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Articles by Salesh Chand

SHOULD YOU PURCHASE NEGATIVE CASH FLOW PROPERTIES?

AUTHOR: Salesh Chand

POSTED: 23 May 2013

The answer to this question is, "It depends on the scenario". If you are planning to buy a rental property that is cash flow negative, you need to look at the future capital growth potential and the land size of the property, i.e. is this a subdividable section or is there value left in the property which you can use to refinance later?

The current tax law allows that any losses generated against cash flow negative rental properties can be claimed against your personal income if structured correctly. This means that if your average tax rate is 33%, for every dollar of loss, you will get 33 cents back.

Future Capital Growth/ Discounted Properties
If there is no potential for capital growth and the rental property is cash flow negative, then you should avoid the property. These sort of properties will result in cash flow issues for you.

If there is good potential for capital growth, i.e. 7%+ and the property is slightly cash flow negative, i.e. less than $4k a year, then this would be a good buy.

Note $4k a year negative cash flow means $77 a week top-up from your pocket, but if the property is gaining value (let's say the property is worth $300k) your capital growth will be $404 a week. So this would be worth buying, as you can always use the increase in value to refinance your property to purchase more investment properties. However, you need to look at your cash flow and calculate if you can afford the $77 top-up a week.

Subdividable Properties
Properties that can be subdivided are great investments in cities where there is a major shortage of land supply. If you can find good subdividable properties at the right price, you should consider buying them because the capital growth on these sorts of properties will be high.

Last year I bought a subdividable property and it went up in value by nearly 30%. Another subdividable property I bought in December 2010 has gone up in value by 60%. A property that I bought six weeks ago can't be subdivided, but it is possible to build a minor dwelling on it - I was offered $100k more for this property within three weeks of purchase.

The first two properties were slightly negative cash flow at the time of purchase but the capital growth has outweighed any revenue losses. The property that I purchased six weeks ago is cash flow positive by $60 a week and there is still potential for major capital growth.

So if you are living in a city, try buying properties with large sections. The above properties were bought in Auckland.

Summary
In summary, only buy cash flow negative properties (less than $4k a year) if there is potential for good capital growth or they can be subdivided. Do your due diligence prior to purchasing these sort of properties and always look at your personal budget to calculate if you can afford to buy a negative cash flow property. Do not buy cash flow negative properties if you can't subdivide or the property has no potential for capital growth. Always talk to your accountant about this sort of property purchase.

Request a Meeting

Salesh Chand
Director of Business Services

09 522-7955

[email protected]

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

Comments

Testimonials

Hi Salesh, I just wanted to send you an email on behalf of GRA to say how fantastic we have found your company to date. As you know, Ben and I joined GRA a couple of months ago and have just found you so amazingly helpful in getting our new property set up correctly and sorted out. We have what I would consider a rather complicated structure as a result and it’s a fantastic feeling to know that we are getting everything done in the best way possible. We have just had approval to put a minor dwelling on the property which will make a massive difference in terms of cash flow and obviously value, something we would never have even thought of without GRA and which we are very excited about. During the buying process we attended a seminar with Matthew and from the outset thought he was fab. We therein signed up for property school and found this nothing short of fantastic. The content was relevant, up to date and comprehensive, but more importantly it was taught in a way that we could actually understand and really get value out of. I wanted to mention also, that everybody GRA have recommended to us has been just so efficient and absolute masters at what they do. A wonderful network of people that we feel very lucky to now be able to call on. From Kris Pederson and Bryan Rist who put our mortgage together to the insurance guys they then referred us to, I’m super impressed. Within GRA, Ellery has probably turned things around for us faster than I’ve ever known before, something which we appreciated so very much when it came to crunch time. She’s always a pleasure to deal with and again, we’re stoked. We’ve just settled on the property today and are about to go and get the keys. I’m pretty pumped and hence this email is probably rather excitable. So, a massive thank you to you Salesh, the partners for such a fabulous 6 weeks at property school and everyone at GRA for their help. May this be the start of our property empire. Thanks again, - A & B - July 2015

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