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“How To Cashflow Property” was a popular question asked by many of the hundreds who completed my short 90-second survey this week.

THANK YOU to everyone who participated!

Current cost of living pressures have people torn between two realities:

1. The need to exercise extreme caution and defer new investment borrowings because of uncertain economic conditions.
2. The need to break the poverty cycle and get out of the financial ‘rat race’ once and for all… also because of uncertain economic conditions.

If like so many these days you want to take decisive action but have been put off by adding further pressure to your cash flow then the answer may be right under your nose.

“Great opportunities arise when excellent investment prospects are surrounded by unusual circumstances that cause a situation to be misappraised.”

There is no doubt that we are living in unusual times; but that has its UPside… opportunity, opportunity, opportunity!

One message I have heard through the survey results and from speaking with people generally is that the biggest obstacle to opportunity can be summed up in two words – Cash flow!

Now you can have your cake and eat it too! Read on for details of free-standing houses and duplexes with rental returns of up to 8.85% and great capital growth potential. That’s $299 a week cash flow positive using mrd‘s advanced financing strategies!

15% Property Returns About Normal

As a rule of thumb a property that grows on average by 10% p.a. should at the time of purchase have a rental return of about 5% (total 15%).

For a property to deliver positive cash flow the rental return needs to be about 8%… meaning such a property will grow on average by roughly 7% – or take ten years to double in value (a BIG difference from seven when you factor the power of compounding).

Finding property that doubles faster has always been my goal. Yes, in the same way as some events may trigger a one-off spike in property values the impact of the global financial crisis (GFC) had a negative short-term effect. But it’s medium to longer term averages that we should be investing for (unless you are a property trader or speculator; but that’s a completely different, higher-risk strategy that we do not promote).

You Will Never Get Rich On Rent

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As someone who generates his livelihood from property ‘sales’ it may seem illogical that I do not focus on positive cash flow property. The most compelling argument I can think of for promoting a concept of cash flow positive is that it is an easy sell! There are many books and seminars devoted to this popular myth; as there are to the “It’s the land that appreciates” myth. Oh how I could go on, but will refrain. Over the years I have addressed a number of the more common property-related myths (or traps) but today will just touch on “The Myth Surrounding Positive Cash Flow Property”.

The first point I would like to get across is the mind-boggling power of compound interest. Yeh, yeh, heard that before… or have you? Really?

The Eighth Wonder Of The World

Albert Einstein was one of the most intelligent people who ever lived. When asked what he thought was the greatest of mankind’s discoveries he answered… “Compound Interest”. He referred to it as the eighth wonder of the world.

As an example of just how powerful this can be, consider the following scenario.

Suppose that back in 1492 Christopher Columbus, the explorer, wanting to invest in the ‘brave new world of the future’ deposited one penny (or cent in today’s money) into an interest-bearing account that earned 6% per annum. Assuming he, and his descendants following, withdrew the interest earned every year; his total earnings to date would be just over 31 cents – an insignificant sum of money in 2011! NB: We’re obviously pretending it was possible to remove a fraction of a penny.

Let’s look at another example.

Assuming the same one penny deposited into the same interest bearing account at 6%, but this time the interest was left untouched and allowed to compound. How much would be there today; 519 years on?

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Mark Armstrong | March 21, 2011

I’ve said it time and again that the residential property investment is a long-term proposition.  The property market takes about seven to 10 years to move through a full cycle – from low capital growth/high rental yield, to high growth/low yield and back again. Despite this, many property investors choose locations and property styles with little potential to survive and thrive throughout market fluctuations.

Some investors choose locations that lack the long-term underlying demand to drive capital growth, while others choose property styles that don’t reflect trends in the way people want to live. In other words, the property investment decisions that look good today may not prove so attractive in five, 10 or 20 years.  It’s essential to understand the nature of long-term economic and demographic trends, then select assets accordingly.

Interest rates rise and fall, but in the long term, dwindling oil reserves and rising petrol prices will be a key economic trend influencing the property market.  In the coming years, rising prices at the pump will make outer suburban living and commuting less feasible and less appealing. This will curtail the urban sprawl and increase demand among homebuyers for property in the middle suburbs close to public transport corridors, shops and schools. At the same time, rising property prices in the inner and middle suburbs will put home ownership beyond the reach of more Australians, or at the very least, delay it significantly.

