WHY STARTER INVESTORS SHOULD BE WARY OF EXTREMELY POSITIVE CASH FLOW PROPERTY
A webinar participant recently asked Nathan, “Where do you see future growth and positive gearing opportunities in Australia?” Here is what he had to say about chasing positive cash flow properties for the sake of it and what to look out for.
DISPELLING THE CASH FLOW MYTH
According to Nathan, a lot of people buy into the myth that if a property puts $20 or $50 in your pocket every week, it is, by default, a good investment. It has a positive cash flow – therefore it has to be good, right? Not necessarily. Things can go wrong with investment properties. Just because it initially puts a bit of money in your pocket, it doesn’t mean it always will. For example, you could have a hot water unit break and need repairing. This could put you into negative cash flow territory for that financial year. More importantly, having a positively geared property from day one doesn’t guarantee capital growth, which is more important for building your net worth position. Generally speaking, capital growth is what will really make a difference to your net worth and wealth. Over the long term the a healthy rate of capital growth will provide security and a chance to recoup or increase your profit in case a property did take a turn for the negative for any reason. A healthy cash flow is important as it lets you sustain your property portfolio, but it’s not the be all and end all for investors.
WHAT SHOULD INVESTORS FOCUS ON
As a young man, Nathan embarked on property investing by purchasing properties for $150,000 in Sydney’s far west. These first properties a gave him a neutral cash flow. Nowadays this cash flow has turned positive, while the strong capital growth has allowed him to access equity and build the 200 plus portfolio he currently helms. The lesson to be learned from Nathan’s strategy is that capital growth in addition to a neutral cash flow will ultimately give you more than just positive cash flow without any potential for growth.
According to Nathan, there are quite a few regional areas in country NSW and Queensland that have the potential to earn positive cash flow at this particular time. Regions such as these are always shifting and changing however, and long term capital growth is never as certain as it is in the nation’s capitals.
THE METRO MARKETS
Nathan says that over the past couple of years he has been able to purchase positive cash flow properties in Sydney by structuring the deal correctly. He has purchased properties where he has been able to subdivide, or develop in order to add another dwelling. He has also been able to purchase land and build two houses on it. Strategies such as these are not suitable for those who are building their foundation portfolio as they have a higher degree of risk, delay and uncertainty built in. It is important to get your foundation right, says Nathan, and then use the equity to buy other types of properties with peace of mind that you have a steady cash flow and capital growth base. The Sydney market is now looking neutral however good positive opportunities exist in the Brisbane region.
If you wanted to go head on into buying something high risk, in the hope you will make a strong, positive cash flow, what is your exit strategy? If something goes wrong, how will you leverage yourself out of it? Nathan recommends having a well established foundation portfolio before considering high cash flow ventures such as apartment blocks or hotels. Don’t bite off more than you can chew by going for a big cash flow before building an asset base, he says.
What has worked for you in your investment strategy? Please share your experiences in the comments section below.