People think there are no cash-flow positive properties out there. But if you can’t find one, make one.
At the risk of opening up the kimono too much, and giving away too much of everything I’ve learnt and everything I teach, here are nine ways to increase the income you’re getting out of an investment property.
I call them Income Accelerators Strategies.
Now, the devil as always is in the detail, but this should at least give you something to think about. There’s a bit too this, so I’ll split it over a couple of blogs.
I’ll give you four strategies now, and another five tomorrow.
Income Accelerator #1. Direct Cash Cows
Now, the easiest place to create income is when you buy. If a property puts money in your pocket after all the expenses have been paid, then its something I call a cash-cow. As I said, I’m talking about real cashflow here – not paper income, or tax-credits – actual money you can use to fund your lifestyle or fund portfolio growth.
There’s a rule of thumb I use to get a quick idea if a property is a cash-cow or not. If you take the purchase price, divide it by 1000, and then times it by 2, that’s the weekly rent you need to be in the money.
Well, that calculation actually depends on the interest rate. When I came up with that rule mortgage rates were 8%, and they’re obviously nowhere near that now. So at the time of writing, we should replace that 2 with 1.2. If interest rates went up to 4-5%, then we’d be looking at a multiple of 1.4.
But this is a great rule of thumb to quickly get a sense of whether a property is going to be positively-geared right off the bat, or whether you’re going to have to do a bit of work yourself.
Income Accelerator #2. Regional Cheapies
Generally speaking, regional areas have higher yields (rental returns relative to price) than metro areas. That’s often because the growth prospects aren’t so exciting, but not always.
In that way, regional areas could be good places to do a manufactured growth strategy. Even if you can’t sell and exit when you want to, it shouldn’t hurt you because the property should still be putting money in your pocket.
Income Accelerator #3. Partial Sell-downs
This is a strategy that applies to properties where there are multiple and separate sellable units. So a subdivision or a strata title or a new build construction for example.
So imagine you build a block of four strata-titled units. At the end of construction, after you’ve paid for the site and construction cost, and you still have debt to service, those four units might not be positively-geared. They might be costing you money.
But if you sold maybe two or three of them (a partial sell-down), then you free up money to pay down debts, and reduce your monthly expenses. It is likely then that the remaining units will be positively geared.
It’s probably not going to be huge, but money is money, and it can be a great way to build a sustainable portfolio.
Income Accelerator #4. Short-term leasing
Typically, short-term leasing arrangements – executive leasing, holiday letting, AirBnB etc. have higher yields and a greater return that longer-term leases. Again, there’s no such thing as a free lunch, and those higher yields are to compensate owners for vacancies and management costs.
However, if you can manage it well, and can set up in the right areas – that is, if you can keep the management and vacancy expenses down – it can be a great strategy.
Now, when I talk about holiday-letting etc., people always assume I’m talking about Bondi or Byron Bay. However, the areas that work are not always the ones you think. I’ve got one student for example who found a town on a major transport route that had no motels or other accommodation options. So she set up an AirBnB, pitched perfectly to her market, that now makes about $20-30,000 a year!
So it doesn’t have to be a prime tourist destination. It comes back to being an area expert, and knowing what your potential market is going to need.
Accelerate Your Income
Ok, we’re getting warmed up, but that’s enough for today.
Tune in tomorrow for the remaining five.