Cash Flow Is King ... Or Is It?
Sue Irons uncovers the true reason that prevents investors from buying more property.
31 July 2016
The three limitations for investors that I see over and over again are:
- Skill set
- Risk appetite
And most investors I meet are limited by more than one of these factors.
“Cash flow is king” is a frequently-heard saying, especially in relation to property investment. We could add to that “you won’t go broke making a profit” and “if you look after the pennies, the pounds will follow”.
But is this really true? Certainly having a cash flow positive property is, on the face of it, appealing. The other side of the coin, however, is if this is at the cost of capital growth, then is the cash flow in fact a red herring and the lesser result of the two?
I want to go deeper because it is not lack of cash flow that stops the average investor in their buying tracks, but rather the lack of servicing. The term “servicing” is related to how the banks calculate the potential lending and they use entirely different figures than the actual interest rate.
At the time of writing this article one of our main lenders in New Zealand has set their servicing rate at 7.65%, which is 3.3% above the actual interest rate. Plus, to add insult to injury, they then also assume a principal and interest repayment schedule as opposed to interest only, which effectively turns even the most cash flow positive property, into a fairly ugly result. More importantly, they also apply this same formula to your total lending, including loans at other banks, so your apparently strong income and ability to service debt can be decimated very quickly!
Your Expert Team
So, what’s my point? Firstly, that all banks are not created equal and that as part of your investment strategy, having your finance managed by an investment lending expert is going to make a massive difference to your ability to grow your portfolio.
To quote Richard Tirendi, “If you’re the smartest one in the room, you’re in the wrong room”. If we look at that from an investment point of view, your success will be supported by the quality of your team. Obviously that includes an investmentfocused mortgage adviser, and the same thinking applies to your accountant, solicitor and strategist.
Property is not one-size-fits-all and having your finance managed in the most efficient and effective manner is the first step to success. Just this week I met with two clients, who were in theory “preapproved” to a certain figure.
It was immediately clear, however, that the results they had were at best “lazy lending”. With a quick chat to our finance adviser and some initial analysis, both clients were in the position to more than double their buying power.
Get It Right
Property investment is first and foremost about getting the finance right, without that, nothing else is going to be successful.
Positive Real Estate works closely with finance advisers who specialise in investment lending. If you couple that with a personally tailored investment strategy, it is no surprise that our clients are forging ahead with their plans and achieving their goals, with ease and confidence in their team.
If you would like to meet with one of our coaches to see who we can help you, then please contact me at [email protected] or come along to one of our monthly Property Investment Seminars, which we run in Auckland, Tauranga, Hamilton, Wellington, Christchurch and Queenstown each month.
Property investment is first and foremost about getting the finance right, without that, nothing else is going to be successful - Sue Irons