By Lindy Lear

Property investors pay for their properties from their rental income, so many investors focus on high rental income and yields, believing this will give them positive cash flow. Looking for high rental yields may not always give you the outcome you want. Read on for different strategies on how to maximise the ups and minimise the downs of rental income

Cash flow positive properties
Building a portfolio of positive cash flow properties is what most investors want.
If the properties pay for themselves this can give them a set and forget strategy with minimal outlay from their own pockets. So how do you find cash flow positive properties? Is a high rental yield the best indicator?

High-yielding property can leave you high and dry
Many investors select property based on the criteria of a high rental yield of 8–10%+ to get a positive cash flow.
The downside is that a high yield can also mean a higher risk. Many investors bought in mining areas in WA and Queensland when mining companies were paying huge rents of up to $1,000–$2,000+ per week and they enjoyed a few years of phenomenal rents.

Now, with the reduced workforce in the mining sector and decreased rental demand, some investors are left high and dry with substantially reduced rents or, at the very worst, no tenant at all. To minimise the effects on rental income and cash flow, buying standard residential properties in areas of high population growth and a diversified economy could give you much more security for the long term, and even with yields of 5% they can still be cash-flow positive.

Dual income properties can increase your rental income
In Sydney, building a granny flat in the backyard has been a popular way to increase rental income and achieve positive cash flow. The downside is the high price of Sydney property making this option unaffordable for any but the cashed-up investor. Potential tenant problems during construction and ongoing maintenance on the original property could also reduce cash flow.

In many areas of Queensland, NSW and Victoria, building a brand new dual occupancy investment home is popular due to the increasing population in the growth corridors of the capital cities, and in many regional areas. The dual occupancy can be two rentals under the one roof, eg a three-bedroom house plus a two-bedroom house, with separate entrances, driveways and gardens.

Another option is building a duplex pair of three-bedroom double-storey homes on the one block for two incomes and a potential equity uplift once the block is subdivided at completion. The downside would be if vacancy rates rose and your property manager could not rent both properties, or if you selected an area that was saturated with too many investors or too many dual occupancy properties. Selecting the right area is critical.

To furnish or not to furnish
Furnishing a property can attract a higher rent, more depreciation claims and a positive cash flow. I have had a furnished three-bedroom apartment with the same tenants for the last three and a half years, with a good return. The apartment was bought brand new, with a furniture package included, and the tenants were young and pleased not to have to buy furniture for their first rental, and they love living in a complex with pools, BBQs and gym included. If the market changes and there is reduced demand for furnished apartments, then it is suggested that if the cost of storing the furniture is too great, then you can sell it online or give it to charity.

Summary
Markets and rental demand can change with the changing property cycles. Rental income and yields can go up and down, and investors need to factor this into their strategy and their budget. A buffer account is always recommended to get through a declining rental market, and diversifying your investments into different areas and states will mean that if a market slows, then you have other properties elsewhere to balance your cash flow. In my experience, equating high rental yield with positive cash flow can be a trap for the unwary. Potential for capital growth is a prime selection criteria to be considered.

To understand how to estimate cash flow for a property, register on our website, rocketpropertygroup.com.au/advice, and I will be happy to forward our cash flow estimator to you.

There will be no ban on self-managed super fund (SMSF) borrowing to purchase property, according to the assistant treasurer, but tougher regulation could be likely.

Speaking at the Tax Institute annual superannuation conference in Sydney on Friday, assistant treasurer Josh Frydenberg gave the biggest indication yet that the Abbott government has no plans to ban limited recourse borrowing arrangements (LRBAs) through SMSFs to purchase real estate, Fairfax has reported.

David Murray’s Financial System Inquiry, released in December 2014, called for LRBAs to be prohibited, warning that such arrangements increased speculative investment which could pose a risk to the financial system over time.

“I want to emphasise that we have been considering this recommendation very carefully but flag that we want to make sure the approach we take is proportionate to the risks that have been identified,” Frydenberg said.

“To put it in context only 0.07%, perhaps 6,500 properties, were held in an SMSF through a limited recourse borrowing arrangement in 2013.

“David Murray highlighted the risks associated with increased leverage in the financial system. Increased leverage always represents a risk and we recognise that. The government also recognises that most SMSFs do the right thing.”

When asked whether there were any plans to tighten the rules around SMSF borrowing – instead of implementing a complete ban – Fairfax reports that the assistant treasurer said it was “under consideration.”

By Phil McCarroll | 22 Aug 2015 12:02 PM

Shared accommodation is becoming more prevalent in Melbourne according to new figures from an online share accommodation portal.

In analysing the accommodation listed on its website over the first six months of 2015, Flatmaates.com.au found that there had been a significant increase in Melbourne listings compared to the same period in 2014.

New room listings on the site surged over 110% in the first six months this year compared with the same period in 2014, while shared rooms soared by 250%.

The cost of renting a room also increased, with the average price for a private room rising in the first half of 2015 to $207.75 per week, up 3.4% from $200.98 in 2014.

The average weekly cost of a bed followed suit, rising from $175.52 in 2014 to $181.17 this year, a 3.2% increase.

Flatmates.com.au general manager Thomas Clement said the increases are likely the result of drop in the availability of affordable accommodation in the city of the last 12 months.

“Those who once rented alone, are now offering up their spare rooms to help subsidise rental and living costs,” Clement said

“Inner-city low-income earners, such as students, are now looking to share rooms in an effort to remain close to their campus and workplaces.”

While the number of listings may be up, Clement doesn’t believe there will be a shortage of people looking for a place to live, with serious competition for rooms occurring in the past/

“Earlier this year we saw as many as 40 people grappling for each room listed in Fitzroy, so the increase in property listings has given those looking far more choice.”

