Finding Cash flow properties can be quite difficult in today’s market given the higher buy-in prices across many metropolitan cities. With the subsequent lower yields they possess, it is even more difficult to find a “cash cow” property. However, there are still many ways to pick up cash flow properties if you think outside the box. Identifying the best location and property type may be the first step in finding your next cash cow.
Why are cash flow properties important? Cash flow properties can be extremely beneficial for a range of investors. Purchasing cash-flow properties can assist in the serviceability of a larger portfolio. Alternatively, it could be the driving force in an investor’s approach. Understanding how to find cash-flow properties can assist in reducing the overall search time to acquire these properties. It is important to note, an investor’s due diligence should still be employed to ensure the investment is viable.
Ways to improve cash flow
Before looking for cash-flow properties it is essential to understand there are multiple ways of improving cash flow. Before purchasing a cash-flow-driven investment investors should consider the following:
- An investor may negotiate a better interest rate or refinance their property/s in order to reduce the overall interest paid on their investment. This will obviously reduce expenses and in turn improve cash flow.
- An investor could increase their rental income at the end of a rental agreement with their tenants. This will be dependent on the market and the quality of the property. Though if there is room to increase the rent of a property this could be an opportunity to easily increase cash flow. Just a $10 increase on a property would provide an additional $500 per year. If this was repeated for numerous properties then a change of a couple thousand could easily be achieved. Moreover, if an investor has surplus cash a simple cosmetic renovation could demand a greater rent and even uplift the property’s valuation.
- Building a secondary dwelling on a current property can improve cash flow significantly. Many councils now allow individuals to build a second dwelling if their property meets certain requirements. In doing so, the investor can potentially add an additional $300-400 per week for an investment of $100-150k.
- An investor could sell one of their properties to improve cash flow. This approach may not be too common but it is a viable option for some investors who desire cash flow over holding more property.
Each of these approaches can assist in improving the cash flow of a property or portfolio. Taking these into consideration could drastically improve an investor’s financial position.
Types of cash-flow properties
Should the investor still desire to purchase a cash flow property then the following types of properties may suit the investor’s approach. (Please note the risk profile of each of these approaches is vastly different and needs to be considered by a case-by-case scenario). Each of these properties can be found on realestate.com or domain.com by using their search engines.
A block of units
An investor could look at a block of units in order to improve cash flow. Searching online there are numerous blocks of units generally comprised between 2-5 units on a single title that is under 500k. These properties are generally in rural or regional areas but can provide excellent cash flow. It is important to take into consideration the numerous expenses associated with a given property and the vacancy rates of an area. However, in some cases, an investor can pick up a 400k block of units that may return $800 per week which would put a decent amount of cash into the investor’s pocket annually.
There are two approaches that can be taken in order to implement this approach, that is new or established. Purchasing a block of land and building a new duplex may provide an investor with surplus cash flow. Alternatively, an investor may purchase an established duplex on the same title relatively cheaply. In rural areas, one may pick up a 2-300k duplex which could rent for $150-250, per duplex, per week. A pretty solid return on investment (ROI) from a cash flow perspective.
A “cheaper” property
Generally, the cheaper the property the higher the yield. This is because the dispersion of rent has a smaller range than property prices. For example, a million dollar property may only return $600 per week giving a yield of approximatly 3%. In contrast, a 200k property may rent for $300 per week which equates to 7.8% yield. This is just one example but can be seen quite frequently across the housing market.
The rationale behind this can be explained by housing affordability. In order to cater to the entire population, the rental market still need to be affordable for all people. If rents moved at the same growth rate as property prices many people wouldn’t be able to afford housing. So as property prices increase the increase in rental demand slowly diminishes. This is not always the case but can demonstrate why million dollar properties don’t usually demand yields as high as cheaper properties. With this, an investor may simply decide to purchase cheaper assets which deliver greater cash flow. Some may ask where to find these properties? In most cases, investors will need to look rurally/regional, however, there are still some major cities across the country that will cater for a 200-300k purchase price on the outskirts of the city.
Purchasing student accommodation can be a quite profitable approach if executed correctly. Student accommodation caters for inter-state or international students within usually tertiary education. An investor would purchase a property allocated for student accommodation usually within a an apartment complex. Students then pay exceptional rents for the cost price of the property providing excellent yield. By having multiple of these types of properties an investor could build a quite substantial cash flow portfolio. A common concern which is currently playing out is the demand for these properties. Given the closure of international borders it means there are far less students to accommodate these properties. This can lead to an over-supply and greater vacancies. This risk should be carefully consider before purchasing this type of property.
Short term rentals
Companies like Airbnb and Stayz have become extremely popular in the last few years. Many investors who have property’s in holiday areas have decided to change their property to a short-term stay approach. This can be lucrative for investors that have a product in demand which can easily cater for short-term stays. Generally, the investor will need to furnish their property and take on a more active approach in order to maintain the property bookings, cleaning, management, and administrative tasks. However, if an investor can meet these expectations then it can be an excellent source of income.
Subletting a property
In order to maximise cash flow, an investor may decide to increase their cash flow on a property by subletting rooms to different tenants. Essentially, a single household is occupied by multiple parties. Renting a property by room enables the investor to achieve far greater mental returns. The tenants will share common areas of the property and have their own private space. This difficulty would be in ensuring all tenants are happy and live together without issues. Which would require additional work to maintain as it is a lot different from a standard lease agreement.
From a number’s perspective, a 500k 4-bed 2-bathroom house may rent for $500 a week to a family. Alternatively, the same property being sublet by each room could bring in $200 per person which would return $800 on the same property increasing cash flow by over $15,000 annually. There are likely real-world scenarios that trump this example and thus why this approach could be extremely profitable if executed correctly.
As discussed before, an investor may choose to build an auxiliary dwelling in order to improve cash flow. This could be applied to a growth-focused asset to reduce the holding costs or simply a complete focus on cash flow. An investor could pick up a 250k property on a 700m2 corner block and build a granny flat for approximately 100-150k meaning their total investment would be 350-400k which could return $600+ a week. This is just one example but there are definitely opportunities out there with similar numbers depending on the investor’s approach.
If an investor is looking to switch gears then they may want to consider commercial property. Generally, commercial property can have greater cash flow with longer term leases. Rather than renting to provide housing commercial property is used for a range of business activities. If a residential property is not providing the investor with the cash-on-cash return, they are seeking then a commercial approach may assist the investor in developing the greater cash flow they desire. Note, this will require extensive research as residential and commercial property are vastly different.
There are numerous strategies that can be employed in order to improve the cash flow on a property portfolio. Before purchasing a cash flow property an investor may like to consider what they can do within their own circumstances in order to improve cash flow. Each strategy comes with varying levels of risk and reward. Therefore, each strategy needs to be carefully considered and extensive due diligence needs to be completed. Hopefully, by reading this it has highlighted out-of-the-box approaches to improving cash flow.