Do you have a stock standard cookie cutter property that is negatively geared? Here’s how to try and make it positively geared.
How do you make an existing cookie-cutter investment property positive cash flow?
Hey! I am Ryan from OnProperty.com.au, helping you find positive cash flow property.
What if you already own a property, a standard cookie-cutter property? Maybe it is a new-build, maybe it is an existing property that is not a new-build; what if you already purchased that property, it is negatively geared. How can you flip that around and generate some positive cash flow and turn that property into a positively geared property?
This is an absolutely great question that was asked to me by Adrian. Thanks for asking that question Adrian. If you have questions guys, send that to Ryan@OnProperty.com.au, so I can create a video about them.
So, there are 2 ways – just 2 ways, there are a lot of different ways but they all come under two main umbrellas; to convert a negatively geared cookie-cutter property into a positive cash flow property. There is decrease the expenses of the property, increase the income of the property. They are your 2 options. They are really the only 2 options you have, so let us delve into this in more detail because I know you want to hear some more ideas than that.
Let us look at decreasing the expenses. This is pretty limited in what you can do. The biggest area you can usually decrease your expenses is in your loan. A great option to decrease your loan for a lot of investors is to go from principal-and-interest-only, principal-and-interest loan to an interest-only loan. This would decrease the loan repayments significantly and could be enough to put you in a positive cash flow position. So if you have not already done that, go and speak to a mortgage broker about the opportunity to do an interest-only loan.
The second thing that you can do is to shop around and to try and find a better loan. I think it was someone that I know who recently got a loan for under 4%, 4% interest! Crazy! And I know people are paying over 5% or more for their interest. So by shopping around, you can potentially lower the cost of your mortgage. If you get really desperate, I do not really recommend this, but if you get really desperate and you just need something to push over the line, you could consider self-managing your property, which is going to save you probably around 6% to 8% of the rental income of a property. So, on $400 a week, that is something like $25 to $30, or something like that a week.
It is not huge savings, but if you need that little push, then that is something that you can consider in terms of decreasing expenses. But that kind of ends it for decreasing expenses. You do not have a lot of opportunities to decrease your expenses on your property because a lot of things are out of your control. When the water heater breaks, you have to put up $2,000 to put in your water heater in; not really in your control. So, it is very difficult.
The next thing to look at is how to increase your income. Now, the person who asked this said that they had a cookie-cutter property, and I think the best approach to turn that into a positive cash flow property is to stop thinking cookie-cutter and start thinking how can I maximize the rental income of this property, think outside of the box. Now, that maybe keeping it as a cookie-cutter property and improving it, but there are a lot of things outside the box that could significantly improve your rental income if you were to consider them and think about them.
So, the first thing that I would do is I would go to my rental manager, I would go to my agent and I would say I need to increase the rental income of this property by X amount. Do your figures work out how much extra you need in order to generate a positive cash flow; if that is $20 a week, that is more achievable than if it is going to be $100 or $200 a week. But go to your agent and say, “Look, I need to achieve this growth in rental income for my property.
It is negatively geared, I cannot have it anymore. I am done with it. I need to grow the rental income.” Ask them what sort of houses in the area are renting for that amount; what do I need to do to my property for it to rent to that amount, and they will happily tell you. For them, if they are going to rent your property for an extra $100 a week, that is more money in the bank for them. They want to be a good rental manager; they should give you some advice there.
So, first thing I would do is ask them for their advice. I would not necessarily take it, but I would definitely take it on board, consider it, and then use that as I move forward. So, go and ask your agent. You can consider things like minor renovations, so you could paint the kitchen, paint the bathroom. You could do new carpet, or a liqueur paint all around. It is amazing the difference that a liqueur paint and a new carpet will make. As a renter, there are a lot of properties that we see online that have bright blue carpet. And basically, my wife, she sees the bright blue carpet and she clicks next.
We do not go and view that property unless we are really desperate because we do not want to live in a property that has right blue carpet. Same goes for pink bathroom, or a really ugly kitchen. It is amazing what you can achieve with some white paint to improve an old bathroom or an old kitchen. It is amazing what you can achieve with some fresh, neutrally colored carpet; not bright blue, not all these crazy colors, something nice, something modern. And so, something like that, minor renovations could set you back a couple of hundreds to a couple of thousand dollars, but could get you a significant increase in your rental income if you do it correctly.
You could also consider major renovations. Now, I consider major renovations things like adding an extra room or putting an extension on your property. Maybe it is gutting the kitchen and redoing the kitchen to a higher standard, or doing something like that to the bathroom.
You need to be really careful where you spend your money, and again, great to go and ask the agent and say, “Look, I have some money to do some renovations to this property, where is it going to be best spent?” And they can give you some advice on that. So, major renovations could help increase the income above the money spent so that you can generate a positive cash flow.
