There are many types of positive cashflow properties in Australia. A positive Cashflow property is one in which the income covers all of the expenses. The general rule of thumb is, low price point with high rental yield. This is generally quite easily achievable in country regional areas. However, it is usually comes at the sacrifice of capital growth. As these areas generally don't improve in prices at the same rate as our capital cities.
As we mentioned in our previous articles. You don't want to sacrifice capital growth to simply chase a positive cashflow. Therefore, we focus on areas with strong consistent capital growth and locate the highest yielding properties. This means, capital cities with multiple job clusters.
The Breakdown
First let's look at a simple breakdown on a property to get an understanding of a true positively geared investment. Let's say we are buying an existing house worth $400k with a rent of $520 per week and you have an interest only loan of 80% of the purchase price. On an interest rate of 4.2%.
Income
+We would have a rental yield of $26,000 per year (2 weeks vacancy p.a.)
Costs
-Repayments ($1,120 per month) $13,440 per year
-Management fees (7%) $1,820 per year
-Advertising/Letting Fees $800
-Rates $2,500 per year
-Insurances $1,300 per year
-Maintenance $2,000 per year
-Miscellaneous $1,000 per year
Return
Positive Return of $3,140 per year
or $60 per week positive cashflow.
This is a really rough example of one scenario. Please note these numbers will vary with each individual investor and it will vary on each property type and location. For example a higher loan will bring more costs. An apartment would need to factor in Body Corp. The moral of the story is that you need to know all your numbers prior to making any decisions.
Ok so what are the different positive cashflow properties?
Standard Investment Property with High Cashflow
Description: This could be any property that is low in cost and high in rent. These properties could be townhouses, apartments or houses where the yield outweighs the costs. As mentioned above, we need to be mindful of the trade off between high yield and capital growth. We also need to make sure we are not just looking at rental return Vs loan repayments. Look at income minus all costs.
Dual Occupancy
Description: Two attached dwellings on one title with the secondary dwelling often smaller in size. Each dwelling has its own services and car parking with fire separation required. These properties often look like standard houses from the front with a side entrance for the secondary dwelling. Can be rented out with two unassociated (third party) tenants in each dwelling.
Dual Key is a similar type of property. However, the two entrances are held inside the dwelling. Eg. a house foyer opens up to reveal two front doors to each unit
Dual Living is also similar dwelling. But it's more so referred by Victorians and is often used to house a family member (as per council requirements).
Town Planning: These properties are limited to certain areas based on each council's town planning regulations. Council regulations are becoming increasingly more difficult to comply with. There are limits to the minimum land size, lot frontage and maximum secondary dwelling size often restricting it to a 1 bed 1 bath 1 car.
Strategy: Suitable for those on a low price point looking for a higher yield than a house. Dual occupancies have a lower entry price than a duplex without strata subdivision fees resulting in a higher yield.
Typical Locations: QLD, NSW
Dual Key, Dual Occ, Dual living and even granny flats are typically allowed in Victoria if you have an elderly dependent living in the 2nd dwelling.
Price Range: $500,000 to $800,000
Rental Yield: Generally 5.5% to 6.5%
Duplex
Description: Two dwellings on seperate title either strata or their own title with no body corporate. Each dwelling has its own services and car parking with fire separation required and can be joined (most often) or stand alone. A duplex pair can look like a mirror image from the front with both dwellings looking symmetrical or less obvious on a corner allotment with each dwelling facing a different direction.
Town Planning: These properties are limited to certain areas based on each council's town planning regulations. Land zoned for a duplex is most readily available in regional areas with very limited availability in capital city areas. You will need a development approval before your builder starts construction which can sometimes take 2-3 months (much quicker if you have experts working for you).
Strategy: Suitable for those with a higher budget over $650,000 who want to get both a lift in equity and a higher cashflow than a house. Expect at least 10%+ uplift in equity with a duplex once subdivision has been completed.
Typical Locations: QLD, NSW and VIC
Price Range: $650,000 to $900,000
Rental Yield: 5.25% to 6.0%
House plus Granny Flat
Description: Build a seperate dwelling on the same lot as an existing house typically in the back yard. Fencing is erected between the house and the granny flat to allow tenants independent access. Seperate car parking for the granny flat is not always provided on the property with tenants using street parking. Both dwellings remain on one title and cannot be subdivided.
The granny flat has its own independent electrical switchboard and water meter and 'taps' into existing stormwater and sewer access from the house.
Town Planning: Building a granny flat normally utilises the same town planning as a dual occupancy, however, the secondary dwelling is not attached.
Strategy: Suitable for those on a lower budget whereby you can purchase an existing house on a larger allotment and build a secondary dwelling (granny flat) to substantially increase your rental yield. Expect to spend $100,000-$120,000 on a 60m2 - 2 bed 1 bath granny flat.
