Some investors believe
that increasing cash flow is the best option for the 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;
Air
BNB
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
few months.
Adding to the
hygiene risks has been the closing of borders and international visitors
stopping, that 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.
Which 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.
Student
Accommodation
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.
Investment
properties that have 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.
Some investors are
often sucked in with the promise of high rental returns, from a new property
offering two incomes.
It always comes
back to Supply and Demand and there is a telling story in many of these
locations.
These locations are
often in areas 30-40 km plus form our CBD’s and, in these locations, there is
an abundance of land = High Supply.
On the flip side,
demand is likely to not be there
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 favor of traditional
style homes at now similar prices.
On the Other Hand
If you can get these properties in the 30-40 km plus form our CBD’s in
areas of less land supply and high rental demand. Then you are likely to be on
a winner
In
Conclusion
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 face 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 the capital growth that can be life-changing.
Jason Gwerder
Friday, 31 July 2020
