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The cashflow squeeze

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  • The cashflow squeeze

    Among the things that property investment promoters say are things like:

    "Buy below value, recycle your equity and do it all again"

    "There is no limit to the number of cash-positive properties you can buy"

    We have a high (by NZ standards) household income from the day job, buckets of equity and three cash positive properties, but the bank (admitedly only the one bank we have asked) is getting tetchy about servicability. The figures given to us are:

    To buy property worth $200K the rental would have to be $17,620 Pa (338 pw, 8.8% gross) to stay within the servicability requirements.

    $300K would need $33,828 Pa (650 pw 11.3% gross)
    $400K would need $58,960Pa (1,133 pw, 14.7% gross)
    $500K would need $72,800Pa (1,400 pw, 14.6% gross)

    The first one may be possible at a stretch, but I think that the other yields would provide a challenge to most of us.

    I am sure that using a mortage broker would provide better results than the bank are offering, but even so it seems that we will run out of cashflow pretty soon.

    What techniques have others used to overcome the cashflow sqeeze?

    And no, sitting tight and waiting for rents to rise is NOT an option - we are far too ambitious

    Happing investing

    cube
    DFTBA

  • #2
    I think it depends very much on the bank and even the individual branch as to what is most important. I use Westpac and they are beginning to get nervous about serviceability too. They take only 75% of annual rental income and currently seem focussed on a budget rather than income overall. ie; they want me to have a certain amount of money left over after expenses. And of course, they want the 20% equity. I am meeting a new personal banker this week, so I'll see if I can quiz him to see if I can figure out exactly how it works. You'd think I wanted to know what the 11 secret herbs and spices were the way they react!
    You can find me at: Energise Web Design

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    • #3
      What techniques have others used to overcome the cashflow sqeeze?
      Hi Cube, it is a problem that the majority of investors face at some stage - lack of cash flow, or a lack of equity. And as you say, you may not actually have low servicability in your mind, but the banks do view it as such.
      There is no easy answer - but some things that others have done in the past are :
      buy higher yielding properties - which personally I don't recommend because of the extra hassles
      increase your income - either job or business income
      start another stream of income - either business, second job etc
      lease options or wraps (wraps difficult to do now)
      buy and sell properties, ie quick-cash deals
      mentoring others who are starting out
      affirmations on the wall - eg "what can I do today to increase my overall income?" or "how can I add another $500 a week to my current income without working more hours."

      A little while ago, I worked out my hourly rate for the areas of income that are generated from business, real estate etc.
      It is a great exercise to do and see how many hours you spend on particular areas of income, compared to what they generate.
      The areas for me were:
      wraps
      rentals
      quick cash deals
      mentoring
      book sales
      Mr Rentals franchise

      The least houly rate on a weekly basis (average over 12-months) was about $350 per hour from the mentoring.

      Just a few ideas to think about, but the cashflow/equity dilemma is something that comes up sooner or later with almost everyone investing in property.


      Regards
      Graeme Fowler
      Facebook Property Chat Group NZ
      https://www.facebook.com/groups/340682962758216/

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