How Do You Get Out Of A Negative Cashflow Situation?
Ryan: We are going to start with a question from a previous episode while we give time for people to tune in that we kind of botched last time so we’re going to go ahead and do it better this time.
So the question is how do you get out of a negative cashflow situation? So if someone has an investment property and it’s in a negative cashflow situation obviously they don’t want to be in that situation, what steps can they take to get out of that situation? I’ve got a few ideas but I’ll let you head it off Ben and give some ideas first.
Ben: So I think last time we botched it up, we broke it down a little bit too simply.
Ryan: No we actually didn’t answer the question. I re-watched it and we got distracted because someone had talked about their negative cashflow in Sydney and because of Sydney market had been so hot I think we got distracted by that. So yeah.
Ben: Okay. What are your points that you’ve got because I’ve got a few as well?
Ryan: Well the biggest thing that I think is there’s no like silver bullet when you’re in a negative cashflow situation to get you out of that situation. Or in most circumstances they’re not, sometimes people are undercharging the rent and you can just raise the rent and fix it, but often you can’t get huge gains everywhere so you’ve got to kind of improve every little aspect that you can.
So obviously getting the rents as high as possible is going to be key. So that might be through just raising them up to market rents or it could be through things like a minor cosmetic renovation to make the place look and feel nicer and to be able to rent better. Obviously increasing income is a big one, and then reducing expenses as well.
So there’s a lot of little places you can reduce expenses but I guess the biggest one people should probably look at it is really their mortgage, how much they’re paying on their mortgage, whether they can refinance that to improve the cashflow situation. Like they’re the two easiest and most obvious ones. Yeah.
Ben: It’s interesting that you say that, like literally last night because we’ve just gone from one principal place of residence into another one I’ve taken the money out of my offset account which means I have a large amount of debt on the property that we just moved out of again so that we can take advantage of the tax deductions with that property.
What I did, that was set up as a principal place of residence so obviously I was getting an interest rate under 4% at the moment and then I … fixed that interest rate last night as a principal place of residence at 3.88% for the next two years, which is about a saving of .9 of 1%. So it’s a pretty significant saving on an over 600,000 dollars in debt, like actually a really meaningful saving, dollar saving every year.
Then I rung up the bank this morning after I’d fixed that as a principal place of residence and basically told them that my principal place of residence has changed and now I’ve got principal place of residence loans with the same bank on two different properties that rates well below 4%.
That sort of, as Ryan said, the easiest way to get yourself out of that situation is to talk to your mortgage broker, talk to the bank, potentially go principal and interest on your loans at the moment. What I’ve noticed is there’s a half a percent to one percent difference between interest only rates at the moment and principal and interest.
So if you can afford that extra cashflow hit on a weekly basis you can dramatically bring down the holding cost to the point where the principal component is still less than what it would have cost you just having the higher rate at the time.
But yeah, that’s an easy low hanging piece of fruit for most people and most banks will give you at least the .25 if not 1 percent discount if you threaten them by taking your business somewhere else at the moment because no one wants to lose business right now.
Ryan: Right. So they’re the two biggest things that I’d look to ways to increase your rent as well as look for opportunities to remortgage.
If neither of those are possible or even if you do those and it’s just not enough then there’s other things like looking at your rental manager and who you’ve got to manage and whether you can go somewhere else, save a bit of money and maybe even get a better rental manager.
I had a friend who was paying 8% or 8.8% with a rental manager or something like that and they weren’t doing a very good job. He sourced around elsewhere, found one that was charging I think 6.6 or 6% or something like that and that actually ended up being really good.
So he saved some money there and actually got a better rental manager. Then a more extreme example would be I have seen people sell their property via … What’s it called where you don’t sell it for cash but you sell it on a loan? The term is escaping me.
Ben: Oh like a vendor finance or something like that?
Ryan: Yeah. So there’s other, a more extreme example would be to sell via vendor finance in order to flip the cashflow situation of that property. So that’s a more rare and more extreme example but that’s one way that you can generate positive cashflow from the property as well.
Ben: I think another thing that we haven’t talked about is kind of getting extremely real with that property and actually deciding if it’s worth holding it.
You know we used to talk about buying and holding for life and there are certain properties that I own that I will hold for the rest of my life, the unique ones in great locations with strong capital growth potential and you know strong cashflow potential in the future.
But sometimes, there’s just properties on our books, I’ve had them before that don’t provide good rent returns, are either at the top of the cycle or don’t have any long term potential for capital growth.
I spoke to a client yesterday, they’ve got a unit in Brisbane which they bought for 600k. Unfortunately it’s probably worth 550 grand now. It’s costing them money every single week to hold and I just can’t see how it’s going to do anything for them in the next five to seven years.
So it’s not so much the week to week cashflow that’s killing them but the opportunity cost of having 600,000 dollars tied up in that asset versus placing it into another asset that grows in value by five or six percent per annum for the next six years. So sometimes you’ve just got to cut your losses.
If it’s in the right structure you can carry that loss into a future gain on another property and it can sort of balance itself out.
Ryan: Yeah. And so there are some situations where you can try and do everything within your power to turn it from negative to positive and it’s still not going to make enough difference to cover it and you’re still going to be in a negative situation and so then I guess it’s really up to you.
Do you want to hold this property? Is it a good property? Do you see it performing well in the future? Over time rents could potentially go up which could over time turn it into positive or is it as Ben said, something that you need to cut your losses and run and basically reinvest that money into something that is positive cashflow.
That’s one way to go from negative to positive, right? You sell the property, get rid of it and then buy something that’s positive. So hopefully we did a better job of answering the question that time. We do have quite a few people watching so thanks everyone for tuning in.
Well I hope you enjoyed the answer to this question with Ben Everingham from Pumped on Property. We’re really having a blast doing these Q&A sessions with you guys so keep the questions coming.
If you’re at the point now where you’re ready to purchase an investment property but you think you might need some help, then Ben is offering free strategy sessions to On Property listeners.
Simply go to onproperty.com.au/session and you can book a time with Ben and you can go through where you’re at, where you want to be and what your next steps are to get there. So again that’s onproperty.com.au/session. Thanks so much for watching and until next time stay positive.