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We could all do with more cash in our pockets, right?
I mean, who would not want an extra $10,000 or $20,000 every year.
While this may be beneficial, even after tax, ask yourself… would it change your life?
I would highly doubt it, but I do feel it is the reason many investors chose the path of making cash flow a priority.
They believe that increasing cash flow is the best option for long-term, sustainable wealth.
There have been several trends over the last few years that have been designed to trap cash flow investors with the offer of high rental returns.
These types of investments offer a much higher yield because put simply, there are more risks involved.
They may not seem evident at the time, but in the current environment, they are standing out and are a major thorn in the side for those that have chosen to prioritise cash flow.
Here are my thoughts;
Probably one of the newer trends in the marketplace, given the introduction of the Air BNB platform.
Buying properties in high-demand lifestyle locations or holiday destinations to achieve a greater yield.
Unfortunately, the demand for this type of investment has come to a screeching halt over the past couple of years, hasn’t it?
Adding to the hygiene risks has been the closing of borders and international visitors stopping, which has seen demand drop like a stone.
It has resulted in many owners returning to the traditional model of finding longer-term tenants to cover the mortgage.
This completely undermines the reason for undertaking this strategy in the first place, as you are now stuck with poor cash flow and almost always a poor growth asset.
And as tourism returns Airbnb will become more popular again, but a number of states have now introduced legislation regarding this type of accommodation only allowing a certain number of days each year for Airbnb in certain strata blocks. In other words, you won’t be able to receive cash flow all year round.
This option has been around for many years and has been a growing trend also, particularly around the inner city and university locations.
Universities attract a huge range of students from overseas, as well as local and interstate.
Investors have rushed to take advantage of this trend and have not only built new properties to cater for students but have also chosen to modify existing properties to rake in additional cash flow.
I have been to many an inspection where a home has been modified to squeeze an extra bedroom or bathroom in to boost the rent.
But with Universities closed and borders shut to interstate and overseas students, the well has dried up and there is nowhere to turn.
Investors face long vacancy periods as these properties are not attractive to the average tenant of families and young professionals.
As they have been purpose-built or have been modified, they are considerably harder to liquidate also, especially in this market.
Dual Occupancy House and Land
Another Cash Flow strategy I see major issues with, in the current environment is building a new dual occupancy property.
Cash Flow investors are often sucked in with the promise of high rental returns, from a new property offering two incomes.
For me, it always comes back to Supply and Demand and there is a telling story in many of these locations.
You see they are often in areas 30-40 km plus from our CBD’s and in these locations, there is an abundance of land = High Supply.
On the flip side, demand will look something like this;
Demand tanks and falls well below the averages for the State.
This is where property prices could well fall the 20% – 40% that the media has been touting as demand falls off a cliff, but high supply remains and will do so for decades to come.
This will also see cash flow fall, as people avoid these types of assets in favour of traditional-style homes at now similar prices.
There is a natural attraction for investors to build more cash flow.
But they do not need more cash flow now, they will require it in years to come as they need to replace their exertion income approaching retirement.
In many cases, a higher rental yield will usually be on offer to cover the higher risks involved.
In a solid or standard market, these risks seem manageable, but in times like we are seeing currently, they become too great for many.
With borders closed to local and international tourists and students, the Air BNB fad and Student Accommodation strategy faces serious hurdles as demand sharply declines.
For those that have chased cash flow with dual occupancy in inferior locations, with high supply they also face issues.
If investors dug a little deeper, they would realise that greater cash flow is often much riskier and is not actually getting them any closer to their goals.
They need a strategy around capital growth and asset appreciation.
Cash flow keeps you in the game, but it is capital growth that can be life-changing.
By putting together, a written and documented Strategic Plan, they have direction and certainty with a higher level of security.
The chances of achieving their goals increase substantially and with much lower risk.