By Phil McCarroll | 21 Aug 2015 05:28 PM

New research has revealed that Melbourne can officially lay claim to being Australia’s auction capital.

Research from CoreLogic RP Data has shown out of all of Australia’s capital cities, Melbourne had the highest proportion of residential listings taken to auction over the 2014/15 financial year with 39%.

The Victorian capital came in just ahead of Sydney, where 38% of residential listing went to auction, with Canberra coming in third with 36%.

There’s a dramatic fall off after the top three spots, with Adelaide taking fourth place with 16%, while Darwin and Brisbane both recorded 11%.

Perth and Hobart were even further behind, with 3% and 2% respectively.

Nationally, 26% of residential listings in Australia were taken to auction over the 12-month period and CoreLogic RP Data head of research Tim Lawless said the popularity of auctions for residential properties has been growing for a number of years.

“Auction listings have been rising since the 2008/09 financial year when back then, auctions comprised of a much lower 16% of all dwellings listed for sale,” Lawless said

“Considering how hot the housing market conditions currently are in Melbourne and Sydney, the rise in the proportion of residential properties taken to auction should come as no surprise. I expect we’ll see auctions continue as a popular method for selling residential property,” he said.

Looking deeper into the figures, Canberra has the highest proportion of houses that go to auction, with 46%, while Melbourne leads the way for units with 41%.

On a suburb-by-suburb basis, Sydney is home to the five individual suburbs with the highest proportion of houses sent to auction, with more than 95% of house sales in Queens Park, Clovelly, North Wahroonga, and Alexandria done by auction.

Melbourne tops the suburb list for units, with more than 90% of units in Kew East and Carlton done via auction.

Sydney then rounds out the top five, with Bronte, Dolls Point and Bondi Beach all sending more than 87% of their unit listings to auction.

By Sam Saggers | 17/08/2015

As investors we don’t have control over the market and we have limited control over our finance options. However, oddly enough, the one thing we do have absolute control over is what often keeps us from the financial freedom that we’re seeking.

Fear is a huge motivator to inaction when investing in property.

We’ve been taught that debt is “bad” therefore we try to avoid it like the plague.

It’s difficult to accept the fact that not all debt is bad. If we take on debt that we can pay off with someone else’s money (tenants) and which even saves us money (taxes) then it arguably becomes “good” debt!

Granted, the end result of wealth creation should be an investment portfolio that delivers positive cash flow with zero debt obligations, however, to reach that desired result it takes capital.

Obviously then we’ll need to get that capital somewhere and for most of us mortals it involves using leverage (a.k.a. debt)!

Change Your Mind
To defeat the fears that come with any new venture we need knowledge but knowledge alone doesn’t create wealth. We’ve got to put that knowledge into action.
The following psychological factors keep many investors from success. Don’t let them stop your wealth creation efforts.

Risk
Do you know your own tolerance for risk?
It can be easy to say you’ve got a high tolerance for risk when the bank account is flush with cash, but is it still true when your last tenant has left and the market’s turned south?
Anyone who says that property investing isn’t risky is selling you some magic beans.

The key to defeating your fears is to figure out the worst-case scenario and decide if you can live with the outcome.
Ask yourself the following questions to gauge your own risk comfort level:

1. What am I willing to lose in order to create wealth over the long term?
2. Am I comfortable with borrowing the maximum loan I can get?
3. Can I buy using my head and keep emotions out of it?
4. Do I have to manage it myself to feel comfortable or can I buy it and leave within a property manager’s care? In other words, can I let the manager do his job (assuming I’ve vetted him well)?
5. Can I live with the drops in the market cycle knowing that investing is for the long term?

Risk Mitigation
If you’re feeling a bit shaky about taking the plunge the following strategies can help reduce the fear factor by mitigating your risk:

• Always establish a good buffer when purchasing a property. These funds will be used solely for any costs that arise with the property, keeping your pay in your back pocket.
• Purchase property that is always in demand with little risk of declining values (e.g. located near CBD)
• Avoid cross-collateralisation; keep your home loan separate from your investment property loan(s).

Worst Case Scenario
To help ease your fears, work out what the absolute worst-case scenario might be if you invest in your first (or next) property.
For example, let’s say you’re afraid that you’ll have no tenant for months on end and have to pay the mortgage out of your own funds.

Here’s how to reduce that fear:
Let’s assume you own a positive cash flow property that gives you $20 per week in extra cash flow. This is a modest sum and not entirely impossible to achieve.

Over a year’s time this amounts to $1,040.00.
Now let’s say you’re renting it for $200 per week. With the total amount of positive cash flow you receive ($1,040), your property could be vacant for as long as 5 weeks before you have to pay out of pocket!

Don’t forget tax deductions!
If you’re in the 30% tax bracket, take $60 off and you’re left with only $140 owed, giving you even more weeks of vacancy.
However, what you would normally do if your property is vacant for a couple of weeks is reduce your rent. This is how a positive cash flow property (and of course a good buffer) can help you weather market fluctuations.

For example, let’s say you dropped the rent down from $200 to $180. You’re giving up your positive cash flow, but it’s still costing you nothing monthly to reduce the rent.

When the timing is right, bring the rent back up – or increase it  – to beginning adding back to your buffer.

If your property is vacant due to damages, your landlord’s insurance should fill in the gap.

As you can see, knowledge and contingency planning allows you to defeat the fear of tenant vacancy.

Finally, follow this strategy with each fear that’s put you into analysis paralysis and you’ll be well prepared to take the leap and create wealth through property investing.