[Kiwi Property GuyMember@kiwi-property-guyJoin Date: 2009Post Count: 82]

January 6, 2012 - 12:36 am

Yep Derek and Den are onto it.

Your wealth is definitely created via the capital growth of a portfolio. But to be able to actually build a large enough portfolio to begin with, and secondly be able to afford to hold it long enough to realise that capital gain – You need to have a positive cashflow over all in your portfolio.

Over the years i have written a few blogs on the subject of Cash flow vs Capital growth, Property Investment strategies and building a balanced and sustainable property portfolio with a ‘Cashflow base’.

Links to just a couple of them below:

Blog – Positive cash flow or negatively geared capital growth? http://www.propertyinvestorcentre.co.nz/blog.php?blog_id=18

Blog – Property Investment Strategies http://www.propertyinvestorcentre.co.nz/blog.php?blog_id=104

Blog – Is Property still a good Investment in New Zealand? http://www.propertyinvestorcentre.co.nz/blog.php?blog_id=102

Blog – Positive Cash Flow Property in New Zealand, now more important than ever. http://www.propertyinvestorcentre.co.nz/blog.php?blog_id=41

Happy reading!

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December 20, 2011 - 6:22 am

Von Krumm wrote:

Kiwi Property Guy wrote:

 I tend to disagree sorry Von.

Yeah leverage is a powerful weapon. Interest rate rises are always a risk.

I guess then LVR and liqidity are more important if things go to shiet.

There are ways and means of structuring your debt to minimize the interest rate risk Von. We are all about covering off as much risk as possible. Its not so much the interest rate on each loan we worry about, its more important to make sure that the terms of your loans are set so that only a portion of your total debt comes up to the whim of the market at any one time. IE. stagger the fixed term expiry dates of your mortgages.

And we keep an eye on our average interest rate across all of our debt.

Also doing proper financial analysis and forecasting before committing to each property purchase, by allowing contingencys for interest rate rises, and making sure the portfolio as a whole can sustain those. Starting out by purchasing properties with strong positive cash flow yields also helps a great deal.

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December 19, 2011 - 6:49 pm

Von Krumm wrote:

Thing is with interest rates going the way they are, you're probably better off putting money in the bank than aiming for a +15% yeild on a CF+ IP.

I tend to disagree sorry Von. Its very hard to buy a $50,000 term deposit for a discount, or hard to polish up $50k in the bank and make it worth $60k

Read one of my recent blog posts on the topic of ‘Investing in property vs term deposits’ here http://propertyinvestorcentre.co.nz/blog.php?blog_id=106

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December 15, 2011 - 7:40 pm

gfreer wrote:

Von Krumm wrote:

Thanks for your words clint, I believe you have summed up the crux of CF properties vs neg. geared very well.

Kiwi Property Guy wrote:

considering the growth potential of an investment is of course important.

How important is this? If I'm not mistaken housing prices could drop say 10% for instance while rental returns remain the same or even rise…. hmmmm.

I asked in my previous post but seems it will get missed, "How much corelation exists between rental return and capital value"?

Von Krum

There is a clear correlation between commercial property return and capital value. ie. the yield determines the value. No tenant and the value drops. Just as with equities, there are growth stocks and other stocks which are purchased for yield or income.

Most properties fall into one category or the other. With reduced prospects for capital appreciation over the next few years, it makes sense to target high yielding property or to 'manufacture' growth through careful renovation projects.

The danger with the Aussie DIY culture is that everyone thinks they can add value through renovating themselves, and Fixer-upper properties are selling at inflated values. Personally I am also over renovating myself and recommend using professionals.

Well said Graeme,

The same correlation of yield to value also exists with residential properties where they are only suitable as an investment property. Ie. A block of units on one title. Where they will only ever be sold to an investor. I.e. Comparative sales of other homes never come into determining the value, but more the comparative cap rate (yield) that other similar properties have sold on.

This is the type of property i like to buy. As i find it very easy to manufacture capital growth, by purchasing a under rented block of 10 units for example, then lift the rents to market level, and when that is capitalised at say 7.5%-8% that creates a huge amount of value, hundreds of thousands of dollars. In most cases i dont even have to renovate to get these increased rent levels. Just have to look out for under let blocks of units.

Some times, you can get a double wammy, when the vendor/agent is selling the property on a cap rate that they believe is the market accepted yield, but in actual fact properties are selling on lower yields. So if i buy under rented on a say an 8.25% cap rate. But i can get another $400pw rent in total over all units and the valuer will use say an 7.7% cap rate, i have just created $318,000 of instant capital growth. (this is an actual example of a block of 10 units i have purchased).

