Q. “I’ve found a brilliant house to invest in, but it isn’t cash-flow positive. Is there anything I can do to change this? Or should I just walk away?”
A. During 2006 and 2007, property markets in many parts of Australia experienced considerable value increases, most probably on the back of an economy that was more favourable than it had been for many decades and a resources industry that was booming. The result of such a quick and widespread increase in the value of property was that yields (that is, rent returns) plummeted. For example, a property that was valued at $200,000 with a rent return of $250 a week ($13,000 pa, or 6.5%), which subsequently grew by 20% to $240,000, had a yield decrease of 1.1%, to 5.4% pa. While it is common for values to increase in sudden spurts like this, rent returns, where demand remains constant, tend to increase in a smoother line, tracking CPI increases. As such, we now find ourselves in a position where many areas have high values and low rent returns.
What does this mean for positive-cash-flow investors wishing to get into the market today? Put simply, it will take a year or two of stabilised property values and rent increases until we reach a situation where it is easier to find positive-cash-flow property again. On the question of whether a cash-flow investor should stay out of the market until that time, this depends very much on their personal financial circumstances. If they can afford to fund a small loss for now, then it is well worth finding an area with a strong prognosis for future rent growth, buying today and weathering a small negative cash flow for a year or two. Where personal cash flow simply does not allow for any cash input from personal funds, waiting for the situation to rectify itself may be the more prudent option. The coming years should provide much more stability.
As for being able to turn a negative-cash-flow property into a positive one, there is not a lot that can be done. Be sure that you have explored all options for claiming depreciation, as tax back from on-paper deductions gives you extra cash flow. Decide if small inexpensive renovations can result in higher rent. Sometimes the interest on debt of say $5,000 (around $420 a year, or $8 a week before your tax break) may be a small price to pay for an increased rent of say $10–20, but ask a property manager first if this can be achieved. In some areas, adding equipment such as an airconditioner or audio-visual packages can increase rents and also tax deductions. Any such strategy should be fully analysed first, however, to ascertain if a true benefit can be realised in terms of increased cash flow.
The experts
Margaret Lomas is the founder of Destiny Financial Solutions and is a qualified financial advisor and the author of five best-selling property investment books. In 2006, she was Telstra NSW Businesswoman of the Year. Visit: www.destiny.net.au
John Brodie is the founder of Vim Sustainability, which provides architects, developers and owners with cost-effective strategies to improve sustainability in the built environment. Visit: www.vim.net.au
Chris Rolls is the managing director of Rental Express, Brisbane’s largest specialist property management company with nearly $1bn worth of property under management on behalfof investors. Visit: www.rentalexpress.com.au