Expert tips on how property investors can keep the money coming in today’s low-yield, high-vacancy environment.

Nila SweeneyReporter

Feb 22, 2020 – 12.00am

Cash flow is the lifeblood that powers investing in any asset class, but even more so in property. Without a healthy cash flow, investors will find it difficult to hold and expand their property portfolio.

“Cash flow keeps you in the property game,” says Margaret Lomas, founder of Destiny Financial Solutions.

“While capital growth is critical to help you build a nest egg, if the cash flows are not sufficient to support your property, you may well end up selling before you get to that growth if the property is bleeding you dry and doesn’t pay its own holding costs.”

But how can investors manage their cash flow in this low-yield, high-vacancy environment? Here are some tips from the experts.

Right property, right area

Managing cash flow becomes easier when you buy well, says Lomas. “Buy in areas where there is solid rental demand and capital growth drivers,” she says. “Find a property in a good growth area first – and then work out whether it has the cash flow to allow you to buy and hold it. If not, move on.”

Sydney-based investor Marivic Patos, who recently settled her third investment property in Brisbane with Buyers Club, says buying in areas where there is potential for capital growth and high rental demand has helped her expand her portfolio faster than expected.

“I made sure there was a strong demand for the type of property that I bought,” she says. “I target areas where population is growing, where a lot of infrastructure are going in and it remains affordable.

“I was also able to buy under market value and this helped a lot with my cash flow.”

A quick way to establish demand is to look at vacancy rates, says Jeremy Sheppard, research director of Select Residential Property.

“A check of the history of vacancy rates over the last year will help a lot,” he says. “If vacancy rates are trending upwards, you might like to steer clear – this is a sign that the market is heading into oversupply. Vacancy rates below 2 per cent is acceptable, however a vacancy rate below 1 per cent might mean a rent increase is possible.”

Buying a property that has appeal to a wide range of tenants helps ensure vacancies are kept to a minimum, says Sheppard.

While tenants prefer newer properties than older stock, new homes are more expensive, which results in lower yields and tighter cash flow.

“Well-located older homes with potential to add value through renovation or development would be a better option,” he says.

High yield could mean higher risk

High yields could mean extra cash in your pocket, but these properties often come with huge risks, says Lomas.

“In some areas the high yields are an indicator that it is a fallible and unsustainable market,” she says. “Find out why the cash flow is good – it could be due to an external influence which is unsustainable and the rental market could crash very easily.”

Rental growth potential

There is more to property investment than initial yields, says Mark Wizel, investment director at CBRE.

“It is about the tenant, the length of the lease, the location, the type of property, the age of the property, positive economic growth forecasts, among other things, and it is also about capital growth,” he says.

“Ensure that the yield reflects the true market yield and whether there is rental upside.”

Mitigate the risks

Having a balanced approach that includes investing in both cash flow and growth properties helps reduce the risk of losing money in property, says Victor Kumar, buyer’s agent and director of Right Property Group.

“If you have a high-growth property in Sydney but low cash flow, you can balance it out by buying, say, in Brisbane where growth is not immediate but cash flow is stronger – especially if you add additional income stream like a granny flat,” he says.

“You can also do it by adding higher-yielding commercial properties [to] your residential investment [portfolio].”

Multiple leases

If your investment property has multiple rooms, you can opt to rent it out on a per room basis to boost cash flow, says Sheppard.

“This requires multiple leases with multiple tenants and typically targets popular locations,” he says. “Paying $400 a week may be out of reach for some people but renting a room and sharing a house with others for $150 a week may be acceptable.

“So if you have a house with four rooms, you may be able to rent it out for a total of $600 a week in a location where a single family may be prepared to only pay $400 a week.”

Remember that most leases have to be short term to be appealing, so turnover is higher and there is more work in managing multiple leases.

Fully furnished

Supplying your rental property with furniture, such as beds, cupboards, chairs, fridge and TV could help you increase rent, says Sheppard.

“You may have to spend a total of $10,000 furnishing your rental home, but if you can charge an extra $100 a week, you will recoup your investment within two years,” he says.

The downside with this strategy is that you have to repair these fixtures if they break down or deteriorate.

Add a granny flat or duplex

You can significantly boost your rental income if you can build a granny flat or duplex on your property, says Kumar.

A granny flat also has the potential to boost the value of the property by more than the cost of construction in areas where there is demand for properties that allow extended family to live nearby.

Check the council rules to make sure your granny flat or duplex addition complies.