7 Hot Tips For Purchasing Your First Positive Cash Flow Property
Purchasing a positive cash flow property can be difficult, especially if you have never done it before. A lot of people give up stating that “positive cash flow properties don’t exist anymore”…this couldn’t be further from the truth!
Positive cash flow properties can be found in Australia, everywhere from the inner city suburbs of Sydney to the rural areas and mining towns of Western Australia. However, they are not easy to find and sometimes they have to be created.
Below are 7 hot tips that will help you successfully purchase your first (or next) positive cash flow investment property.
1. Take Your Time
When you have decided you want to buy an investment property it is easy to get carried away and rush into things. Making rushed investment decisions, especially if you have never purchased a property before, can be extremely risky.
When I first started looking for positive cash flow properties I made the mistake of thinking that when I found a positive cash flow property that it was the only one out there and that I had to buy it right away. Luckily a few things stopped me from buying the first property I saw and I’m glad they did. Through that experience I learned that positive cash flow properties are a dime a dozen and if I miss out on one there will be another one around the corner.
So take your time with your research. Research the area you are looking to buy in before you decide on a property and make sure that it is a quality area. Take the time to look over the figures of not just one but many properties so you can compare results. Don’t rush, take your time because it is better to wait an extra year and grab a great deal than to rush into a deal and lose a lot of money, and a lot of time.
2. Do The Figures
When looking at properties it is 100% vital that you do the figures, especially if you are looking to invest in positive cash flow property. If you fail to do the figures accurately then the property you bought that you thought was positively cash flowed might actually cost you money each week.
Just because the rent coming in seems greater than the interest costs on your mortgage, don’t assume that the property will be positively cash flowed. There is a reason why banks only count 80% of the rental income on a property.
You need to take into account expenses such as council rates, water rates, maintenance, insurance, rental manager’s fee and even vacancies on the property. This is a lot of expenses to take into account.
A quick way to test whether or not a property will be positive cash flowed is to take the purchase price and double it. Then chop off the last 3 zeros (000). If your weekly rent is equal to this number then it is likely that your property is going to generate a positive cash flow.
For example, if you purchased a property for $300,000, you would double that figure, which would give you $600,000. Then you would chop off the last 3 zeros to give you $600. If that property was generating $600 or more in rental income then it is highly likely that it will produce a positive cash flow. If you don’t like doing this in your head I have created a free quick test calculator that you can use for free online. It quickly calculates whether a property you are interested in passes the quick test.
Do the figures on a number of properties to see which ones will give you the best cash flow return. Also it helps to play around with the figures and see what would happen if you changed certain things.
Would it be positively cash flowed if you increased your deposit, or increased the rent by 10%. Could you still afford the property if interest rates rose by 1% or if it was vacant for 10% of the year?
The more figures you do, the easier it will become to spot a positive cash flow property quickly. You can use our variety of property calculators to help you do your calculations quickly and easily.
3. Don’t Get Emotional
When it comes to investing you need to remain completely objective. One of the big mistakes that investors make is they buy a place because they “like” it or because they become emotionally attached to it in one way or another.
Emotional attachment is the way we sell our property for a higher than market price, but it can also cause us to pay a higher than market price when we buy our properties.
This is why it is so important to do the figures on a number of properties. You should be buying a property based on its predicted financial return, not the fact that you personally like the layout or like the cute backyard. Remember that you are not going to live in it, someone else is!
The best way I have found to not make emotional decisions is to do a lot of financials on a lot of properties. You then see that this property isn’t “the one” but that is it just “another one” and that many great opportunities come up all the time. That way you know that if you don’t get this one, there will be another opportunity right behind it.
4. Get Ready To Invest
It is important to be ready to invest, so that when the right opportunity comes along you can jump on it without having to stuff around getting bank approval and finding your deposit.
Here are a few things you should try to have ready so you can invest immediately.
An Investment Plan – You should have a plan of how you want to invest and what you want to invest in, that way you can weigh your potential property against your plan to see if it fits in.
A Deposit – It would be great to purchase the property without a deposit, but that isn’t really an option in this economy. You will need to save your deposit (usually at least 5%) before you will be able to invest.
Loan Pre Approval – Get your loan pre approved by your chosen lender so that all you need is a valuation on the property. This will make finances a lot easier.
Due Dilligence Kitty – Have a due diligence kitty saved so that you can afford to pay for the building and pest inspection, and any other inspections you may need.
A Conveyencor/Solicitor – Not as important as the above, but it helps to have a Conveyencor or solicitor chosen, so when you make an offer you can get the contract drafted as soon as possible.
5. Houses vs. Units
A lot of people purchase units, because they allow a lower entry point into the market. But units don’t always provide the highest cash flow return. This is because they often have high strata rates that strip you of any positive cash flow you may have achieved.
Houses are also often easier to add value to. You have more say over the changes you make to your house, and this can allow you to increase the rental income significantly.
Houses also allow for dual occupancy (and dual incomes). There is more land so you can do a subdivision to decrease your loan or to add another property (and income). You could add an internal wall for less than $2,000 that could increase the rental income dramatically.
There is a lot you can do with a house to increase the rental return that you are restricted from doing with a unit. I am not saying units are bad investments, but I am saying you should look at both opportunities and look at the advantages a house can offer you.
