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.
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.
Lindy Lear is a successful property investor who had a late start into investing, yet she built a portfolio of eight properties in just three years. She is a qualified property advisor and general manager of Rocket Property Group, and she won the Reader’s Choice Award in 2009, 2012 & 2013 for Property Investment Advisor of the Year. Lindy is passionate about helping others realise their goals through investing in property, and can be contacted on Ph: 1300 850 038 or visit www.rocketpropertygroup.com.au
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.