Figures from the Bureau of Statistics tell us that the proportion of households renting from private landlords increased from 19 to 22 per cent in the 10 years to 2006 when the last census was completed. What’s more, the proportion of Australians aged 35 to 44 who were renting rose five percentage points over the same period, to sit at 32 per cent.  There’s every reason to expect that this trend will continue. Because many tenants want to maintain the trappings of an urban lifestyle, the trend away from home ownership will increase demand for rental properties within walking or short driving distance from trams, trains, shops, cafes and entertainment.  This will further boost capital growth prospects in the inner and middle suburbs.

Delaying having children is another trend set to influence the residential market well into the future. The median age for parents is growing, at 30.8 for women and 33.1 for men.  And women aged 40 to 44 said to have completed their families have an average of two children, compared with 2.8 in 1981. The shrinking family unit means that demand for low-maintenance, compact dwellings will rise, while demand for the conventional sprawling home on an outer suburban block will fall. When you look at all these trends in their entirety, it’s clear that pockets of the middle suburbs with large blocks on land close to public transport, shops and schools will provide feasible long-term opportunities for residential property investment, particularly for investors who have been priced out of the tightly held inner suburbs.

Mark Armstrong is an independent property analyst and adviser.

>>> Why it’s essential to have long-term investment views.

“Don’t Buy Property, It’s A Big Mistake” if you are just getting started as an investor!

mrd is approaching its 9th birthday and I can promise that over those past years I have met with many property owners who are suffering the consequences of mistakes made.

How mrd Came About

I founded mrd in 2002 and have worked hard to create a relaxed environment where you could comfortably and safely learn the “WHY TO” and “HOW TO” of becoming a savvy & successful property investor. When you understand the benefits of owning property and are taught how to go about it responsibly; you’ll get on board; if you have the financial ability. This Customer Care business model has been a win/win for mrd and our clients alike.

I know firsthand the challenges of balancing our time and money budgets; I’ve (we’ve) raised four kids… ahhh; and have just one left at school! We lead busy lives with many demands on our time and money and the urgent gets priority over the important. If you were tougher and put boundaries around your time to ensure the important was attended to things would be very different in five years time from what they would otherwise be.

This Is What You Want

We want to get to the “finish line” at a ripe old age, in great health, surrounded by family and friends who love us… having enjoyed the journey and “smelt the roses” along the way. We want to have had fun, adventurous and unique experiences. We want to be able to look back and reflect on the lives we’ve touched and the people we’ve blessed. We want to know that when we pass on we go to heaven and are missed by thousands. We also want to know that we have something significant to leave behind for the generations that follow. I’m not just talking about money… although that too; I’m referring to an example and a legacy.

If you are not actively working a plan that will set you up in the short to medium term I ask you to consider change. One of my goals is to positively impact as many lives as possible. In my early adult years I did that as the Pastor of a Church. In business I do it by attempting to help as many families as possible break free from job dependency through property.

The really important thing is to find the right balance. That is the fine line between doing nothing because you don’t know how or who to trust and racing out “having a go” before understanding what you’re really doing. Think for a moment what would happen if for whatever reason you were unable to ever work again. How would that impact on you… your family… and what about your home; would you lose it?

No Such Thing As Get Rich Quick

There’s no such thing as getting rich quickly (perhaps with a few exceptions like Justin Beiber) but if you don’t start somewhere it’ll never happen. I chose residential property as my wealth creation vehicle because it’s safe, predictable and offers better leverage than other asset classes… allowing me to speed the process.

Your life is different to mine in so many ways but where we are exactly the same is in what we want (more time and more money so we can choose what to do on a daily basis) and the time we have each week. What you do with your 168 hours each week will ultimately determine what your “finish line” looks like.

Prioritising Learning!

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The potential for future capital growth is the number one incentive for Queensland property investors, according to the Real Estate Institute of Queensland (REIQ).

The institute conducted buyer and seller research last year and found 74 per cent of investors were buying property for capital gains purposes.

The next most common reasons were to fund retirement, for negative gearing purposes, as a means of deriving an income stream, or because they believed it offered a better long-term return than shares or super.

“While Queensland has had a very tough start to 2011, it’s heartening that many investors recognise the strength of our property market and the opportunities that remain for growth over the long-term,” REIQ managing director Dan Molloy says.

REIQ says 13 per cent of buyers purchased property last year for investment purposes. This is vastly different to 2003, when the proportion of investors was 40 per cent.

“Investors have most stayed on the sidelines over the past 18 months, but there are tentative signs they’re re-entering the market,” Molloy says.

“With stable rents, increasing demand and less pressure on property prices, there are plenty of opportunities currently available for investors to enter the market.”

via Australian Property Investor :: Capital growth pushes Queensland investors to snap up property.

