Top 5 problems buyers face when buying for cashflow.
A lot of investors look at buying for cashflow to bring in a good chunk of income each month. But things don’t always work out as simply as they look on paper …
Here are some of the top problems buyers face when buying for cashflow.
1) Hidden costs that turn buying for cashflow into negative cashflow.
According to Nathan Birch of Binvested, a lot of people don’t factor in all of the running costs of a property when assessing its cashflow.
“You could pick up a property for $50,000 and it could still be negatively geared even if you buy it cash,” he says.
“It’s important to look at its net position.”
While the rent may cover mortgage repayments, it also needs to cover council and water rates as well as strata levies (if applicable) and insurance costs. Property management is another regular cost that needs to be factored in for an accurate cashflow analysis.
2) The property has no growth prospects.
While a regional property may have a good cashflow and a cheap purchase price, it may not have any upside for growth.
Nathan says it would be a better investment to purchase a metropolitan based property with a neutral cashflow that has good growth prospects.
The same applies with cashflow. A regional property may have positive cashflow from the onset that doesn’t really go up over the next five to ten years. In fact, it may even go down.
In contrast, a metro property may have a neutral cashflow to begin with that turns positive over the next few years and continues to increase regularly over the long term. Buying in a high demand area such as Sydney or Brisbane means you will be more likely to consistently achieve a good rent in the years to come.
“You could buy a property that is neutral today, and over the course of the next ten years, by boosting the rent up by $10 a week each year, you would have a property that has a $100 a week positive cashflow by year ten,” says Nathan.
“That’s far greater than buying one that is going to give you $20 a week in a regional area.”
3) The property doesn’t fit well in the investor’s portfolio.
Nathan says it is always important to factor in the type of property you need in your portfolio. Do you need capital growth and equity or do you need cashflow?
While $50 per week in positive cashflow may look appealing, building a strong capital base could help you achieve a bigger and better portfolio that will bring in even more income over time.
Assessing your position and goals will help you figure out what type of properties you should purchase at each step of the way.
4) Not having a purpose in place.
Buying a positive cashflow property can be a great way to increase your serviceability. But, buying one just for the sake of earning $20 or $50 extra a week won’t really get you very far. Sure, it will pay for a six pack or a trip to the cinema, but it won’t be enough to build lasting wealth.
Nathan says that every property you buy should serve a purpose in your property portfolio.
For example, you may want to buy a property in Sydney but you can’t service the loan. If you buy a cheap regional property that has a good positive cashflow, the increased income may help you get that Sydney property after all.
The Sydney property may then add to your capital position and give you equity to fund another purchase and so on.
5) It is too risky without having a foundation portfolio in place.
A lot of people want to buy properties such as unit blocks, motels or commercial buildings because they have excellent cashflow.
But, while these types of properties are great for seasoned investors, they are too risky for those just starting out.
Nathan says it is important to build a strong foundation property portfolio before buying large cashflow deals such as these. Without a strong foundation, you leave yourself vulnerable with little contingency in place.
If you’re only thinking of buying for cashflow, remember the fundamentals!
Nathan says, there is a lot more to property than just cashflow.
He always buys below market value, with a good upside for growth and a strong cashflow.
It is crucial to ensure each property you buy serves a purpose in your portfolio.
If you have a clear idea of how each property will bring you closer to achieving your goals, you will have a much better chance at reaching financial freedom and telling your boss where to go.