The importance of understanding cashflow

This week we have had the pleasure of working with a mixed array of client briefs; from home-finders to investors. Not unlike other weeks, our investor assignments have all been unique and our metrics we’ve targeted have been engineered based on cashflow.

Many investors assume that investing is all about capital growth, but there are other important elements and they can’t be overlooked, because the combination of the investor’s cashflow, appetite for improving, comfort with risk and available time is critical to understand.

Capital growth is important, but rental yield can make or break the success of the investment.

Two purchases this week are perfect examples of how our clients’ cashflows lead the decisions we made when we recommended specific property types in two very different areas.

One client was embarking on his journey and had strong surplus cashflow available, while the other couple were repeat clients who were adding to their portfolio and targeting a purchase which would be easier on their cashflows.

Our acquisition for an investor couple in Ballarat was based on their request for net cashflow to be close to zero; that is, a cashflow neutral investment.  While we understand that a higher rental return almost always means that capital growth prospects are moderated, we still need the property to exhibit capital growth. Targeting a city with a growing population (albeit slow growth), a wide range of employers, a good transport system and access to Melbourne within 75 minutes was a deliberate move. Our job in this instance was to guide our clients into an area where they could anticipate a richer blend of rental yield, yet still experience capital growth over the long term.

This property in Ballarat East is located in a more recently subdivided street, close to the freeway entrance to Melbourne and just minutes’ drive to the heart of Ballarat’s main shopping precinct; Sturt Street. We secured it for $342,500 and the rental return our clients can expect will sit around the $350pw mark. Factoring in property management, rates, insurances and maintenance, their out-of-pocket contribution before tax benefit will be close to zero. Given the age of the property, the depreciation benefit they will receive will create a slightly positively geared outcome for them.

Our second investor this week fell into a different cashflow position based on his age, appetite for growth, resilience to an area which is still gentrifying and his overall goal of amassing capital growth as aggressively as possible. We targeted Ardeer for a well-presented, ready-to-rent-now house on a full block. Aiming for a higher Land to Asset Ratio was critical to ensuring he would benefit from the highest level of capital growth the area could offer.

The property boasted some ‘sixties charm and the ultra-wide hallway, renovated kitchen, beautifully polished floorboards and large bedrooms rated well when we ran the idea past a good, local property manager. The landsize, streetscape and incredible surge in buyer interest for houses on full blocks in the area was the basis for our decision though. Based on a purchase price of $574,000 and an anticipated rental return of $350pw, our investor will need to provision for an out-of-pocket contribution to the tune of several hundred dollars per month, but what he can anticipate as a result of his commitment to holding the asset is an out-performance capital growth rate when benchmarked against other properties in the sub-$600K category.

While we’d all love extreme capital growth, understanding the ongoing cost of holding a property is a critical step.

Selecting an investment is based on a highly personalised decision-matrix.

No two are ever the same and every assignment is tailored.

Wishing our two investor clients a successful journey with their respective purchases….