6. Choose The Right Loan
The right loan can make the difference between property that costs you money every month and a property that makes you money every month.
Obviously the lower your expenses the more likely your property is going to generate a positive cash flow.
Your mortgage is going to be your biggest expenses, so any reductions you can make on this would help your cash flow more than any other area. It will often make the difference between cash flow positive or negatively geared.
Here are a few tips to save a significant amount of money on your home loan.
Shop Around – Shop around yourself or get a mortgage broker to shop around for you. You could save as much as 1% interest on your loan by shopping around instead of just going with the bank you already have a bank account with. On a $300,000 loan that equates to $3,000/year in savings or over $57.00/week. That is $57/week you don’t have to earn in rental income to cover those costs.
Honeymoon period – Many lenders offer a honeymoon period, where the first year or two offers you a lower than market rate. Then in the later years it goes back up to market level. The first couple of years will be when rents are at their lowest. If you can lower the interest for this period you can save yourself a lot of money. Then when the honeymoon period ends, hopefully, the increased rent will cover the increase cost.
Interest Only Loans – Many people steer away from interest only loans because they aren’t paying down the principle. But it is often a smart move to free up that cash flow so you can afford more property or increase your cash flow. On a loan of $300,000 at 8% p.a. an interest only loan will cost you around $461/week in interest, and a principle and interest loan (@25 years) will cost you approximately $534/week.
That is an extra $73.00/week that you don’t need to earn in rent. If you save 1% and go interest only instead of principle and interest you could be paying approximately $130/week LESS on your mortgage (based on $300,000 loan). That could turn a lot of properties from a negative cash flow to a positive cash flow!!!
Then when the rent goes up you could always change the loan back to principle and interest, and let the increased rents pay off your mortgage, instead of having to take it out of your own pocket.
Fixed vs. Variable – Depending on the market it could be better to choose either of these products. Choosing a variable interest rate may be able to save you a larger percentage on your mortgage, making it positive cash flow. But it also exposes you to market fluctuations a lot more. Do your research and make the decision that is best for you.
7. Increase Your Rental Income
Be creative and look for ways you can increase your rental income above what you are already achieving. There are many ways you can increase the potential income of your rental property.
Some examples include:
Renovations, adding an extra room, dual occupancy, renting the garage separately, including an air conditioner, including a washing machine or even something as simple as painting the house or bathroom or landscaping the gardens.
For more detail on the ways you can increase the value of your property (and the rental income), get your copy of of our eBook “50 Proven Ways To Dramatically Increase The Value Of Your Investment Property, Instantly” by going to our eBooks page now. (coming soon)
On this blog I always want to under promise and over deliver by providing you with you more (and better) content than you first anticipated. So I have compiled 3 bonus tips below to help you buy your first positive cash flowed property.
A. Make Creative Offers
Even in the Australian market you can make creative offers and have them accepted. The mistake that most people make when negotiating is that all they negotiate on is price. This can work, but creative offers can work also.
For example, a couple of years ago I had an offer accepted where I would pay full purchase price but I would pay 90% of the loan at settlement and the remaining 10% within 3 years. That creative offer got me 10% of that property interest free for 3 years.
Creative offers work, but it can be difficult to get them past the real estate agent to the owner of the property. I have found it helpful to write the offer down (on paper or in an email) and get the real estate agent to pass it on.
Most agents aren’t used to creative offers, and neither are buyers. But if you can offer them full price but negotiate on terms, you can create a huge win-win situation where the buyer gets what they want and you can save a lot of money.
Some examples of creative offers are:
Options to buy, delayed payments, vendor/owner financing, longer settlement periods, early access to the property, or even where the buyer pays your stamp duty and taxes. Be creative and you can easily turn a property positively cash flowed.
NOTE: I find this easier in a slower market (such as rural areas) as the buyers have more time to consider your option and you aren’t outbid by someone offering cash with no fancy terms.
B. Make Any Property Positive Cash Flowed
You can make any property positively cash flowed by selling your property through an owner financed deal. This is a deal where you as the owner sell the property not for cash, but for a loan. The buyer assumes a loan with you instead of with the bank.
You can usually sell your property for greater than market value and charge slightly higher than market interest rates. So even if you have a loan on the property you can generate a positive cash flow.
This is too big a topic to go into in this post. I have dedicated a whole post to it – How To Generate A Positive Cash Flow Through Owner Finance
C. Keep On The Lookout
Believe it or not, but positive cash flow properties are not one in a million. They are hard to find, but there are lots of them out there if you know where to look.
Keep on the lookout for positive cash flow properties. Search the Internet and do the figures on a variety of different properties and soon you will begin to know where to look for the positive properties and you will know exactly what they look like.
Don’t give up! This is an endurance event, not a sprint. The more you do it the easier it becomes. For more information on where to find positive cash flow properties read one of my most popular posts “10 Places You Can Find Positive Geared Properties For Sale”
D. Read A Book
A good investment book can teach you as much about investing for $30 as a full 3 day seminar will teach you for $3,000. It is well worth the investment and will prepare you mentally for the challenges of buying an investment property. The best return on investment you will ever get is the investment into your own education.
Read my post on The Top 10 Positive Cash Flow Books Ever Written
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