Typical Locations: QLD, NSW
Price Range: $500,000+
Rental Yield: 7.0% to 9.0%
Rooming House
Description: A house built to a higher classification that allows each room to be rented out to seperate tenants. Note - THIS IS NOT A BOARDING HOUSE. It is a standard residential house that is managed under a special rooming tenancy agreement.
This type of property can have a number of different design layouts:
a) Multi-Occ - Purpose built to look and feel like a large normal house. Similar layout to a 5 bedroom standard house allowing it to be rented both as a house OR on a room by room basis. Each bedroom has its own ensuite bathroom with shared common areas such as a kitchen, laundry, lounge and dining.
b) Self contained - In addition to their own ensuite, each room has its own kitchenette and sitting area allowing tenants to effectively live self-contained in their own room.
c) Converted - What was once a standard house has now been converted into a rooming house. Often will need a major renovation to comply with classification. Bedrooms always outnumber bathrooms and overcrowding can often be an issue with this style.
Rooming houses can only be managed by an experienced rooming house manager.
Town Planning: Rooming houses are limited to certain areas with different limitations on the number of tenants and rooms. Some locations require them to be registered with a state body to ensure compliance with minimum standards and for operators to have a license. Some require the houses to be a certain distance to CBD and transport. It is different in each state.
Strategy: Suitable for those looking for the highest residential cashflow and strong capital growth. We focus on capital city locations to ensure strong capital growth. Ideal for replacing income immediately without sacrificing capital growth.
Typical Locations: QLD, VIC
Most areas in NSW only recognise houses or boarding houses, nothing in between.
Price Range: $650,000 to $900,000
Rental Yield: 9.0% to 10.0%
Builder Display Homes
Description: Staged land estates that are developed over a number of years often have a display village where a number of builders construct display homes for the general public. The display homes are then used as sales offices for people to buy houses from them to be constructed within the estate. They are completed with high end specifications to attract the attention of the discerning buyer.
Rather than the builder having to fund the construction of display home, an investor can purchase the house and land package and the builder will then pay an agreed rent for 2-3 years. Once this period has expired the investor can either rent it out again at the market rate (usually lower than the builder lease) or sell it to capitalise on the equity increase.
Strategy: Suitable for a client who wants higher than market rent for a guaranteed period of time and large potential capital growth with the builder putting in high specifications at cost price during the build. Advantage is that if you do choose to sell in 2-3 years the house is in 'as new' condition with no one having lived in it (plus being cleaned daily).
Locations: QLD, NSW, VIC
Price Range: $700,000 - $1.2m
Rental Yield: 6.0% to 7.0%
NDIS
Description: The National Disability Affordability Scheme was introduced by the Federal Government to allow disabled people to live more independently. NDIS housing has certified disabled access to bedrooms and common areas through ramps, wider doorways, larger turning circles in common areas, grab rails in the bathrooms for example. To incentivise investors to provide these types of properties the Government is providing guaranteed rental incentives per annum for each disabled tenant. The amount of rent per tenant depends on the level of disabled access, whether there is the provision of a carer's room and the location.
However if you want a tenant you need to build them where the demand is and where you can get capital growth.
Strategy: Suitable for the investor looking for a very high guaranteed rental yield. In the event that NDIS funding is no longer available in the future, they can be rented out as rooming houses.
Town Planning: Under standard residential housing
Typical Locations: QLD, NSW, VIC
Price Range: $600,000+
Rental Yield: 10.0%-12.0%
Block of Units/Townhouses
Description: Constructing your own townhouses or units in a small development (2-4 dwellings) and then renting them out. The advantage of developing your own small development is that the cost is normally 10-20% less with a development margin built in and stamp duty only paid on the land value. This means you get a higher rental yield and higher positive cashflow.
You can buy an existing development site with an approval in place (which may need to be modified to increase profitability) or buy the land and do the development approval yourself. Strongly recommend getting expert help ;)
Strategy: Suitable for a more experienced property investor with a higher budget that wants to develop and build a property portfolio. Someone looking for instant equity and strong cashflow.
Town Planning: Land must be zoned a higher density to allow multiple dwellings. You will need a development approval through council before you start construction. This will take a minimum of 6 months.
Locations: QLD, NSW, VIC
Price Range: $1.2m+
Rental Yield: 6.0% - 8.0%
The type of positive cashflow property you should purchase will ultimately depend on your strategy, your budget and how quickly you want to retire.
TAKE NOTE:
When creating extra income you need to consider how this will affect you tax-wise.
Often if you develop/build your positive cashflow property, you can look to claim maximum depreciation benefits to help offset any extra tax you would pay.
More income, plus pay less tax? Yes that's right - ask us how.
If you have any questions regarding positive geared properties, please don't hesitate to contact us - contact@thepropertyroom.com.au
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