Source: The Real Estate Conversation – Steve Waters
When it comes to cash flow, it’s not about the rent that you’re earning from your portfolio.
Successful property investment requires an understanding of your individual cash flow position needs as well as your ability to manage your cash flow over the decades.
In my experience, people tend to start looking for properties that will represent what their understanding of cash flow is – which is often wrong to start off with.
If you take someone who is on a really good income, a 5% yielding property might be good enough for them once they include all of their tax deductions.
However, if you consider a young couple who are just starting out and don’t earn a lot, and therefore not a lot of disposable income, 5% yield may not be enough to maintain their lifestyle.
It’s an individual equation
Your own unique situation or financial footprint is going to dictate where you should begin and where you’re going with your cash flow requirements.
As life unfolds there are going to be times when your cash flow is going to be more important to you, which is why pre-planning is vital.
Managing your cash flow throughout your life – including when children arrive, as an example – is the name of the game, especially when you’re building up an asset base.
Take our interest rate at the moment, which is historically low but won’t stay that way.
Too many property owners and investors aren’t thinking about that overly much, which will ultimately impact their cash flow, because they’re too busy enjoying the strong capital growth. In my opinion, this is a critical mistake.
Cash flow management
When it comes to successful cash flow management, you must review your position every quarter – this is what we do with our clients.
A quarter is a long time in real estate and things can change, such as your income, your job, your interest rate, your tenants vacating, or your mortgage might be rolling over into principal and interest repayments.
Quarterly reviews enable you to very clearly establish a plan – and to activate it there and then.
If you only do it once a year, you’re being reactive rather than proactive.
The key to managing your cash flow, therefore, is to have a mitigation in place before you need it.
That involves having some liquidity, which could be an offset or redraw account or perhaps a line of credit.
This provides a facility for you to maintain your cash flow in a worst-case scenario.
Why the state of your wallet matters
Cash flow is there to help us sustain the asset, which is why it’s absolutely imperative throughout your property investment journey.
Now, I don’t mean positive cash flow properties in regional areas, I mean cash flow management over the years.
Cash flow simply means money coming in, but cash flow management means where can you put your hands on cash when you need it the most?
The thing is: the state of your wallet plays with the state of your mind.
Unfortunately, if your wallet is a little empty it can result in you making bad decisions, such as selling when you don’t need too.
That’s why you always need to have ample cash flow to see you through the troughs.
Investing is not this linear trajectory in terms of growth.
We have ups and our downs. We make a little and then we give a little bit back.
It’s usually those times when we’re giving a little back that the fundamentals of the local economy are not great, which potentially means cash flow pain due to higher interest rates.
The fact of the matter is that no one lost their properties due to lack of equity during the GFC. They lost them due to lack of cash flow or cash flow management.
All of those people who hung on, did whatever it took, and managed their cash flow sufficiently to survive the GFC, look at where they are now in terms of their asset values.?
And that, quite simply, is why cash flow management is king.