Cash Positive!

Cash positive! It’s a subject line if there was ever a subject line, but unfortunately not one that could be used in Brisbane, or other Australian Capitals, too often in the last 3 to 5 years. On the odd occasion if you did see it, the property was either a motel unit where no vacancy factor was ever considered, a boarding house, but with the added risk involved with these one should expect them to be cash positive, or an illegal property, such as a house converted to flats and located in the wrong zoning.

You should also be careful when you do come across ‘cash positive’ as a selling point in Brisbane. The fact is, most of the time they are illegal or the agent has worked out their numbers incorrectly. Many agents believe cash positive is when the rent covers the interest repayments only, but what about all of the other costs? Especially management fees in motel units or council rates with every property. We have even come across advertised properties where the agents assume a Loan to Value Ratio (LVR) of only 50% to get it cash positive, even though most property investors have an LVR of 80% and some will also use a line of credit for the 20% component. But if you are determined to have cash positive that is one way to go about it... get a loan for only 50% of the property’s value!

In certain regional areas in recent years, those with a keen eye discovered that houses could be purchased for, say $60k, and rented for $120/wk, so these properties and areas did mean positive cash flow properties could be purchased. These times have largely passed though.

The reality is that in recent years in Australia, most cash positive property is only that because you make it that. You renovate, you add bedrooms, you put up the rent to market value or you develop the site.

However, with interest rates dropping times are changing. You can now get fixed rates of 4.99% or discounted variable loans around 6%. Most residential houses in Brisbane have a 4.5 to 5% gross rental return, so you can see that you are getting close now – much closer than when interest rates were around 9%!

If you buy a property on a loan equal to 80% of the purchase price and use cash for the remaining 20%, you fix your interest rate at 4.99% and the property has a 5% gross rental return, then you will be about cash neutral or even slightly cash positive, assuming fairly standard charges for rates, property management, insurance, loan charges, etc. This is based on purchase price only and does not include buying costs, although these charges are only applicable in the first year anyway.

So as you can see it is no longer so terribly difficult to find cash neutral or slightly positive property, but buying a house with 5% gross rental return is nothing special. Special is buying that same property and having the ability to add value, either now or down the track, through renovations, increasing rents, development or subdivision. Alternatively you can buy something with a greater rent return such as blocks of flats or student accommodation.

With the rental market still strong (although we are currently experiencing the traditional seasonal slowdown) and peak rental season (January) on its way, now is the time to get excited! There will be a lot of investors already with property or currently buying property that will be cash positive in January, or soon after if the Reserve Bank reduces rates again.

Investigate Property can help you with your investment needs. A recent deal that was made known to Investigate Property clients was a 3 bedroom, 2 bathroom house that represented good buying as it was, but had the potential to be a 5 bedroom house with absolute bare minimum work. Being located close to a university, the CBD and transport meant that rent returns of up to 7% could be expected.

Now that’s cash positive!

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