@von Krumm, Do we really care if the market comes back by 5-10% when we have just bought 30% below value This is one reason why I believe buying below value is soooo important, it gives us extra safety margins on many fronts.

With normal homes (that could be purchased as a home, or as a rental property) the value of these properties is generally based off recent sales of other similar properties, and has nothing to do with what it rents for. Therefore no correlation of value to rental income. What normally happens thru normal market forces of supply and demand, is values will move up with demand, rent will lag behind but will eventually move up as well, then as rents move upwards, values are normally static, then values will move again and so on, and this keeps on going in a sea-saw type effect.

You can see why i love the blocks of units, as it is so much more like commercial property. Once you understand cap rates, and value determined by rental income, you are able to spot some great opportunities.

@ Graeme, over the years here in NZ i have seen many kiwis with the same DIY attitude, that think all they have to do is buy any old property and do some reno work and they will automatically make money. As we know, it doesn’t work like that. But its more about the proper due diligence to determine final value (after reno) and working out an accurate reno budget. Most people seem to over estimate final selling price, and well under estimate reno and holding costs.

Same old story, most people that make mistakes or come to grief is due to jumping in before they get educated and fully understand everything involved.

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December 15, 2011 - 12:06 am

Don. wrote:

In the current market ( and really just to throw in a short commentary and not get to involved) when seeking cashflow it is critical to ask:

1) Is the property CF+ (cashflow positive) because prices are falling in real terms. Are asset values falling adjusted for inflation?

or

2) Is the property CF + because you have a situation where adjusted asset values are stable or rising and real income is rising. IE, properties are going up and holding their value and rents have risen due to supply shortage. ( This is to over simplify rental price pressure of course)

However, just MHO but unless you have capital growth potential you should not consider at it.

Applies for NZ or Australia.

What is the reason you think the asset will go up – find it – tick that box
Now – where are properties that pay for themeselves.

Not best to do it the other way around.

Don’t forget about small commerical as part of an entire portfolio.

To qualify: At least for your first 5 to 10 properites in a portfolio.

Cheers

Whilst considering the growth potential of an investment is of course important. I think you miss the more important point here.

Building a successful property portfolio is more about the ‘balance’ of cash flow to stay solvent, and the growth potential of the portfolio.

The way we do this, is to build what we call a ‘cash flow base’ first. These properties are bought pretty much for there ability to generate a positive cash flow surplus. Of course we endevour to create an instant capital gain with each and every purchase, by buying below the true market value. This locks in a capital gain from day 1, and gives us an extra safety margin as well. So for the cash flow base properties, we get that cash flow surplus, plus an instant equity gain at purchase (around 20%) which also enables us to recycle our deposit out, by re-drawing against the higher valuation (so 100% financing the property) and re-using our initial deposit again and again to purchase subsequent properties.

Once we have built a ‘cash flow base’ of properties, all producing a positive cash flow surplus, we can then go out and target properties that are better located to return us a higher rate of capital growth. Of course these types of properties don’t return as higher yields, so normally end up running at a cash flow deficit and costing us money each month. However the surplus from our ‘cash flow base’ will take care of the cash shortfall on the high capital growth properties.

Its all about the balance of the cash flow and the capital growth. We see so many people that get this so wrong, they go out and buy the high capital growth, low yielding properties first, and due to their surplus personal income being used up to service 1-2 properties like this, they are no longer able to qualify for mortgage finance, and hence their property portfolio has come to a screaming holt! Or due to their very stressed debt service position they are unable to hold these properties long enough to realise any capital growth anyway.

By using our ‘cash flow base’ investing strategy and keeping a check of the balance of cash flow and growth, and keeping a close eye on the portfolios overall debt service ratio, you never run out of borrowing power to keep building the portfolio, and you are in a much stronger cash flow position than doing it any other way.

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October 26, 2011 - 8:12 pm

ten_burner wrote:

Hi Guys,

its not hard finding the deals in NZ its getting decent finance, I approached a couple of lenders in NZ 2 months ago (Im an Australian citizen) and the best LVR I could get was 70% and on top of that I need X amount of cash in a bank acct there as a security

has anyone heard different ??

Hi TB,

From our experience with our Aussie based clients, the lending criteria does vary quite a bit from bank to bank at the moment for Australian citizens purchasing property here in NZ.

Some are only able to get 70% finance on purchase, others are getting 80%. Some banks rejected the applications on the basis that the client had no other equity/security here in NZ, which is completely bizarre, as as soon as they purchase the property they then have assets/security here, as well as a income stream here. Moral of the story, all banks have different lending criteria, that do change quite often, and are very client specific too.

