By Rich Harvey, CEO & Founder propertybuyer
Over the past few years in particular, I’ve noticed the majority of investors chasing blue-chip assets in our major cities, giving scant regard to cash flow, all in an effort to ride the growth wave.
In fact, those who admitted to focusing on a cash flow-geared strategies were somewhat scoffed at – why would anyone chase high yield assets in markets creating extraordinary gains in values?
The view seemed to be a high-priced asset that had a low yield was far more fashionable than a well-priced holding with high rents.
But the tables seem to have turned – for now, at least – in Sydney and Melbourne where prices have slowed and buying for value gains has fallen out of favour.
Cash flow is in vogue in a big way and competition seems to be heating up for high yield real estate.
The investors I like most are those seeking advice on how to balance cash flow with long-term growth prospects. This is the smart approach in the current phase of the market.
Here’s a few reasons why cash flow has become ‘the new black’ in property investing.
Pockets yearning for cash
Who doesn’t love money coming in? Income from rental properties can help reduce your liability and debt repayments while giving you a comfortable buffer in your portfolio.
At the moment in Sydney and Melbourne, the ability to rely on capital growth from your investments over the short term is seriously diminished.
Prices have softened and are expected to be a bit flat for a little while yet. There are bargains to be found, no doubt, and a good property in a good area will always be sound investments. But a bit of cash in your pocket is nice too.
Buying a property that is well-priced, in strong demand among renters and delivers a good cash flow positive yield is a smart way to go. It means that you’re not tightly leveraged and can still continue growing your portfolio and future wealth.
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Banks love them
The revelations from the Royal Commission into the banking sector have created difficulties for investor finance and called some lending practices into question.
Financial institutions have suffered a public relations nightmare. They’re keen to show they’re learning the lessons of the past and being more responsible.
Also, the financial regulator is cracking down on lending to potential homebuyers on thinner incomes as well as investors who are highly leveraged.
As a result, getting finance at the moment is tough. And I mean really tough. Pre-approval amounts are often lower than they would’ve been 12 months ago. The time it takes to assess applications has blown way out.
I’ve heard stories of lenders querying borrowers about how much they spend on lunches.
It’s a tight scenario.
But do you know what softening the blow and helping shore up their decisions of good risk versus bad risk? Rental income.
Mortgage applications for properties with strong rental demand and high yield are viewed as stable and attractive prospects by lenders. They’re going straight to the top of the pile.
Banks are wary and want to be absolutely certain they’re backing a sure thing. Cash flow is the new black for them, as well as many investors.
There’s always a ‘but’…
Those snooty capital growth investors I mentioned before had a point. Cash flow is not always a goose that lays a golden egg.
Imagine someone sells you a tree that grows money.
You buy it for $100 and every week, it drops a single one-dollar coin onto the ground for you to collect. Happy days! For two years, you diligently collect your harvest which amounts to $104 in total. Happy days!
But to buy the tree, you had to borrow the cash from a friend, who you agreed to pay back with interest. So, while the tree’s fruit has helped service that debt, the joy has been somewhat diminished.
And when you decide that you want to sell your tree and move on to something else, you might only be able to get what you paid for it. Worse still if a heap of other cash trees had grown up in that particular orchard and they all hit the market at the same time – you might have to sell yours at a discount.
This is a simple illustration of the scenario cash flow properties face. They offer you steady income and a good gross yield, but after costs you might find the net yield is less compelling.
And, when it comes time to sell, the value mightn’t have grown at all.
While targeting cash flow, always look to buy in suburbs that have good growth fundamentals – the right type of housing stock for both current and future buyers, good infrastructure like schools, transport and essential services, as well as amenity.
What you want is a small-scale version of those areas that have tended to deliver capital growth. This could be the next suburb out from those premium locations, or an area likely to undergo gentrification. It could be a good regional town with a mixed economy and steadily growing demand. It might be a suburb where the population is tipped to increase.
And in the current market, it could be a location that’s gone through a price downturn but remains in demand from renters who love the area.
It’s always best to do your homework and enlist the help of an expert who can guide your particular strategy, particularly a cash flow one, to ensure you buy well to for your future success.
Finding these types of investments is our business. Rental demand is a core component of our research. So, call us and we’ll help keep you ahead of the pack – and always in the black.
If you would like us to help find you the right property, then click here to:
Our friendly team of Buyers Agents would be glad to help you further. Tell us your property brief or call us on 1300 655 615 today.
