Positive Cash Flow Property Queen

Brenda's Cash Flow Top Tips

My definition of positive cash flow is;
When the income is greater than the expenses.

Capital Appreciation or Positive Cash flow: Which is better?
Answer: It depends on what you do with the profits.

With Capital Appreciation, you can only use that money by either refinancing or selling the property. If you wish to replace your wage with a regular amount of money coming in, then positive cash flow is best. Cash flow positive properties are not dependant upon rising values of real estate to make their value felt. The value comes in the steady and constant rent returns.

Is it possible to buy cash flow properties today?
Yes, it is possible but they may be in areas where there are very little prospects of any capital appreciation in the near future. Beware of rental vacancies. No rent = No income. Research an area carefully to assess the risks. Ideally, you need some of both cash flow and capital appreciation to continue borrowing and buying.

How can a negatively geared property be turned into a cash flow positive property?

1. Time:
   Wait for natural inflation to raise the rents until you show a profit. Wages increase over time, as do rents. If you have the income to hold the negative geared asset then rental returns will eventually grow enough to cover your expenses. It may just take a little while.
   
   
2. Refinance to interest only repayments:
   This could make a difference, as the repayments may be smaller than the rental income and thereby achieving positive cash flow. If you are worried about interest rate rises in future, then perhaps you could also investigate fixing the interest rate for a term. Always consult your financial advisor or financier to check all your options.
   
   
3. Pay in a large deposit:
   Borrowing less makes the loan smaller and thereby any loan repayments smaller. On my very first property, I got a 6 months grace of cheap 'honeymoon' interest rates. I invested every spare dollar I had during that time to reduce the loan amount so that when the honeymoon rate expired and I went onto variable interest rates, I had paid a substantial amount off the loan already and was ahead in my loan repayments.
   
   
4. Have a long 30 year Principle and Interest loan:
   The repayments will be smaller than on a 20 year loan. I have two 20 year loans at present. The repayments are higher than on my 30 year ones. I will be getting those two loans extended to 30 years in the near future as it does affect my cash flow.
   
   
5. Buy two properties instead of one:
   When the values double with time, sell one property and payout the loan on the other. Compound the idea and buy lots more, selling some and paying out the ones left. I do not have a never, never sell strategy. I like to sell one when it has achieved good Capital growth. I pay out the loan on it and another, then go shopping and buy another couple. I do a lot of calculations on my own financial situation, to weigh the pros and cons of selling and buying some more.
   
   
6. Add an extra bedroom and increase the rental return:
   Actually, a better word is "find" another bedroom. A tip I picked up from the Reno Kings workshop. I love finding the older houses with a formal dining room. This room quite often is easily suited to converting into an extra bedroom. All you have to add is a wall and a door, easy. A three bedroom house commands a far better rent than just a two bedroom one. Actually, you may even find the value of your house will increase if it has an extra bedroom.
   
   
7. Do a cosmetic makeover:
   Do a cosmetic makeover without spending a packet of money, and increase the rental return. This is my favourite area and it does add value to your property as well as attracting a higher rent return. The effect of a good scrub-down and paint of a property can be dramatic. Getting an old toilet replaced with a new one is not expensive and tenants will thank you for it. Just putting new handles on kitchen cupboards can dress the kitchen up a bit. Buy lace-look continuous curtaining for the windows. It is not very expensive and looks a treat. The theme here is not to spend heaps of money, but enough to attract a tenant who will be happy to pay a higher rent.
   
   
8. Niche Markets:
   Turn the property into furnished, student accommodation and bring in more rental yield. This is a potentially huge market, so if you have a property nearby to a university and there is public transport available, you may be able to pursue this niche market. Always check with your local council to make sure of any bylaws.
   
   
9. Subdivision & Joint Ventures:
   Subdivide a large block, keeping your house on one side and sell off the spare block to pay down the debt on your house. Tenants mostly hate mowing an overly large block. Some subdivisions are not too expensive to do. Enquire with local councils of the fees. If you are short of cash to fund anything like this, there may be people around interested in investing in the subdivision area with you and claiming some of the profit upon the sale of the new block. These are called joint ventures.
   
   
10. Strata Title a block of units:
    Strata title a block of units, and sell a few off to pay down the debt on the one's you have left. Again, you need to check with the local council, to see if it is possible. There are niche market investors who specialize in buying blocks of units and strata titling them for a profit.
    