We are referring our clients to a couple of really good brokers, who are very experienced with securing finance in NZ for offshore purchasers.

But all in all, finance is certainly available to Aussie citizens buying investment property here in NZ. About half of all of the property deals we pass on to clients go to Aussies at the moment.

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September 14, 2011 - 3:31 am

Tommy1 wrote:

Pretax cashflow $2,020p.a. (at 100% finance)
Pretax cashflow $3,415p.a. (at 100% finance)

Can you please advise on how you calculated the pretax cashflow.
Thanks

Hey Tommy, sorry for the delayed reply, have been hectic.

We have our own web-based Property Analysis software, that we had created for us called ‘Property Wizard’ which we give as a free bonus to our e-Coaching students.

You simply enter in all the financial details, and it generates a quick snap shot of performance indicators, Discount % below value, immediate equity $, Gross Yield %, Net Yield %, pretax cashflow annual, monthly & weekly. First year total return $, First year total return %, cash on cash return year 1 %, number of months to recycle your deposit, these are all great ways of comparing one deal to another. The software also generates a 10 year report forecasting cash flows and equity growth over time.

However getting the pretax cashflow figures is a fairly straight forward calculation. Of Annual rental income, less all expenses to own the property (including annual interest on the mortgage) Expenses incl Council rates, insurance, allowance for repairs and maintenance etc. In these two cases there is a surplus rental income left after deducting all these ownership expenses.

Our Property Wizard analysis software also has a function to analyse ‘renovate to rent’ deals, as well as ‘renovate to sell’ deals. We had it created to be easy to use, as some of the other property analysis applications we have seen are unnecessarily complicated, and we feel they need to be easy to use, and quick to get a result.

We wanted it to be web-based so it could be easily used by clients with Mac’s or PC’s and so that clients didn’t need to have MS excel or similar software already installed onto the computer for it to operate. And also by being web-based it is easier for us to update it down the track.

I Hope I have answered your question.

Cheers.

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September 6, 2011 - 4:40 am

I have had several emails from people off the forum asking about the type of deals we are finding here in NZ currently and passing onto our clients.

So for the benefit of others that may also be wondering, here are the numbers from two properties that we have passed onto two different Aussie based clients in the last 10 days.

Prop 1
3 bedroom brick standalone home, very good condition, 736 sqm freehold section
$132k Purchase Price
$160k Registered Valuation (this property had a valuation of $210k at the peak of the market in 2007)
17.5% discount below Value
$28k immediate equity gain
Rent $250 pw
9.85% Gross Yield
Pretax cashflow $2,020p.a. (at 100% finance)

Prop 2
Small 4 bedroom standalone home, minor cosmetic tidy up beneficial, 735 sqm freehold section
$97k Purchase price
$125k valuation
22.4% discount below valuation
$28k immediate equity gain
Rent $235 pw
12.6% Gross yield
Pretax cashflow $3,415p.a. (at 100% finance)

Both good sound properties and are in the same reasonable sized town (20,000 population) with the main State Highway 1 passing through it.

We are currently focusing on these lower priced properties, as this is what the majority of our clients are saying they want to buy, with both good discounts and pre tax positive cashflow.

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August 30, 2011 - 11:38 am

shoooshoo wrote:

hi guys, i came to this post to get information of the latest CF+ locations in australia, can someone update me, instead of going through 20pages of the forum …many thanks.

Hi there shoooshoo,

The highest positive cashflow properties can be found in the most southern states of Australia, New Zealand

Seriously now, we are once again seeing many Aussies buying up our CF+ properties here. After our price corrections over the last 2-3 years yields are back to where they were pre-boom in some areas, and there are certainly some great deals to be had at the moment. The market certainly appears to have turned a corner as well, with far more buyer interest now, and prices slowly starting to edge upward again.

Sorry, i can’t help you with actual Aussie areas.

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February 9, 2011 - 1:01 am

Primrose wrote:

What does CF+ properties stand for??

Hi Primrose,

It is Cash Flow Positive Properties. Which is a property that generates enough rental income to cover all costs of owning (including mortgage payments) and there is a surplus rental income left over, so in other words, a property that pays you a passive income to own it, even when financed at 100% of the purchase price.

