Monday 28 July 2014

Sustainable Property Investment

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.

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