CF +ve, for how long?

[PHenry]

Hi All,

I would like to share a insight / thought that i have been mulling over for the last few days.

I have been reading these forums for a while now and you cant help but pick up on the the strong CF +ve slant of many members. This seems especially common when someone mentions that they are relying on an assumption of Capital Gains. The usual line espouses the idea that betting on capital gains is a mugs game, instead you should look for CF +ve property as this protects you from potential Capital Losses.

I have recently been working on my property analysis spreedsheet and what occured to me was that the property being CF +ve is also based on an assuption. That being the assumption that rental prices will not drop. Sure the tolerance can be modified by manipulating the size of the depost.
but if rents fall too far at some point any mortgaged property becomes CF -ve.

Further more should the property market undergo a strong price correction then the rental market would probably follow, and investors buying what was once a CF+ve property will be in a similar boat to those that were anticipating Capital Gains. Albiet with the benifit of the +ve CF that had been generated up to that point.

I raise this to point out that buying CF +ve is no guarantee and that any investment carries a risk. its just that a CF +ve potfolio is less risky than one bassed on Capital Gains.

Comments anyone?

-Paul

[Gerrard]

Hi Paul - I totally agree.

By getting into the property market we're all taking a risk that the whole maket won't fall apart. However once we're in there lots of other risks and opportunities to be weighed up.

+ve CF is the "preferred" type of property because it gives some insulation against intrest rate rises, drops in rents and values. It also helps you loan servicability ratios, allowing you buy more property than if it was -ve CF.

So +ve CF is a risk management strategy, but it is not the whole answer. Buying anything anywhere that is +ve CF isn't the answer. +ve CF alone won't give you much of a return in the long term. That's why Kieran promotes +CF in Auckland (which has historically had the best capital growth in the country) and Graeme Fowler promotes +CF and paying off the mortgages as a way to generate larger ongoing income from each property (and reduce exposure to a market drop).

So after all that waffle what I'm saying is yes, I agree with what you said!

Cheers
Gerrard

[fudosan]

You are right. Any of the following factors can turn a +ve cashflow into a -ve one: increase in interest rate when you refinance, increase in vacancy rate, drop in rent, and unexpectedly large repair. We just have to be cautious and always have a margin of safety.

[kolzee]

Hi Paul,

A very good point raised.

My personal point of view is that you won't get rich on the rental yields on residential property, so my purchases are aimed at making money through capital gains.

The usual line espouses the idea that betting on capital gains is a mugs game, instead you should look for CF +ve property as this protects you from potential Capital Losses.

This is not my thinking.....i don't think that cashflow positive properties will protect from capital losses as, in general, capital movements are likely to be a lot larger than the -ve or +ve CF......for me it is just a way to avoid making contributions to top up ongoing.

So, i agree with what you're saying. Personally, i buy an asset that i think is going to increase in value but on a portfolio basis i'm not prepared to contribute to top them up. CF +ve places though, can help fund those with more potential for capital gain and -ve CF.

[Rolf]

Property investment can be risky, but the longer you stay in the game the more you can reduce the risk. I don't rely on CG although I expect it to occur over the long run.

My strategy is like this:

1: Use my current income from full time job to pay off my own home (I have split home loan onto fixed and RC facility) - that should be done in 5-6 years.

2: As the home loan principal drops my equity builds up and I will use it as deposits to aqquire more IP's which should be CF+ or at least income neutral.
If CG occurs or I do renovations then I can speed up the building of equity by getting new valuations done - but I don't rely on this.

3: When my own home is paid off then its time to pay off the IP's one by one and thereby increase my passive income - eventually to the point where I can retire completely.

In this scenario, the risk I run from market changes depends on my cashflow from all income sources combined. When the cashflow builds up over time as I pay off the properties, the risk is also reduced since I now have more room to ride out the bad times.
I think the first years will be the riskiest for me, while I pay off my own home - But steadily decreasing in risk every month as loan interest payments drops and leave me with more cash to invest or use as a buffer.