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February 2, 2011 - 2:51 am

marq001 wrote:

Hi All!
Yes I do believe that there are +CF properties to be sourced if investors become creative in ways to receiving high yields.
I have found a few, but what suits one persons financials does not necessarily suit another.
Because i chose to leave work and dedicate my life to purchasing investment properties, I have no choice with the banks than to borrow thru a Low Doc Loan. This means that any borrowings would be at 8%+. So even if i purchased a property with a yield of
10%, it would still be negative geared assuming I am putting no money down on the deal.
So my dilemma is that although i can source properties for 8-9%+, it still isnt enough. I understand that after a few years it may  ell become neutral or positive, but I need cashflow NOW!
So even by becoming creative and adding value to the property to increase the yield it would still mean that i have to borrow further thus increasing my mortgage.
I can put money down on the purchase but this would limit the amount of properties that i can accumulate in the future.
Can anyone enlighten me on other ways to turn a 10% deal into a positive cashflow????
The only other way i can think of is to have a tenant that is willing to "rent with an option to buy", this will then give me extra money each week (rent plus weekly deposit on purchase) but im not familiar with this method or how complex it is to set up or find such tenants?

Hi,

Without knowing your full situation, the short answer (and its probably not what you wanna hear) is you gave up your job too soon. This is quite a common mistake.

It's best to keep your job/regular paycheck a little longer, so to ease the process of attaining mortgage finance. Build up your portfolio to a reasonable size (measured by level of passive income, not number of properties) before throwing your JOB in.

It also helps to 'trade' a few properties along the way as well to create chunks of cash that can be used as 20% cash deposits. This aids getting finance, as its easier to qualify for 80% mortgages, than it is for 100%. It also increases your cashflow as your debt level is lower.

(Trade properties that don't suit your long term buy and hold strategy, I.e. Not built from permanant materials)

Hope this was of some help.

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December 14, 2010 - 7:48 pm

Packer wrote:

This may sound stupid but what does CF stand for?

Hi Packer,

No such thing as a stupid question CF refers to Cash-flow. And when we talk about CF+ or Positive Cash-flow property, we are meaning an investment property generates enough rental income to cover all of the expenses you have as the owner to own it, including the loan payments. Even when 100% of the purchase price is funding via a mortgage.

The amount of rental income that is surplus after paying all the ownerships costs, is the amount of positive cashflow the property generates. We normally are focussed on pre-tax cash-flow, ie. Not factoring in tax credits, as you generally dont get those until the end of the tax year.

Hope that helps.

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December 8, 2010 - 6:07 am

morrissue70 wrote:

Interesting to read through the posts in this thread.. I have built my portfolio on  CF+ properties and live and breath this subject. CF+ with potential growth is what I am interested in right now and in the past I have used Ryder's reports to source good areas. Looking forward to following this thread further.

Hi Sue,

Welcome to the forum.

Good to see another CF+ investor posting here. I too have built a CF+ portfolio, and have always invested by locking in a capital gain from day 1 by buying below market value, any further gain in value from that point on i have treated as a bonus. Rather than relying on getting capital gain to make the whole investment work like some others do.

My investing is all about long term sustainability of ownership. Build capital with the purchase of each deal, and growth of rent role over time.

As you well know, cash flow should always be #1, and capital growth #2, as if you dont have the cashflow, you wont be able to own the properties long enough to realise the growth in value.

Very simple really, but a principle that so many seem to struggle to grasp.

I look forward to seeing more posts from you.

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June 16, 2010 - 9:20 pm

crusty wrote:

 I prefer 3 sligthly   – geared or neutral properties , more dollars worth apreciating. then one grossly neg geared property where you will have to actually go and have to  do some work to pay off.

More great advice, buy and hold property investing is all about controlling as large an asset base as possible for as long as possible.

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June 16, 2010 - 9:17 pm

LandlordCentral wrote:

I've done many things in real estate, from passive investing through to active property development and I can say with hand on heart that passive investing is far easier and generally just as profitable over the long run as active development. And if you simply must be a developer (that includes you renovators out there), then I would encourage you to put your profits into passive real estate investments.

Very good piece of advice, that if followed would stop many developers eventually going broke.

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June 2, 2010 - 6:05 am

quickchick wrote:

Did some quick numbers on James' deal… If you borrowed $198,000 (using equity in another property), if you could borrow at 7% it would cost you $266.54 to pay interest only. Is the rent $390 for each unit? If so, $390 – $266 – $160 outgoings comes to a loss of $36 pw. Does the outgoings include strata fees? Of course, if you have a deposit the numbers would be somewhat better. As these are retirement units, can a tenant who is retired but does not own their own accommodation afford to pay $390pw rent? Just asking a few genuine questions, may be good answers to all these questions. quickchick

Hey quick chick, i think you will find it is far worse than that. It appears that both units rent for a total of $390per week.

