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46. Build good working relationships with agents and be at the top of their lists of buyers to call first

45. Know areas intimately

Know each street in the suburb as there could be $50,000 difference between streets. Become a specialist in a few areas.

44. Buy properties with strong cash flow

In my experience, having a strong cash flow position reduces your risks and also enables you to build your portfolio more rapidly. This doesn’t mean you compromise capital growth. You can have both, despite what many experts have you believe.

A strong cash flow position means the rental income is meeting the cost of holding the property, at the minimum. This is also called cash flow neutral. You’re not earning extra cash, but you’re not spending a cent on your property. Essentially, your investment property is costing you nothing.

From the serviceability point of view, you can buy as many properties as your risk profile allows you to, in principle. Since you’re not spending a cent on this property, as far as the bank is concerned, your serviceability remains intact. Of course, you should try and get cash-flow positive property without compromising on the capital growth, where possible. This can be achieved by buying under market value and getting a strong rental income.

On the other hand, having a poor cash flow, where you’re tipping you hard-earned salary to support the lifestyle of your tenants, puts you in unnecessary risk and prevents you from expanding your property portfolio further.

How to quickly calculate cash flow:

Cash flow = Expenses (mortgage repayments, landlord and building insurance, management fees, rates and maintenance) = $ (positive/negative)

For example
Rent $430 – Expenses $480 = -$50 negative per week
Rent $340 – Expenses $300 = $40 positive per week

In order for a property to be cash flow neutral, you need to get a yield at least 7%. Personally, I would not accept a yield lower than 7%.

 

Is your rental yield high enough?

A quick way to tell if your yield is high enough is to add 1.5% on the interest rate and factor in additional 1.5% for expenses.

Assuming mortgage interest rate of 6%.

6% + 1.5% interest rate buffer + 1.5% maintenance cost = 9%

You need 9% gross rental yield to ensure positive cash flow.

If you get 7% gross rental yield before tax deduction, this might bring you to neutral position.

43. Distressed sales

The owner might be in financial  trouble and needs to sell quickly.

42. Property may be located in areas with bad reputation

Some of the areas I invested in had bad reputations, but are slowly gentrifying and shedding their bad image. In these areas, you can still pick up reasonably-priced, even under-market valued properties as many investors often overlook these areas.

41. Properties that are undercapitalised and may have poor presentation

If the property is poorly maintained, you may have a higher chance of negotiating down on price.

40. Cheap asking price

This can be tricky because a lot of agents engage in underquoting. But you can tell a genuine bargain when the agent is fairly negative about the property and is keen to take any offers to the vendor.

39. Ensure you buy under market value

Buying under market value ensures you immediately get instant equity that you can then use to buy your next property. This also means guaranteed, instant profit.

Best of all, buying under market value lowers your risk. Say if you lose your job or got sick and unable to work, you will not lose money when selling your asset because you’ve already bought at a discount. The worst-case scenario would be for you to break even.

How I estimate/calculate market value:

• Look at comparable sales over the past six monthss
• Look also at the recent sales and what properties are on the market.
• Compare that with the asking price of the property you’re considering.

You need to make sure that you’re comparing like for like to establish the amount the market is willing to pay for similar properties. You can then use this figure to estimate the value of the property. Of course, you also need to bring in a professional valuer to ensure your estimates are correct and you’re truly buying under market value.

38. When it comes to retiring on property, lower LVR is the key

Obviously you can’t retire on a portfolio of negatively geared properties. But you also can’t retire on a portfolio of cash-flow positive properties if they’re only cash-flow positive after tax. High cash-flows areas are quite often high-risk areas. These are not locations to hold a ‘set and forget’ property. The relaxed cash-flow portfolio is one with a low LVR.

Fifty per cent LVR should be more than enough to make a property cash-flow positive. That’s your target.

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How to buy under market value and negotiate a good deal

Buying under market value is one of the quickest ways to build equity and your profit. Nathan Birch shows you how to do it

37. Find a pedant to do your bookkeeping

You want your accountant’s time to be spent on strategy and your bookkeeper’s time to be spent on compiling data for your accountant to make decisions with. Scan and store all correspondence you receive from insurers, councils, tradesmen, property managers, etc, so you can easily share this data with your accountant and/or bookkeeper.

Have your bookkeeper create a spreadsheet for each financial year that lists every transaction related to your property portfolio.