you Den?
Den: Well, we’ve had our first open house of this place that we’re trying to sell. Probably not much news but we’ve had people go through, the real estate agents got a list and they’re obviously going to chase up with people. So hopefully we’ll start receiving some offers and we’ll have somewhere to go. So right now it’s been little bit of a week of holding our breath. But hopefully we’ll have something going on.
Kaz: Alright well I hope that goes well.
Den: Thank you very much.
Kaz: In today’s feature segment we’re going to talk about the best kept secret: Positive Cashflow property–very close to my own heart, Den!
Den: I know, Kaz, it’s certainly the technique that Kaz has used and that I’ve used as well to invest in property. But before I go into it, I just want to be clear about the difference between positive gearing and positive cashflow. Positive gearing is an investment strategy where the net income from the property is greater than the net outflow of money, so therefore before tax and straightaway you’re making money everyday on that property. Positive cashflow requires depreciation to come in to turn a property that might be losing, just a little bit of money, into a property that puts money in your pocket every week. So we’ll really be talking about positive cashflow property but remember all the benefits of positive cashflow property are the same as positive gearing without even worrying about depreciation for positive gearing. Ok, now Positive Cashflow property takes into account, as we’ve said the depreciation. When you buy a property, especially a new one, you are able to claim the fact that the house and the fittings will get older and therefore lose value overtime. That’s called the depreciation. So when you claim depreciation you get a certain amount of tax back, now if the depreciation you get back is greater than your loss, you’re suddenly going to be making a positive cashflow investment.
Kaz: Actually I wanted to make a point here Den too, in regards to having that depreciation turning a negative property around into a positive, you don’t necessarily also have to wait until your end of year financial tax return either, to actually get the benefits of that?
Den: That’s right there’s some sort of a statement you can do or some sort of an adjustment you can do, which means that you can get that tax back every week.
Kaz: Yeah, a tax variation and you need to see your accountant about that one.
Den: Yeah your accountant will do that and it should be pretty cheap as well to get done.
Kaz: Okay, so positive cashflow property means you buy a property, the income of the property exceeds expenses and you are therefore making a profit. Is that right Den? A lot of people say that can’t happen.
Den: Well from day one, a positive cashflow property will put money in your pocket. And I know a lot of people say that it won’t happen but there are properties that you can buy that will do that and I’ve bought them and you’ve bought them. And I don’t think we’re so remarkable that we’ll be the only people on the planet that’s able to find them. So they do take a little bit more effort to find and you do need to go in a very targeted search to find them. And we can certainly go into the techniques you would use to search for a positive cashflow property. But the profit you make you can use to either pay down your own debt, to pay off your home, to save up a deposit for another property and it’s a really great way to invest. It doesn’t take money out of your pocket. It means that you can actually buy a property, more and more and more and more properties because your out of pocket expenses aren’t limited. If every property puts money in your pocket you don’t have a limit with how many you can buy. Your limit’s going to be determined by your service ability and by your loan-to-value ratio. So your banks will be determining your limit rather than you. Ok now in the same way as negative gearing, you would expect positive cashflow properties to increase in value overtime, but as we’ve talked about last episode, they might not increase as quickly, some will, some won’t, but they may not increase as quickly overtime.
Kaz: And you can also use that money, that additional funds as you were saying, to pay down debt or to leave off or reinvest in other things.
Den: Yeah I know some people whose overall plan is to have enough properties. So that they don’t need to work anymore so the income coming in from their properties is their income for life.
Kaz: So just sort of summarizing that the pros then of positive cashflow property, it doesn’t take extra money out of your pocket, you can continue to service more and more properties so you purchase more and more properties. You can get really lucky if you’re lucky, and find not only that you are getting the positive cashflow but that your property values are increasing over time, so you’re getting capital gain and you can use that money to live off, or to reinvest in other things.
Den: That’s right, so there are real benefits from doing this. Now of course, not everything is full of benefits and no cons. So the cons are that it’s harder to find the positive cashflow properties than negatively geared properties and that’s something that I’ve certainly found. Anytime I’ve gone looking for a positive cashflow property it’s taking more time, takes more research. You might need to be a little bit creative as well to generate a positive cashflow situation. Now, something like low interest rates will make more properties a positive cashflow than higher interest rates. You might find that you need to do a little bit of renovating, you might find that the rent needs to go up a tiny bit. Sometimes a property that you might buy that’s only a small amount, $2 or $3 negative cashflow when you buy it, within a year will be positive as well so that can be worth waiting.
Kaz: Den, I’ve got a question for you there actually Den. What happens and can this situation happen where I might buy some property that is positive cashflow and there might be a change in interest rates and that could potentially make that property become negatively geared?
Den: Ok, well that’s exactly right so you do need to be careful. And that’s when we come down to, in a couple of episodes we’re going to talk about bank loans and fixing interest rates or having a variable interest rate, that sort of thing. But if you have a loan that has variable interest rates so you haven’t fixed it and interest rates go up, it’s possible that a property that was positive cashflow now becomes negatively geared. Because as interest rates go up you’re paying more interest out of your account or out of your loan. So that means that you would need to earn more money from rent to cover that and if you’re not earning enough money from rent you’re going to end up losing a little bit of money.
