8 tips for positive cash flow investing

8 tips for positive cash flow investing

Posted on Thursday, March 15 2012 at 9:35 AM

In the current property cycle cash flow positive properties are increasingly on the investor’s hit list, but many don’t fully understand what to look for, according to Robert Projeski of Australian Mortgage Options.

The first step is to be clear on how much the property needs to return to be positive cash flow, said Projeski.

“This may depend on your income, your tax position and your level of comfort with debt, but once you know, you can look at the best finance for it and whether the likely rent will be enough,” he said.

“If debt is something you’re comfortable with and can manage well, you may consider using equity to fund the shortfall in high growth potential properties.

“Make sure you understand the pros and cons of this sort of strategy well, before you choose this option. You may also use equity in funding the property. Be aware that most investors who fail have simply pushed themselves too close to the edge and any changes in interest rates or rent have them against the wall. Talk to a mortgage broker and good tax accountant to establish your best position.”

Projeski offers eight tips:

1. Do your homework – eg. RP Data, investment magazines etc.

Between RP Data and investment magazines you’ll have access to statistics showing average rental returns, property values and sales history for most areas. If you find the highest ‘average’ on rental return and then research properties in that general location or just outside of it, then you have at least a good starting point to work from.

2. Do your research online first

The ability to find suitable properties online, in your own backyard and all over the world, are magnificent. You have the ability to shop and research 24/7, which can give you access to a host of opportunities. Doing your research for specific property types, prices, locations and styles of housing this way means very efficient use of your time. Using alerts can give you access to new listings within your search criteria delivered right to your inbox. Consider looking for lower value properties (often the best returns), blocks of units as well as motels, hotels, boarding houses and lucrative student accommodation.

3. Check out properties without leaving home (Google earth)

This is a fantastic free program that helps you survey an area using satellite technology. It’s great for looking at properties that aren’t in your backyard. You can get a fair idea of the layout of the area and look at the properties you’ve found on the internet.

4. Speak to as many local agents as possible

Talking to a number of real estate agents in an area can give you an overall picture of the area, help you understand the growth potentials relating to the local economy and what areas potentially to avoid. However, sometimes the areas they tell you to avoid can still be good to invest in. This can be done remotely by telephone and email. Many agents are quick to respond to emails, but an initial telephone call can be quite effective too.

Sometimes it’s more beneficial to have face-to-face conversations if you’re close by, giving you a better basis to establish a good rapport with the agent. Remember, agents want to make sales, so as a potential investor, they’re likely to keep you posted on any suitable properties on the market or that are coming up.

5. Get the lowdown on the local rental market (property managers)

If you’re looking to invest in an area, speak to property managers, as they usually know the rental market better than the sales people and have a good idea on rental demand and returns. They understand where the tenant demand is, what they’re likely to pay for specific style and location of housing.

6. Employment, transport, shopping and schools

As an investor, look closely at existing employment centres such as factories, shopping centres as well as easy access to public transport. Where there’s work, there are people. It’s worth finding out about any infrastructure works in planning as this can make properties more attractive for tenants and re-sale later on. Also, look at shopping centres and schools in close proximity to the property, which will make it more attractive for families and ensures highly rentable properties.

7. Always start your offers ‘low’

Once you’ve found a potential property that has a higher than usual return or potential for growth, calculate what price you could pay to have it work for you – then make your initial offer low. It may seem like a very low offer, but what do you risk? Remember it’s a buyers’ market and a rejection is an opening for further negotiation.

If a property has been ‘for sale’ for a while, the vendor may be particularly motivated to sell even at a lower price. Investing is all about numbers – make more offers and eventually you’ll be successful in buying a property at a price that adds up.

8. Look for properties that are different or unusual

Consider unusual properties where you can potentially get a better than average yield. For example, look at old ‘Queenslanders’ or other properties that can be renovated, have the potential of turning a block into two lots, or a simple creation of space, eg. separate living areas.

Consider granny flats as a potential for double tenancies. In New South Wales there are new laws that allow for multiple rental properties on one title to meet the growing rental demand and the ever-present housing shortage. Consider an old motel that might be able to be renovated to provide individual permanent rental for students. This can work particularly well near training hospitals and universities. Be creative, some properties may have a back lane access presenting opportunity to rent out sheds for storage to tradespeople or to accommodate boats and caravans.

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