There are a number of “Different Ways To Make Money From Residential Real Estate” and they all have their ‘pros’ and ‘cons’. Listed below are some of the more common ways to profit from residential property:

1. Purchase Positively Geared Property:

‘Positively Geared’ means the rental income covers all the outgoing costs. Generally, to achieve a positively geared property, it will mean buying older, cheaper properties in regional areas that have less potential for capital growth.

However, owning a negatively geared property does not have to mean that the property costs you money from your cash flow as here at mrd we employ Advanced Finance Strategies to manage this. Some real estate agents will promote a property by advising potential buyers that it is positively geared but that is because they are assuming you will only need to borrow 80% of the purchase price.

At mrd we look at a property being either positive or negative based on borrowing 100% plus all your costs, using no cash of your own.

There are problems with choosing only positively geared properties: Read more…

We recently received this “Unsolicited Feedback From An Investor In The USA”; so I thought I would share it with you and give you the links to a couple of our previously written articles supporting the importance of capital growth over cash flow.

Hi Nick and everybody at MRD,

I just found your site and is very interesting. I been an investor for over 40 years and still learning especially from sites like this one. You have a great deal of good logical information. I live in the USA and been doing mostly what you been saying. Property values are down right now but the cash flow keeps on coming in:) I retired at 42 now 63 thanks to my investments, just wish I would of paid more attention to capital growth instead of cash flow. Going to look at focusing on strong growth area’s as you suggested, makes a lot of sense. If I lived in your area, you would become my new best friend.

Jim P.
P.S. keep up the good work.

Worth Reading… Read more…

By Martin Bell

Recent figures from RPData inspired me to hit the keyboard again.

The capital growth figures for last year (median prices up to November 2009) show that Australia wide units showed better growth over the 12 months than houses.

Yes that’s right… in 2009, based on median prices, houses with the big land content did not grow in value as much as units with minimal land content.

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I actually wrote today’s main newsletter article late last week; I called it “Truth About Housing Affordability”. Coincidently, this very topic has had much media debate this week and after reading Christopher Joye’s online blog yesterday, Is Australian Housing Expensive, and listening to a segment on Lateline where Steve Bracks and Bob Carr discuss population growth, I couldn’t refrain from writing a follow up to my first article. I have called this; “mrd’s Property Selection Bias”.

Many have read my earlier contributions to the housing affordability debate; which are at odds with the populist view that ‘Australian housing is very expensive by international standards’.  Christopher Joye is the managing director of Rismark and the arguments he puts forward  in his article ‘Is Australian Housing Expensive’ are quite compelling, in my opinion.

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Looking Back Over A Year

About this time last year many Australians were at the height of hysteria and panic. Fuelled by pessimistic and often irresponsible journalism, it looked to many as though the global economy would slip into the abyss and take Australia with it.

Lehmann Brothers, a large US investment bank had just collapsed, stock markets were plunging and the numerous ‘prophets of doom’ were being interviewed on primetime TV, scaring Australians into believing that their homes were about to plummet in value by 40%.

It now seems that the Rudd Government’s fiscal stimulus package was an overreaction. Certainly the Reserve Bank of Australia (RBA) began their massive monetary stimulus by slashing interest rates to 50 year record lows.

In amongst all this, we did our best to remain sober in our assessment of the economy and the property market. What we said then is still on the record now, via blogs and recorded webinars. In a nutshell we said that there were great buying opportunities for those that were informed and felt they could tough out the negatives. We said that Australia’s house prices would stall and perhaps soften due to a lack of household and investor confidence… but they would not fall by anywhere near 40% (except perhaps those executive homes at the top-end where demand is limited). We said that by mid to end 2009 we would see the market actually take off again and that 2010 would be a great year for those who hold an investment property portfolio. Might I add that we picked every interest rate cut ahead of time (with the exception of suggesting the RBA would go one more .25% down, which they didn’t).

I say all this not to ‘blow my own trumpet’ but rather to reinforce the seriousness with which we take what we do. We are not merely selling real estate but rather mentoring people to safely and responsibly navigate a wealth creation journey towards the realisation of whatever it is that is important to them and their family.

Unexpected Bumps

There have been some unexpected speed bumps along the way. I was not expecting the rental market to be so affected by the Rudd government’s boost to the first home owners scheme. I did not see rents softening as much as they have and I did not see the prolonged rental vacancies that have occurred; albeit just for a minority of our clients.

Looking Forward Over A Year Read more…