Forums / Property Investing / Help Needed! / Answers to “Where to Find CF+ Deals”

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  • Profile photo of hambim336hambim336
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    Hi

     

    You can find this info by using search box in the top of website with some keywords related before posting questions.

    Profile photo of Von KrummVon Krumm
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    Don. wrote:
    but unless you have capital growth potential you should not consider at it.

    Speaking as a complete novice here but could someone elaborate on that?

    I would guess that "rental income + capital growth" is the tripple bottom line.
    So if you're getting 20% yeild by rent (somehow) why would you care if your growth is negligable?

    Also I have heard some quality anecdotal advice that rent doesn't depend on the capital value, but more importantly the "ability for the tenant to pay rent" or something like that. Yeah I was like whaaaaaat when I heard it too.

    Anyway in other words the buying market is somewhat differnet to the rental market. Even though related they seem a bit distant when trying to work out a corelation and future predictions… Yes/No?

    Profile photo of ZacJZacJ
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    Hi guys, I've been subscribed to this thread for years…

    Anyway I'm looking to buy a unit in Moranbah – 22 mines within 56 kms of this town. $369k for the unit – two real estate agents have done appraisals at $1000 per week (I'm realistically expecting $750-950 per week rent).

    They are mainly coal mines that way, but they have also discovered gas recently. Apparently about 70 years of work to go on out there…

    I thought others might like to know so they can investigate…

    Also I would love anyone's thoughts on this unit (or the area in general)?

    Zac

    P.s. these are the units – http://www.realestate.com.au/property-unitblock-qld-moranbah-108832186 – however if you are going to make an enquiry, I could recommend dealing with Jason Savage – he's been helping me. His number is 0401 546 762.

    Profile photo of Kiwi Property GuyKiwi Property Guy
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    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.

    Profile photo of Von KrummVon Krumm
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    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"?

    Profile photo of gfreergfreer
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    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.

    Profile photo of Kiwi Property GuyKiwi Property Guy
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    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.

    Profile photo of quickchickquickchick
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    In my opinion, there is not a clear correlation between purchase price and rental return generally. (Residential).
    As discussed, this can be different with blocks of units. But I'm talking about houses/units here.
    And I'm not talking about specialised areas eg mining towns. where there is a definite correlation between rents and purchase price.

    Purchase price depends on how many buyers there are, in relation to sellers, in a given area.
    Obviously more buyers causes prices to go up. This is affected by many different factors, eg employment rates, interest rates, confidence in the economic climate, etc.
    The rental price in the same market depends on the rental vacancy rate, and how many investors are buying in that area.
    eg an area with lots of rental units, unless it is very popular with tenants, the rents may not increase because there is no shortage of rental properties for tenants. If too many landlords flood that market, they may be competing for tenants.

    In difficult economic times (eg recent and continuing) purchase prices do not tend to go up, even if interest rates drop, because the confidence of the buyer is reduced and the seller has to take the price offered, or not sell. However, if less people are buying (including investors) and some investors are concerned their capital growth will not be very good, there may be less properties available to rent. This applies if the investor is negatively gearing, as the only incentive is capital growth, and if that was minimal, why would they bother?
    So it is conceivable that prices may go sideways or down, and rents may go up due to shortage of places available to rent.

    Great if you're an investor!

    But the cycle then changes, as prices to buy are more favourable in comparison to rents for a tenant, and interest rates are dropping, so you get to a point when first home buyers come back into the market en masse. (ie some tenants become first home buyers). So then there are more buyers between investors and first home buyers, and prices for modest homes will gradually rise.
     Investors will not buy if their return reduces (due to higher purchase prices) and unless there is a shortage of rentals, the cost of rent will not increase just for the sake of the investors. 

    Suffice to say, there is a relationship between purchase prices and rentals, but it varies depending on where we are in the economic cycle. its more about the demand and supply of houses to buy (for purchase price) and houses to rent (for rental cost.) 

    Profile photo of gettinitgettinit
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    Hi

    I know everyone has there own conversations going on in here but does any one have an update for where to find CF+ properties in Oz?

    That is the heading and after scrolling through 10 pages and that there hasn't been really any suburbs talked about.

    Any ideas?

    Cheers

    Profile photo of Von KrummVon Krumm
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    quickchick wrote:
    The rental price in the same market depends on the rental vacancy rate, and how many investors are buying in that area.
    eg an area with lots of rental units,

    Yes this is I guess the big one. Thanks for your words of wisdom.
    And thanks graeme and clint, you've helped me quite a bit.

    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.

    If you still haven't found the "top yeilding suburbs in australia", try google again?

