Offsetting -CF properties with +CF properties

[Guest]

Hi All,

I have been using/reading this site for a very short time and this is my first post.

I'm hoping I can get some reponses to help me with my next property investment decision.

I currently have 3 IP's in Auckland, all brought over the last 3 - 4 years. After all expenses I'm out of pocket approx NZ$300 per week
(not taking into consideration tax benefits) or $100 per week per property. I am actually currently living in Australia so with the exchange rate it's even less.

I have built up enough equity to purchase a 4th property, however, I've thought there's potentially 2 options.

1. Buy another property in Auckland, however, my my concern is this will start increasing my servicing by say another $100 per week
which I'd start feeling a little uncomfortable with. Therefore, I'd probably wait for another 2 - 3 years.

2. Buy a property in a different area (ie, Dunedin for example) where I could potentially.
a. Have a +CF property after all expenses PLUS
b. Have money left over (approx $80 - $100) to service the expenses of 1 of the current 3 properties I have

This would then mean I could buy a 4th property in Auckland and still have the same out of pocket expenses of approx NZ$300 per week
(but having 1 property in Dunedun for example and 4 properties in Auckland)

On paper it seems like a good idea but I'm probably wanting to get reasons why NOT to go with that option and to just keep with the Auckland option only.

Any advice or ideas would be appreciated.

Regards,
bmr

[Rosco]

Hi bmr,

$300 per week is a lot of negative cashflow. And I'm guessing that is at low interest rates, so your biggest risk (and especially if you buy more properties) is that interest rates go up, and your properties end up costing you $500 or more per week.

First thing I would look at rather than buying another property, is what can you do to improve the current return
- Can you add a minor dwelling onto any of the existing properties? A minor dwelling might cost $150,000, but might get $300 (or more) per week which would give you a 10% gross yield, which should pay all the expenses plus give you some cashflow surplus to help with the other property deficits
- Can you increase the rents?
- Can you convert a garage into a sleepout? If you have a standard 3 bedroom with a good garage, can you convert this garage into a bedroom with ensuite. If the garage is in good condition it might only cost you $20,000 to $30,000, but could return $200 (or more) per week. This added rent would easily pay for the extra interest costs and give you a large cash surplus.
- Can you convert a living area into a bedroom? Generally more bedrooms = more rent. So if one property has two living areas, is this an option?

Second, I would look for cost savings. What terms are you loans on, and what interest rates. If you are paying over 5.5%, then you should definitely be able to do better and hopefully you could get your interest rate down to 5%. This might reduce your cash shortfall dramatically.

I don't think you should even consider another property, unless the Gross Yield was over 10%. But watch occupancy rates and higher repairs bills, that can ruin the cash profit.

Hope this helps

Ross

[Ahar]

Hi bmr....have you considered what will happen to your cashflow as interest rates increase?

For every 100k in mortgage you are up for an increase of 1k p.a or $20 pw.....and that is for every interest rate increase of 1%

Doesn't sound much.....untill you multiple it by the several hundred thousand that it sounds like you are in debt AND then multiple again by a few % points

The long term average in interest in NZ is I believe about 9%....so if you are currently paying 5.5%, then you could be up for a very unpleasant surprise....perhaps you should be consolidating your position...hard to do when you are cash strapped

Rosco's ideas are good....try to improve your cashflow by increasing your current returns

IMHO property investment should be veiwed as a long-term plan

Too many folk think it's a quick road to riches

[essence]

How are your mortgages structured?? All P&I?? Here's another option. If you can renegotiate your mortgage rate, at the same time split your mortgage into 80% Interest Only (IO) and 20% Principal & Interest (P&I).

This allows you to still be paying off the principal (albeit on a smaller amount) and could assist your cash flow. When the property becomes cashflow +ve, then you start paying down the P&I loan faster. When this is paid off, renegotiate with the Bank to split the remaining 80% into another 80/20 split and continue the same routine.

Works a treat.

