If there's no cash in a business, it's dead. The most recent spectacular crash in Steinhoff shares is proof of that.
It is no different for property.
If your property doesn't generate a positive cash flow - the investment is dead in the water.
Choosing to lose money isn't a valid investment strategy
It's all too often that I hear investors say “I'm not making money on the property yet. But in a few years' time I will”.
If you knew a share price would drop tomorrow - would you buy it today?
No. Then how do you invest in a property, knowing you will have to put in more money year after year?
Here's an example of just how badly this could work out for you:
This is a typical apartment in Cape Town. The sales price is R680,000. Rental income is R6,700 per month. Levies are R1,100, rates and taxes R237 and the full amount is financed at 10%. I have factored in 5% annual increase in rental income and increases in levies and rates.
You will see that this property will only reach a positive cash flow in year 7.
Break-even will be much later.
You might say that capital growth makes up for this – and it does in the long run.
But what happens if you own four of these properties – paying R4,788 a month. And your situation changes, perhaps you get sick. Or you lose your job. How will you cover these negative cash flows?
A simple negotiation could change all of this!
Considering we’re in a tough market, what if you negotiated a better price on this property.
Say R630,000 – that’s still less than a 10% discount.
You negotiate with the bank to give you a 1% lower interest rate, and you put down a R30,000 deposit (equal to the negative cash flows you would’ve seen in the first two years in the example above).
And perhaps you take a chance – increasing the rental amount to R6,800 a month instead of R6,700.
Suddenly the picture changes completely!
Francois Joubert built his property empire using other people's money.
He bought his first property when he was a broke student with less than R20,000 in the bank using this method, and he hasn't looked back since.
Today, at just 27 years old, his property portfolio is already worth over R3.585 million.
Now, you make a positive cash flow from year one!
What’s more – instead of having to ADD R46,635 to your investment over the first six years you will now suddenly RECEIVE R45,189 from it! That’s 50% more than the deposit you paid in the first place. This would probably pay for all your maintenance on the property over this period!
The hidden downside of negative cash flows
Another thing many people don’t realise when investing in negative cash flow properties is their ability to borrow money from the bank is affected.
Remember – the banks look at your income vs expenses.
A negative cash flow means that you have LESS disposable income for further borrowing.
And that means when you try to get your next loan, the bank will likely tell you NO.
But if you have positive cash flow, that means MORE disposable income – and better ability to repay future debt.
This in turn means a better chance at bigger or more loans from banks to finance your next property!
So – when you buy your next property: DON’T SETTLE FOR NEGATIVE CASH FLOW.
Make sure you negotiate with the bank for the best possible interest rate.
Make sure you have found a motivate seller – and you can negotiate a lower buying price.
Even if it is just 2% or 3% - it can make a difference.
And make sure the complex is well managed. High levies is one of the biggest factors that can make or break a property investment’s potential.
Here’s to unleashing real value