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June 1, 2010 - 8:52 am

urbanedge wrote:

ozharp,

if that's want you really want , then go for it..!   there's nothing wrong with your   decision  for new zealand is a nice place to live in..

i  have some info here..hope it can help you

New Zealand's Tax Regime for Property Investment.

New Zealand has no sales tax on property or mortgage transactions. The only direct property taxes are property rates which are levied by local Councils to provide Council services such as roads, water, rubbish collection and community services such as libraries. Rates are based on the value of the property and would vary between NZ$1500 and NZ$3000 per annum for a typical median value house.

New Zealand allows unlimited deductiblity of property losses against other New Zealand income, obviously including rental income. This includes depreciation of buildings and fittings. If there is no other New Zealand income to off-set the loss then losses are carried forward.

Other deductions typically made by New Zealand property investors are:

• mortgage interest, not capital repayments
• insurance of the property
• property management fees repairs and maintenance; but not improvements, these have to be capitalised and depreciated.
• accountancy fees
• valuation fees
• bank fees
• property rates
• lawyer fees associated with financing, not purchase of the property
• relevant magazines, books at fees for Property Investment courses
• reasonable travel and expenses for managing property portfolio – your next New Zealand holiday could become a tax deduction!

Parts of your info above are not correct, particually with the changes anounced in the May 2010 NZ budget.

Please see our recent 'post budget' blog post to see some of the changes, around depreciation, and ability to claim losses etc

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May 26, 2010 - 1:41 am

Just a quick update on the Market here in NZ.

Many investors have been holding off, sitting on their hands for the last few months, waiting to see what our GOVT sprung on us in the way of proposed changes to the tax rules on rental property. There were a few nasty proposals being thrown around, IE the introduction of a capital gains tax, or the outright ring fencing of tax losses and the investor loosing the ability to offset these against personal income.

Well, the GOVT delivered the budget last Thursday, and they were actually reasonably friendly towards us property investors.

They did not introduce Capital gains tax, and did not stop investors being able to claim losses etc. I have written an in-depth blog about the changes in the budget, and how they will effect investors and the overall property market – Read the blog post here

All in all I think it was a great budget, and the heavy cuts across the board to the personal tax rates, along with the surprise cut of the company tax rate is certainly aimed at creating economic stimulus for New Zealand. Which can only be a great thing for the property market and the Country as a whole.

I think the general consensus is that the playing field for us property investors hasn't been effected greatly, and we are seeing local investors step back into the market already.

There are still some great deals around at present (we are certainly putting a few excellent pre-tax cash flow positive deals together currently, and they are getting snapped up fast by our clients both here in NZ and in Australia) However with the budget now behind us, and investors now having the certainly of knowing what the changes actually are, I don't think these great deals are going to be around for that long, as investor activity picks up once again.

Our last deal was a 3 bed home, that we secured at 2/3rds its market value, and was showing a 13% gross yield – Not surprisingly it was snapped up by the first person to contact us about it.

The time to be buying is NOW, before the market picks back up again.

Happy Investing

KPG

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March 8, 2010 - 5:04 am

Gavross wrote:

G'Day All, I am a newbie, I have just finished the book 0 – 130 properties. I just need to confirm my own thinking. I own a property in Townsville, bought in late 2003 and lived in as primary residence (defence family move every 2 yrs). Current conservative value of $350k I owe $120k, with gov paying $120 of the interest for me a month. The property is currently rented at $330 a week. My thoughts are before I embark on my real estate empire is to use equity to renovate (approx $30k) so I can increase rent and value of property and push me into +CF territory as at the moment as the property costs approx $5000 a year (maybe I have set aside to much for maint, managers and all other costs). I already have a guaranteed passive income of $55k (CPI indexed). I would like to increase this substantively so my wife can retire and we can maintain our same standard of living (medical issues life is short, need to enjoy life a lot more before I no longer can). As I already have this passive income this will be my full time job / hobby. I would just like opinions on wether to focus on this current property first whilst I learn the ins and outs of full time property investment and forming our own family property business. THank you all forumites for your wisdom Gavross

Hi Gavross,

Feel free to contact me, i am happy to have a consult with you free of charge to get you on the right track.

Regards,

Clint.

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February 10, 2010 - 3:57 am

Further to my post above about blocks of units.

Dont be put off by thinking "Thats alright for you, but i wont be able to afford to buy a whole block of units"

My very first multi unit deal was a block of 4 x 2 bedroomed units in Rotorua NZ, that i purchased for $225,000 all up back in 2002.

I bought them sight unseen. In fact i was living in the south Island at the time, and i owned them for 1 year before i eventually visited them. – I still own them today.