[Guest]

Morning,

Everyone, thanks very much for the replies! Rosco, thanks very much for the ideas. Think I'll definitely investigate the options you provided.
Just a quick couple of questions/responses (in blue):
------------------------------
- $300 per week is a lot of negative cashflow - Just wondering if you think this is a lot with regards to what my income might be or regardless (ie, in general)? - If after tax and thinking about this from an $Aus point of view… if each house is actually costing me approx $Aus60 per week then is this a lot? Would this also be dependent on what your captial gains are projected to be etc…? Really keen to here a bit more about this if you coule provide your thoughts/opinions Rosco.
- All 3 properties are on I/O and on an interest rate between 5.5% and 6% - so could look into trying to save here
- Minor dwelling - Great idea and definitely room on 2 of the properties to potentially do this. Would just start with 1
- Can you increase the rents? - This is being done on a regular basis by my Property Management as per the current market rate
- Can you convert a garage into a sleepout? Another good idea and something I'll look in to
- Can you convert a living area into a bedroom? Not an option in my case but another good idea thanks
- I don't think you should even consider another property, unless the Gross Yield was over 10%. But watch occupancy rates and higher repairs bills, that can ruin the cash profit. - This is exactly why I thought of Point 2 in my first post. There was a property with a Gross Yield of 11% - I did the figures and that's why I thought of buying a +CF property to cover the expenses of a -CF property
- Have you considered what will happen to your cashflow as interest rates increase? - Yes I definitely have.You're probably right with regards to consolidating as well… my thoughts have been to be able to be in my current cashflow position (-$300 per week) when interest rates are 8%. Although Rosco mentioned $300 is high so maybe less ). So maybe I have to take a step back and run with Rosco's ideas to improve cashflow first to cater for when interest rates rise again. (getting 1 step ahead of myself)
- IMHO property investment should be veiwed as a long-term plan - I agree
- ...Renegotiate with the Bank to split the remaining 80% into another 80/20 split and continue the same routine - Thanks for the idea, will keep that in mind
------------------------------
So in summary, it's probably best to:
1. Consolidate my current position by potentially:
a. Negotiating my interest rates
b. Keep increasing rents on a regular basis to match current market rates
c. Look into the potential for a minor dwelling, extra room, sleepout etc.
- This will all go to increasing my cashflow and putting myself in a position, where when interest rates rise to say 8.5% I'm in a similar position to that of today?

2. Once at this stage would it then be safe to start looking into another property?

Thanks again and still happy for any more suggestions/ideas.

Cheers,
bmr

[drelly]

Flog them all and replace them with CF+ property. Then you will have to offset your CF+ property with extra holidays instead.

[Wayne]

Interesting exchange rate - I make NZ$100 to be around A$80 rather than 60.

$100 per week -ve is OK if you expect the house will increase in value greater than $5k per year to make up for the $5k you are putting in at the current low interest rates.

[Guest]

Thanks again for the replies.

Thanks drelly - will stick to my current plan (for now) but it's definitely food for thought in the future! It really intrigues me the battle between +CF and -CF... I'm not arguing for either way but am happy with the path/approach I've currently taken... What's your thoughts on having both +CF and -CF properties? Also, are you talking +CF properties in places like Auckland or smaller NZ towns? (ie, potentially replacing CG's for +CF) or do you try to find +CF properties in Auckland?

Wayne - Thanks, I was meaning Aus$60 (approx) after taking into consideration tax and exchange rate ("If after tax and thinking about this from an $Aus point of view…"
At this stage they've definitely been going up by more than $5k per year and am happy with my projected/estimated ROI it's good to know re $100 per week -ve being OK

Thanks again,
Ben

[drelly]

Thanks drelly - will stick to my current plan (for now) but it's definitely food for thought in the future! It really intrigues me the battle between +CF and -CF... I'm not arguing for either way but am happy with the path/approach I've currently taken... What's your thoughts on having both +CF and -CF properties? Also, are you talking +CF properties in places like Auckland or smaller NZ towns? (ie, potentially replacing CG's for +CF) or do you try to find +CF properties in Auckland?

