Investors in property are required in general to
take a long-term view of the market. Property unlike stocks or unit trusts are
very illiquid. It will take time to search, purchase, transfer or dispose a
unit. Sometimes, it may be necessary to hold a property through a downtrend of
the market cycle.
How then to successful property investors so
heavily invested can sleep sound at night?
The secret is sustainable cash flow.
A property investor who is forced to sell his/her
property due increase interest rates or margin calls from banks due to negative
equity would have no choice but to top up the mortgage or increase their installment payments.
Those that are unable to do so suffer as a
consequence. The heavy gearing on property as high at 90% could easily set an
investor back many years of investment opportunities.
Cash flow calculations are simple, no more
complex than primary school math.
Start by calculating your estimated monthly Income that you will receive. The
income is typically the base rent of the unit. Sometimes however, there may be
additional fees, for example the tenant agrees to pay an additional amount for
furniture and fixtures, or perhaps an agreed amount for utilities or
maintenance charges.
Next, determine the estimated monthly Expenses that your unit will incur. These
typically include the installment payments for bank loans, monthly management
fees and repairs. Don’t forget to also expenses that are incurred annually like
insurance, property agent fees, property and income taxes.
The Cash
Flow is simply the amount of money left over after all the expenses are
paid.
So, for a property investment to be sustainable,
it should be cash flow positive. This will help buffer for any unexpected
increase in cost such as interest rate increases, unexpected repairs, hike in
insurance premiums or rises in management fees.
Till date, I am glad to say, I have managed to
make sure all my properties are cash flow positive. The left-overs are now
prudently stored away awaiting the next investment opportunity.