Success in property investment requires meticulous planning, particularly around your finances and how you sustain your portfolio for the long term.
Creating an optimal cashflow environment is essential, as you will require a solid fiscal foundation from which to manage your mortgage repayments and other associated investment outgoings, such as property management and professional service fees, rates and maintenance.
Following are 6 easy steps you can take to strengthen your cashflow position and minimise the risk of coming up short at any stage throughout the acquisition phase of your investment journey.
1. Review your rent regularly.
Given that the rental payments your tenants make will be the primary means by which you consistently manage your property investment expenses, it’s essential that you receive the maximum possible amount for your asset.
A pro-active property manager will be your greatest ally when it comes to establishing a fair market rental price for your investment, and should conduct annual appraisals to determine if you can ask your tenants to reasonably pay a little more.
Given the incredibly low interest rate environment and buoyant accommodation market of the day, property investors can easily sustain that enviable, neutrally geared position in many instances, just by keeping on top of market rent reviews.
2. Manufacture extra income and equity all at once.
Not only can minor refurbishments to a tired property investment immediately boost your rental yields, they can also see you manufacture instant equity if the right kind of cosmetic improvements are undertaken. This gives you the capacity to augment your cashflow in two ways…
In the first instance you are within your rights to ask a higher rent on the newly renovated premises, thereby increasing your bottom line. And secondly, you could access some of that extra equity you’ve created to establish a cashflow buffer, consolidating your financial position with a bit of added security.
3. Maintain a cashflow buffer.
In a natural segue from the above step; it’s impossible to discuss a healthy cashflow position without mentioning the need to maintain a suitable cashflow buffer.
Establish a Line of Credit or Offset account linked to your mortgage and you have immediately boosted your cashflow by reducing the interest payable on your loan (based on the balance of your cashflow buffer).
How much you need in a ‘rainy day’ account will depend on your portfolio position and risk profile as an investor. Essentially, you should at the very least have enough to cover any shortfall there might be between your rental income and mortgage repayments for a year.
In other words, if you have to contribute $10,000 per year from your own pocket to hold onto your investment, you should have at least $10,000 in an offset account. This would give you 12 months of breathing space should some unforeseen circumstance see you lose your job, tenants or any other regular income.
Consider how many years of “safety” you need to sleep soundly at night and then build your buffer accordingly. For some it might be two years – or a $20,000 buffer in the above instance, for others it might be 6 or 7.
4. Refinance for a better deal.
Reducing your level of debt immediately improves your cashflow position. It’s simple logic – the less debt you have, the less interest you pay on that debt and the better off you are from a cashflow perspective.
This is perhaps the best possible time in lending history for property investors to negotiate a better loan, or seek one elsewhere if necessary. Competition to win and retain business is fierce among the banks, and there are deals to be done.
It might seem like an arduous task to refinance one or more investment properties, but if it means saving tens of thousands in interest repayments over the life of your loan(s), surely it’s worth it? And remember…a good mortgage broker can work wonders for you.
5. Find a good accountant.
One of the benefits in being a landlord and providing private rental accommodation for Australian tenants is the very helpful tax incentives. Claiming all legitimate deductions and ensuring you have an up to date depreciation schedule drawn up by a professional Quantity Surveyor are two of the measures your accountant should assist with to reinforce your cashflow position.
And it’s not just at tax time that you can use allowable deductions to boost your income either, with provision made to withhold portions of income tax payable through your employer in certain circumstances, via special application to the ATO.
Make sure your accountant is helping you make the most of the property investment tax perks available to you.
6. Review your portfolio and make any necessary changes.
We all find it difficult to admit to a slight error in judgment, particularly when it comes to something as significant as the hundreds of thousands of dollars you’ll invest in a property asset. But the fact is any real estate ‘lemons’ you might have acquired along your journey could potentially sour your entire portfolio.
You should assess the progress of your property investments every year, so you have a consistent measure of their performance. If you identify an underachiever that’s simply not providing the necessary returns to ensure you reach your end objectives, have the courage to admit you made a mistake and then be pro-active about implementing an adequate solution. Throwing money at a dud asset is a serious waste of critical cashflow.
The question of how you cover any shortfall in outgoings when investing in high growth, negatively geared property often makes beginning investors a little nervous. But you can see from the above tips that there are numerous ways to boost your portfolio’s bottom line in order to mitigate much of the risk associated with sustaining an optimal cashflow position. All it takes is a little logic and a lot of good help in the form of appropriately experienced professionals.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).