Kaz: So a tip there might be Den, and this is certainly what we do if we’re looking at property. When you’re analyzing a property to work out its potential cashflow, is it negative or positive, we would factor in interest rates that are one or two percent higher than what the actual interest rates are. That means we got a little buffer there?
Den: Yeah I go for 2%. When I do mine I look at 2% above the current rates.
Kaz: That’s a good tip for people then.
Den: Yeah it’s a great idea to do that. So look, we’ve talked about the pros now the cons, obviously it’s harder to find. You might need to be creative, should I say? They can be in areas of slower capital growth, now that doesn’t mean that that’s always the case. I know about two years ago we bought a property in Queensland in Australia, and it was a $144,000 and it was a positive cashflow property, within three months the property was worth over $200,000. So it jumped up dramatically. So it doesn’t mean that only negative gearing will give you good capital growth, but you need to maybe be a bit lucky. And the other con is, and I don’t really think it’s a con but it is, is that you have to pay tax on your profit.
Kaz: Yeah I don’t think that one is a con either; I think you need to pay tax and that’s a fact of life.
Den: And my mum always said to me, God Bless the woman, but my mum always said to me the more money you earn, the more tax you pay, that’s the way it is. If you want to earn more money be comfortable paying more tax and I certainly am. Ok, so with that in mind I just to go through really quickly how you might look to find a positive cashflow property. And the first thing I do is jump on to one of the websites that looks at property in general and look for areas that have high yield. Once there’s an area that’s got high yield, then go and have a look at that area on your online search, have a look at sale prices and have a look at your average rents and see how they’re going. Now you’re probably going to have to go through and make yourself a spreadsheet or make some sort of a data number cruncher, because in my experience I don’t know about you, but in my experience I really haven’t found a lot of great property analysis tools online.
Kaz: Yeah I think I found the same experience actually we’ve ended up making our own spreadsheets to crunch the numbers.
Den: Yeah I’ve done the same thing
Kaz: There are few out there and look just to be honest, I haven’t actually found one that I’ve continued to use at all.
Den: Yeah no, I’m quite happy with the one I use which is my own spreadsheet. Maybe if people are looking for a tool like that let us now and maybe we’ll titivate our own ones up and send them to you to give you a little spreadsheet to use or something you can use that will have a few of the numbers and a few of the formulas already in there. So if you need a hand with that do get in touch with us and we’ll see what we can do to help you.
Den: Ok this episode we have a listener’s question. We’ll it’s not really a question but it’s very exciting for us because it comes from someone overseas. Well overseas as far as Australia is concerned. So it’s John from Parnell and fortunately John wrote that Parnell was in Auckland because I wouldn’t have known that. So here’s a cheer out to John, and what is John have to say?
Kaz: John says, ‘Hi guys I just wanted to share good news story with you. I was listening to one of your podcasts about seeing if you could buy a property. Now I took your advice and wrote down the budget. Seems I have some excess cash each month though I must say I hadn’t noticed. I spoke to my bank and it looks like that I can afford to buy an investment property albeit a small one. I’m stoked and now I’ve become a real estate website junkie. Will let you know how I go. Cheers, John.’ That’s great!
Den: That’s fantastic, fantastic. So really do make sure if you’re interested in investing in property make sure you’ve got a finger on the pulse of your own finances. Just like John did.
Kaz: So Den what’s our Quick Tip for today?
Den: The Quick Tip for today is that a positive cashflow property is going to have a similar yield to the interest rates. So if you know what your interest rates are and you have a look at the yield and they’re similar, there’s a good chance that it’s a positive cashflow property.
Kaz: And where can people find out about yield?
Den: Ok, the yield rates again are in the online websites; websites like domain.com.au I think they’re great for finding out the average yield of a certain area. Or in a popular investing magazine, you might be able to find that sort of stuff as well. Often the property investing magazines have huge tables at the back and they let you know yields for certain areas.
Den: Alright, and that brings us to the action for this episode. Use one of those previously mentioned resources to find three areas where there’s a high yield. And by high yield, normally we mean more than 6% but if you can get more than the current home loan interest rate that’s fantastic. Try and find one property in each of the areas which you think might get a positive cashflow and crunch the numbers for that property. Do a little bit of an analysis and see what you can find.
Kaz: Ok well, next episode we’ll be asking you what’s your strategy Den! We’ve talked already about negative gearing and about positive cashflow and we’re going to talk about some of the other strategies there are next week and give you some ideas on how to determine your strategies. I’m looking forward to that!
Den: Fantastic. Now remember you can always email us at email@example.com. Or just share your good news stories like we had today. Alright we’ll also have our usual segments next week including news and tips so get over on to iTunes and subscribe to our podcasts.
Kaz: And don’t forget to visit the website www.everydaypropertyinvesting.com and sign up for our Email newsletter tips and regular information about when our podcasts are coming out.
Den: Fantastic. Well Kaz, until then!
You’ve been listening to Everyday Property Investing, the show empowering everyday people to create wealth and achieve financial freedom. Please note that this show provides general advice based on personal experiences and is for educational purposes only. We’re not qualified accountants or lawyers and we strongly recommend that you build a strong team of qualified professionals around you and seek their professional advice that is specific to your own circumstances. You can visit us at www.everydaypropertyinvesting.com.
See you next time!