By the way, what are peoples strategies/goals here in the forum? I assume we all want financial freedom, but what path do you follow?

[MiniMogul]

edited

[HermanZ]

Hi Mini,

Not trying to be tooooooooo negative.
Just some feedback from a crusty old phart.


I am sure you are far more successful than I am.
Ive read a lot of your posts and i am having trouble filtering the info from the creative writing.



So plse what does this mean?

Re; Auckland prices going up more than other places, sooooooo disagree, but without disclosing actual places to back this up, which I don't wanna name check, you may or may not believe me. But I have documentary evidence of gains so big that they wouldn't even fit on the graph.

5 times the rate of Auckland capital gains, and beyond. properties going up 5 times their value in a year. I have proof of these.

Are you saying?

a) If you bought in Auckland you are ******.

b) I know where the good deals are na na naaah na.

c) I'm touting for business.

d) I want to start a pissing contest (old EU saying)

e) All of the above


So plse give us some facts. I am sitting here fantasising about a $200k property being worth $1mill in 12mths.

OK, I feel better now. Feel free to flambe me, or hit me with world famous ''How many'' post.
Just give us the facts mam.

Herman

PS plse type slower, Engleesh is my 2nd language

[MiniMogul]

edited

[Julian]

HermanZ

I'm with you on that one. If someone has something to say they should say it - not just try to allude to some bit of secret info they (might) have. If it's something they want to keep to themselves then make no reference to it. Any less is childish.

As to the original thread, all activities carry risk, and even doing nothing is risky. Information and knowledge can help, but it is impossible to remove all risk.

But let's face it, we all came into the world with nothing and if we leave it with nothing we aren't much worse off, so live a little. Nothing ventured, nothing gained. If you fall off the horse, dust yourself off and try again ...or try something else.

Julian

[MiniMogul]

edited

[cube]

So of course I'm gonna get shot down!

Not at all - at least not by me.

Your posting style is enthusiastic, humourous and, despite what others think, informative.

Keep up the good work.

cube

(ex pom, in Auckland - does that make me a Whinging Auckland ******!)

[AustinWong]

I have deleted my orginal reply due to my incessent gibbrish.... see my new reply later in the piece.

Cheery

[Monid]

Before Muppet says it...

Lets get back to the point of the post

Rolf we follow much the same strategy as you do, adding in a few wrinkles about buying cheaply, preferably badly advertised properties. (Thus far these have been our big wins)

I think P&I protects you to some degree from the vagaries of the market, you can afford (but not like) for rents to slip once you have paid off some of the principle.

[kolzee]

Sorry Monid but i can't resist,

Mini - you should consider whether others want to read your ramble about unidentified areas with 5 times growth, blah blah blah....after all, it's a forum, not a blog.

Otherwise i'd be willing to 'show you the money' to keep your 'facts' to yourself.....i'm sure others would be willing to chip in!!

Seriously though, my point is that some of your posts could do with some filtering.....i agree with some of what you say but it's too often embedded in boasts and bravado.

[pixie]

Back to the original posts.

The value of positive cash flow for me is two fold - freedom of life style since (today) it is not dependent on my dipping in my own pocket to fund properties and b) the ability to weather any signficant change in interest rates.

Below 9% you can easily weather any change but above that every 1% increase will significantly dent your financials. I am mid 40s and watched person after person go down in a tonne of bricks with what was happening during the 80s and up until the mid 90s.

Will it happen again - I don't know but at my age I have no intention of rebuilding my life yet again so I choose properties based on my version of economic sense.

If you don't know what is right for you then simply look at what you have and ask yourself - if the interest rate was 9% would you cope? If it was 11 ? If you wanted to do your big OE or have another kiddy does it still make sense?

But most of all - have attitude. Half the stuff we read is theory. You have to take the theory and personalise it to your needs. If it makes sense to you and you have your thinking cap on then you will do fine!