You can also consider some outside of the box things like dual occupancy, so converting what is a single dwelling – so maybe it is a 4-bedroom house where you can only have one tenant, into a dual occupancy property, where you have 2 2-bedroom houses that you can rent out both of them. You can potentially increase the income there. Obviously, you need to check with council and things like that, if you are allowed to do that. You could consider student accommodations as well. So, by renting out by the room to students or actually to anyone, you can get a higher value rent for your property there. You could look at AirBnB as well.
Now, this is an outside-of-the-box way of doing it, but I know friends of mine who have rented out their property for, I think they got like $7,000 in the space of 4 to 6 weeks for their property, which if they have rented it out full time over that period, they probably would have got somewhere between $2,000 to $3,000. So, this was peak holiday period and so they earned a lot more money for it; but that is something you could potentially consider, if AirBnB-ing the property.
So, dual occupancy, AirBnB, you could consider building a granny flat out at the back. Again, check with your local council but there are a lot of companies out there, a lot of builders who will build you a granny flat. Generally, it would cost around $100,000 to build a 2-bedroom granny flat. In some areas, like Sydney, it can be really easy to get this done, and then you can rent them out for significantly increased rental incomes. They have seen granny flats that cost $100,000, renting for $400 to $500 a week in the right areas within Sydney. So, granny flats are something to consider.
More advanced things would be like subdivision and potentially building a property on the subdivision; or you could subdivide and sell off the land, where you could subdivide and sell off the house and keep the land. You can play around with subdivision. Another opportunity that is not really done out there, but I feel like it definitely could be, is you could charge more for people if they have pets.
So, you could advertise your property as a pet-friendly property but it is going to cost more if they have pets. And so that is something really hard for people with pets to get accommodations and to rent because so many places do not want pets. Well, if you do your numbers and you say, “I can get an extra $20 or $30 a week because I am allowing people to have pets,” maybe that will push you over the line.
Lastly, some things to think about: Firstly, are you claiming depreciation on your property and are you claiming it correctly? Have you had a depreciation schedule done? Because if you can claim more depreciation, you can potentially get more tax back which could put you in a positive cash flow situation.
Now, obviously speak to a surveyor; speak to your accountant about this, but definitely getting a depreciation schedule done so you are maximizing your tax deductions is going to help get towards that positive cash flow situation.
And the last suggestion that I have is quite outside of the box, and that is to consider selling your property via vendor finance. Now, this is where you sell your property to a new buyer, just like you would sell a property to anyone, but instead of them going out and getting money from the bank and paying you in a lump sum, you are actually extending a loan to them. So you are saying, “I will sell you this property, but you just need to pay me a deposit of X amount.
And then I am going to charge you an interest rate of X%.” And so, there is a whole process there that you can go through where you can actually sell your property for probably more than its worth via vendor finance – to people who cannot get a traditional bank loan. They generally pay a higher than average interest rate as well, which can turn a profit because you have a lower mortgage with a lower interest rate charging a higher amount with a higher interest rate, which is going to create a passive income for you.
So, this is out of the box. This is not for everyone. You need to be very active if you are going to do this. You need to get the right legal advice and things like that, but definitely it can be done in most states in Australia. So, check with a lawyer or something like that, a solicitor if you want to go ahead and do this. If you just Google vendor finance solicitor, there will be some that will come up for you. So that is kind of the last ditch effort if you are really struggling with negative gearing. You want the positive cash flow but you cannot get it through rental loan, you could consider selling via vendor finance.
So, there you have some ideas about how to make an existing cookie-cutter investment property positive cash flow. We can try and decrease our expenses, mainly our mortgage by getting a better interest rate, considering interest-only as well. We could go self-manage if we want, and manage the property ourselves; though it is probably not advised.
It is a lot of work for not a lot of money. And then we can look at ways where we can increase the rent. So talk to the agent, minor renovations, major renovations and extensions, dual occupancy, renting out by the room, granny flats, subdivisions, charging people more to have pets. Look also at your depreciation; make sure you are maximizing your tax deductions. And lastly, you could consider selling via vendor finance.
So, I hope this has given you some ideas with whatever property that you have. Generally, people who have cookie-cutter properties, if it is brand new or something like that; it could be very difficult to increase the rental income for the property. You really need to get outside of the box. You really need to think about different things, get to understand your market, think about in what scenario, in what situation will this market pay more for your property than what they are currently paying because often the suggestion of asking your agent, they might not have any ideas. They might just be an agent who is happy doing open for inspections, collecting rents and that is about it.
They might not be super creative thinkers, and so sometimes you need to really get creative with your thinking. Look at the market, assess the market like go through and assess a lot of different options until you find the one that is going to generate a positive cash flow for you. Because the chances are you are, you are not just going to be able to increase your rent $10 per week, you are not just going to be able to paint the house and magically you are going to be positive cash flow; you are going to have to do some drastic things in order to turn it into a positive cash flow situation.
So, I wish you all the best turning your negatively geared, cookie-cutter investment property into a positive cash flow property so you can start seeing the passive income coming in, which will give you security and flexibility. I wish you the absolute best with your investment property, and until next time, stay positive!