    
11. Raising:
    Raise a low set house into a high set one. The tenant will love the extra room under the house for storage and you may even find the improved views from a highset will command a better rent return. If you can achieve city views, or sea views, the value of you property could increase dramatically.
    
    
12. Pet Owners:
    Put in a fence and get tenants with a dog. They will often pay a higher rent for the privilege. Some people will do anything to be able to keep their pets with them and the added security against burglary is a good thing. Make sure your rent lease specifies any damage to property by the pet, is the responsibility of the tenant. Tenants with pets do tend to stay put in a rental property and hardly ever move out, so you have no vacancy rate problems there either.
    
    
13. Quantity Surveyor:
    Always get a quantity surveyors report done on any property to claim any depreciation through taxation. The government wants you to provide accommodation and will reward you via your tax return. There is a whole stack of tax deductions associated with rental properties and you are entitled to claim them. Consult with a tax accountant, (preferably one who has rental properties of their own), to find what they all are.
    
    
14. Time:
    How long would I give a negatively geared property to get itself into a positive situation?
    I give it 3 to 5 yrs. If it isn't looking better by then, I cut it loose and sell it off. This is only my current strategy as I am fast-tracking my way to wealth. Be aware of what the current sales market is doing when you assess the negative gearing situation. You don't want to sell one off cheaply if there is likely to be a sharp rise in property values in another 12 months time. After you sell, can you get back into the market with a better buy? You may not want want to hold something that is going to be negatively geared for the next 15 years or more, and no capital growth for ten years either. There are exceptions. A house on the bank of Sydney Harbour may be well worth hanging on to, despite negative gearing.
    

Remember:
Not all properties will achieve positive cash flow by themselves in a reasonable amount of time. (3 to 5 yrs for me.) Not all properties will achieve fantastic capital growth in a reasonable amount of time (7 to 10 years). Capital appreciation is relatively easy, positive cash flow can be more tricky.

You need a good balance of both.

Good Luck
Brenda Irwin

PS. I will be at the next Property to the Max workshop

Additional info:

Conversation between Reno Kings and Brenda Irwin for the Today show 10-09-04

Reno Kings: Brenda, you did the Reno Kings workshop in 2001 and you went out and purchased 20 houses in 18 months and you are a one-income family, how could you afford to do that?

Brenda: I bought cash flow positive houses

Reno Kings: Brenda, what is the difference between cash flow positive and negative gearing.

Brenda: Negative Gearing: Is when a rental property is purchased with the assistance of borrowed funds and the net rental income, after deducting all expenses is less than the interest on the borrowings. Positive Cash flow: When the income is greater than the expenses.

Points to Note:

Negative gearing: takes money out of your pocket
Positive cash flow: puts money into your pocket.

Reno Kings: It sounds like positive cash flow is the best option. Why would anyone buy negatively geared property?

Brenda: Capital Gain or Positive Cash flow? With Capital Gain, you can only use that money by either refinancing or selling the property. If you wish to replace your wage with a regular amount of money coming in, then positive cash flow is best. Cash flow positive properties are not dependant upon rising values of real estate to make their value felt. The value comes in the steady and constant rent returns.

Reno Kings: Is it possible to buy cash flow properties today?

Brenda: Yes, it is possible, but they may be in areas where there are very little prospects of any capital gain and beware of rental vacancies. No rent = No income. You need some of both cash flow and capital gain to continue borrowing and buying indefinitely.

Studio: Brenda, if our viewers already own a negatively geared property, is it possible to turn it into a positive cash flow.

Brenda: Yes it is possible in some situations. Some examples are:

• Inflation will increase rents eventually – might take a while
• Refinance to interest only
• Increase the term of loan to 30 years
• Pay a larger deposit
• Add an extra bedroom
• Put a fence in and allow pet – increase rent

Reno Kings: How long would you give a negatively geared property to get itself into a positive situation?

Brenda: I give it 3 to 5 years. If it isn't looking better by then, I cut it loose and sell it off. Remember: Not all properties will achieve positive cash flow by themselves in a reasonable amount of time. (3 to 5 years). Not all properties will achieve fantastic capital growth in a reasonable amount of time (7 to 10 years). Capital Gain is relatively easy, positive cash flow can be trickier. You need a good balance of both.

Reno Kings: Thanks Brenda.