I've got CF+ properties and CF- in Whangarei and Paihia and if I had my time again, I wouldn't buy the CF- ones. I think they hold back your CF+ portfolio from expansion as much, if not more than they may eventually contribute in extra capital gain. It's hard to turn away from that potential "big hit" of great capital gains, especially in a boom, but when they're sat there for years going nowhere, the gloss rubs off a little. Also, I don't think we should under-estimate the greater risk with something that isn't paying it's own way. If the proverbial hits the fan, the CF+ properties will hold their own, while the CF- will be like a big shiny gold bar in a sinking boat!

[Wayne]

It has been said before that good capital gain properties are often CF- and good CF+ properties often don't appreciate in value fast. Is still true? Was it ever true?

Certainly drelly is right that CF+ properties will weather a storm better.

[drelly]

It has been said before that good capital gain properties are often CF- and good CF+ properties often don't appreciate in value fast. Is still true? Was it ever true?

I've always thought that was too much of a generalisation. The same way that CF+ doesn't necessarily mean "a dump in a bad area" and CF- doesn't mean "Mansion with no cashflow".

[Rosco]

How bad the $300 per week cash deficit is does depend on your other income sources and how easily you can fund this. But, what happens if you lose your job, your business gets into trouble etc? If your income is less secure, then you need to try to fix the deficit more.

Why do you want to invest in property(why have you invested in property)? Just bear this answer in mind when you consider buying in Dundein. Does this actually help your long term goals, or is it just a sticking plaster over a short term problem?

Which is better out of positive or negative properties all depends on future capital gain. Unfortunately I don't have a crystal ball, so its all a guessing game. In 10 years time we can all see which was better and which we should have done.

If you have great income, that is extremely secure, then your Auckland properties should easily gain in value more than they are costing you. But it would be so much better if you could get them down to costing you $100 per week, as then you could reduce debt further which has a snowballing effect of giving you more cashflow.

Ross

[Guest]

Thanks again for the posts...

Everything's been really helpful and constructive. It's a really good and for me personally been good getting me back on 'track', not getting too far ahead, thinking about consolidating at the moment and decreasing my -CF before jumping into another IP.

Cheers,
bmr

[Ahar]

It has been said before that good capital gain properties are often CF- and good CF+ properties often don't appreciate in value fast. Is still true? Was it ever true?

Certainly drelly is right that CF+ properties will weather a storm better.

Wayne....I bought a CF+ property in Beachhaven back in 2001.....couldn't beleive my luck in finding something with over a 10% yield.

This property was giving itself to me for nothing....100% financed and a ton of spare cash to boot...why I'm able to retire early

My criteria for buying ignores capital gain....did it once and swore never to be tempted again....CF- properties can keep you very very poor and stop you from buying better i.e. higher yielding properties

So anyway, imagine my delight when that area posted the largest %gain in AK for the following 12mths...I believe it was in the vicintiy of 89%

I think the general perception tha CF+ properties don't appreciate as much only holds true when you are buying in a one horse town

Auckland tho' has many ponies....it's been my casual observation, that if one area increases by 10%, then the others will follow suit.

However, I also think that when hard times come calling, the poorer quality areas can suffer from declines quicker than better areas.....I'm thinking of how Manurewa has declined, whilst Shore prices have stayed quite bouyant

[Guest]

It has been said before that good capital gain properties are often CF- and good CF+ properties often don't appreciate in value fast. Is still true? Was it ever true?

Certainly drelly is right that CF+ properties will weather a storm better.

That is the general rule but like all rules it's not always the case. This is because investors push prices down while home owners push prices up. Therefore if there is a high yield area there is also likely to be a lot of investors there.

BMRNZ there is no reason why you can't do both. With a boom right around the corner Auckland is a great place to buy property and it is still possible to buy cash flow positive in Auckland, especially with current interest rates. Interest rates aren't tipped to go up until mid 2014 which means you have 18 months to down pay your debt with the surplus cash plus do the garage - sleep out conversion / build minor dwellings. You could also renovate your current properties to increase the rent.