    Profile photo of Jacqui MiddletonJacqui Middleton
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    gettinit wrote:

    Hi

    I know everyone has there own conversations going on in here but does any one have an update for where to find CF+ properties in Oz?

    That is the heading and after scrolling through 10 pages and that there hasn't been really any suburbs talked about.

    Any ideas?

    Cheers

    This forum topic has been active for a long time.  The suburbs in the "highest yielding" list change over time depending on what's happening at that point in time.  If you find a reference to a great CF+ suburb, you would still need to do your own homework to check that it is indeed still a CF+ suburb, whether a particular house in the suburb is CF+, what are the reasons it is CF+, and what influences could cause it to revert to CF-.  Quite often a suburb is CF+ because there is a higher risk.  For example in mining towns.  Everything is great while there are not many houses but there are a lot of renters.  But once there are more houses than there are renters, the situation changes.  Worse still, if the sole industry that the town relies on moves out, suddenly your house is worth nothing because nobody needs to rent in the town and nobody will want to buy your property from you either. 

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Kiwi Property GuyKiwi Property Guy
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    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

    Profile photo of Von KrummVon Krumm
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    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.

    Profile photo of Kiwi Property GuyKiwi Property Guy
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    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.

    Profile photo of hambim336hambim336
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    If you want to get more materials that related to this topic, you can visit:

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    Best regards.

    Profile photo of Von KrummVon Krumm
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    Want to know where CF+ properties exist?

    CAIRNS!
     
    I have been doing some research and cairns has properties (1-2 bedroom units) that are CF+ straight out the blocks.
    But there are many properties on the market, often cheaper than 2+ years ago and what's not to keep them from falling further…

    I am lucky enough to have APM data nation wide and there is one property id like to discuss…

    1 Bedroom apartment in cairns suburbs

    Heres the price history:
    1993: $83,000
    2003: $49,000
    2004: $87,500
    2005: $106,000
    Then it went on the market for $130,000 in 2009

    Dropped in 2010 then again this year…
    On the market for 2 years it finnaly sold private treaty for around $75,000

    This has to be the time to buy something right?

    My only concern is when it went back to $49k in 2003. Wow that's insane.

    Profile photo of wobblysquarewobblysquare
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    Find out the body corp costs and status, and also vacancy rates for the area – before jumping in to something like this. There are plenty of down town units for sale – at low prices. It might be +ve cash flow, a little. But almost no capital gain – for quite some time.

    Profile photo of quickchickquickchick
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    If its CF+, great! After you've deducted all your holding costs, rates etc (see above article too.)
    If the value did go down (worst case scenario) but your rent return gave you the same CF+, then that's not a tragedy. You are still getting the same CF+ you were happy to buy it with. (Unless you needed to sell for other reasons.)

    The trick is, how secure is your rent?
    Is your unit likely to be vacant between tenants for a few months, for example?
    You can usually rent out a place in a high vacancy area….. but only by dropping the rent to below market.
    If you are only 1% CF+, it is a tight margin and your risk is higher, than if you were 4% CF+ and if the rent had to be dropped (I agree, worst case scenario again), maybe you'd still be CF+ 2% and feel safer with that.

    Profile photo of DerekDerek
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    Von Krumm wrote:
    Want to know where CF+ properties exist?

    I have been doing some research and cairns has properties (1-2 bedroom units) that are CF+ straight out the blocks.
    But there are many properties on the market, often cheaper than 2+ years ago and what's not to keep them from falling further…

    I am lucky enough to have APM data nation wide and there is one property id like to discuss…

    1 Bedroom apartment in cairns suburbs

    Heres the price history:
    1993: $83,000
    2003: $49,000
    2004: $87,500
    2005: $106,000
    Then it went on the market for $130,000 in 2009

    Dropped in 2010 then again this year…
    On the market for 2 years it finnaly sold private treaty for around $75,000

    This has to be the time to buy something right?

    My only concern is when it went back to $49k in 2003. Wow that's insane.

    What rent are you looking at?

    If you are looking to invest in the Cairns unit market then the property will have to be very cashflow positive to mitigate against the risks associated with investing in Cairns.

    Cairns has had massive numbers of units built there in recent years and I am sure part of the probelm your price research has shown is due to the building surge of recent (and not so recent years)

    Profile photo of Von KrummVon Krumm
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    quickchick wrote:
    The trick is, how secure is your rent?

    Yeah this keeps coming back when doing my research and is probably one of the most important things to consider.

    I have been reading one of Margaret Lomas' books and she says:
    "Capital gain must take a back seat to cash flow", when buying for CF+.

    The abundance of units for sale (potentially turned into rental properties) is concerning, but a stagnation or even deflation in unit prices should be a second priority, according to the expert not me.

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