Do positive cash flow deals exist? This is one of the most frequently asked questions we get these days. It is very interesting to note that before the increase in interest rates this question was not often asked. It was like property investors either took it for granted that cash positive properties just did not exist, or that the difference between the bond repayment and rental did not really bother them based on handsome equity growths.

As interest rates started increasing, so did the frequency at which the question, “Are there any cash flow positive properties?” got asked.

So do they exist?

The answer then was ‘Yes’, it's ‘Yes’ today and it will be ‘Yes’ in the future. However, just answering ‘Yes’ is not enough, we need to expand a bit if people are to understand where to look for such properties, for many believe that such deals are just an urban legend.

When people get the answer that such deals do exist, the next question is “What areas should I be looking in?”

There is no specific area where you should start looking. The deals are all around you, you just need to know what you are looking for and keep looking for it with consistency. Yes, there are areas where the likelihood of finding them is greater, but not that much greater that they will jump and wave hands in the air shouting “Hello! Here I am!”

So what are you looking for?

There are many reasons for a deal being cash positive, but it’s hard to find situations in the market where the surrounding circumstances are just right in order to make that deal possible.

As one might expect, it's a bit like looking for a needle in a haystack. However, one’s chances of finding cash positive deals increase when one has three vital ingredients:

  1. Time
  2. Money
  3. Knowledge

The cash flow positive investor thinks laterally and acts in a manner that is counter cyclical. It's contrary to popular market thinking and often confounds those less informed and for that matter many estate agents who have been trained to sell mostly everything a positive cashflow investor does not seek.

Investors seeking cash flow are not too concerned about equity growth or if the tiles in the bathroom are Italian. That's just nice to have. Instead, it is income they seek. The type that keeps arriving in the bank each month, without much effort. We call it passive income. Passive income specialists are actually lazy people as the only effort they expend is that which further allows them to do as little as possible. But effort at the beginning they do extend.

To summarise:

  1. Know what you are looking for.
  2. Look for it all the time.
  3. Don't look in the mainstream property media.
  4. Estate agents are probably not going to be of much help.
  5. Lifestyle property is generally out of bounds in certain market conditions.

Alright, so what's left?

  1. Look where there is no interest or focus from the mainstream media and buyers like areas with the potential for future growth. These may be remote, in low income areas or may have completed their growth cycle. In such areas there are far fewer mainstream buyers and therefore prices stabilize or even decrease from their previous highs. This can be anywhere, but speculators should lack interest.

    That said it is a myth that only low-income areas are cash positive. Which brings us to the next place to find cash positive properties.

  2. Low and mid market areas are still a good place to find cash flow positive investments. Though if the areas have been excessively over traded and too many investors are buying for speculation and selling, this will create a high price effect even if the prices look relatively low. For example, in the Johannesburg CBD one could buy flats for R15  000 to R40 000 around 2003 to 2005, but today prices are around R120 000 all the way to R300 000 for the exact same flats. Even if this looks cheaper than the entry level townhouse, they are no longer cash positive at these prices.

    On the other hand if you look further south, in and past Walkerville in Gauteng, you find small areas that are lower cost and still yield cash positive rentals. However, you still need to understand the microeconomics and rentals of the area to know if it is a good purchase.

  3. The third place to find cash flow positive properties is in the ‘triple D’, Disease, Divorce and Death. Not nice, but real investors don’t only swim in this market, they are champion swimmers. Good cash flow investors are often noted to be without compassion and so should you when you enter these situations.

    There are buyers that need to sell fast because of problems which may even extend beyond the triple Ds to issues such as immigration, financial trouble, liquidations of businesses (not necessarily property repossession) and many other reasons. With the right motivation such sellers will sell fast for less than market value to move on.

  4. Pre-boom areas. To even see such areas one must know what is going on outside the property market. For example, if in a small town a major company like Escom or Sasol builds a plant, property is sure to be in demand both for rental and home ownership and therefore have capital growth at the same time as cash positive rentals if buying at the right time. But finding such areas needs careful considerations not only of future developments, but also land release from government for further property developments and sustainability. If there is only one major employer in the whole area and they decide to downsize the whole property market could potentially collapse. Again, market research is essential for success and careful consideration of all microeconomic factors.

Though none of this is rocket science you need time, money, knowledge and great effort. Many advertisements in the newspapers say ‘great investment’, so something that most entry-level investors don’t understand or believe is required.

Source: www.PropertyInvestorNetwork.co.za