Gone are the days when you could simply buy a positive cash-flow property and sit back while the dollars rolled in. Now, investors need to be smart, innovative and proactive if they want to reap the maximum benefits.
In the not-too-distant past, being cash-flow positive was simple – you just went out and found a positive cash-flow property. Now, with a slower market, positive cash-flow properties are becoming harder to find. So the future of property investing will lie in the ability of the investor to create these positive cash-flow opportunities.
10 questions you must ask
So what are the properties you need to invest in? There are several questions that you need to ask before you even think about purchasing a cash-flow property. Some of the main questions include:
Is the property cash-flow positive and will it remain that way?
If you’re serious about becoming a successful investor, you need to become familiar with number crunching. In doing this you’ll need to calculate all the exact costs and all income before you purchase. Just buying based on a rough estimate isn’t good enough and leaves you at risk of making a loss. If number crunching takes you back to your high school maths days, then it might be better to get your accountant to do it.
What is the vacancy rate in the area?
The higher the vacancy rate, the lower rent will be in the area. You can find out what the vacancy rate is through the Real Estate Institute website for each state.
What’s the competition?
What other properties are you up against? If you buy a two-bedroom apartment, how many other two-bedroom apartments are in that area? If an area is full of them, it might be better to buy a three or four-bedroom house if there aren’t as many of those.
Is the property tenant friendly?
One of the biggest pitfalls for investors is buying an investment property based on emotion. Remember, it isn’t you who’ll be living there so look for a place that’s solid yet simple as opposed to a place that has a lot of fancy features.
Does it have furniture?
An already furnished home can add to your cash flow and help attract tenants in the first place. This is a particularly good idea if you’re looking to attract students.
Is there a body corporate?
Most apartment complexes or townhouse complexes will have a body corporate. If you’re paying a body corporate it will add to your expenses, which will ultimately minimise your cash flow.
What are the developments in the area (shopping complexes, parks, etc)?
Know what future town projects are going to be carried out. This will help you determine the future demographics of the area and thus guide you towards what sort of property to buy.
What is the population growth of the area?
Good population growth means that there’s likely to be greater demand for rental properties, which means that not only does it increase the chance of your property being occupied by tenants, but also that rent will be charged at a higher rate. Conversely, if the population rate isn’t growing at all or is falling, then purchasing a property in that area mightn’t be a great idea.
What’s the condition of the property?
As it’s important not to buy a property that’s too lavish, it’s just as important not to buy a property that may collapse at any moment. Similarly, you don’t want a property where things need repairing every couple of weeks. Some of the key things to look for are the condition of the floorboards, bad plumbing and dodgy electrical wiring.
Is the property being sold at its market value?
Buying a property cheaply in the first place is often something people overlook, but when you think about it, if you buy a property that’s $20,000 over the market value, then that’s $20,000 you have to make up in either positive cash flow or in capital gains where the property would have to rise double that amount just for you to break even. You’ll only know what the market value is by conducting thorough research on other sales in the area.
Ways to increase cash flow
If you’re like a lot of investors in Australia and you’ve bought a property that’s costing you more than you thought it would, you’ve got three options; you can either do nothing and watch your money go down the drain, you can sell, or you can increase your cash flow. If you’re pondering between choices two and three, you should seek professional help from a financial advisor. If you want to know some ways you can increase your cash flow, read on.
Raise the rent
Many landlords resist raising the rent in fear they’ll lose their tenant. The trick is to offer the tenant something that will benefit them as well as yourself.
Buy, subdivide, sell
If the house you buy is on a piece of land that’s big enough, you can legally subdivide the land either once or numerous times. You’d then look to sell the vacant land for a profit. Having made a profit on the sale you would use that profit to help pay the loan. This would, in turn, reduce the interest payments and increase the cash flow.
Essentially this means that the landlord is financing the tenant who has agreed to buy the rented property at a price that’s agreed upon by both parties. The landlord then has the option to charge rent at a higher-than-market rate. This rent is counted as payments toward the purchase of the property. A fee of about $3,000 is charged to the tenant as compensation for a deposit.
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