It used to be that negative gearing was the in-vogue investment strategy. Rachel Barnes, from InvestorFriendlyAgents.com.au, remembers people looking at her strangely and thinking it mildly humorous when she found and endorsed the potential of positive gearing back in early 2000. In today’s show she tells the story of her success if that category.
 

Transcript:

Kevin:  My next guest is Rachel Barnes from InvestorFriendlyAgents.com.au.
Rachel, thanks for your time.
Rachel:  You’re welcome, Kevin.
Kevin:  No doubt, as we’re talking to many property investors around Australia, we get to talk about positively geared property and negatively geared property. Let’s talk about positively geared because I know that you’ve basically built quite a good portfolio on that strategy. Is it still possible, Rachel, to do that?
Rachel:  Yes, it is. It’s just harder to find new negatively geared property, and that’s the thing. Often people either put it in the category that “If I get positively-geared property, I won’t get capital growth” – and I haven’t found that to always be the case – or they think it’s too hard to find. But there are compromises sometimes that you have to make, and that’s where it gets down to just choosing the right property in the right place for your strategy.
Kevin:  Do you find that you can work with buyer’s agents in this way? A positively geared property depends on how much capital you’re putting yourself in a lot of cases, doesn’t it?
Rachel:  Well, sometimes, and that’s just the thing. You see a lot of places advertising positive cash-flow properties, but you really have to check the assumptions that they’ve put on there because they may be assuming that you’re only borrowing half the amount. But, of course, then it’s going to be much easier to make it positively geared.
Whereas, when I look at it, I’m looking at more 80% to 100% of a loan – one way or the other, either using two properties or one to make it still positive cash flow so that I can buy as much as possible.
Kevin:  You mentioned earlier in our chat about the possibility of getting capital growth and cash flow at the same time. Is that possible?
Rachel:  Yes. It’s funny because sometimes you go into a property and you know it’s negatively geared and you think, “But that’s okay. I’ll just hope and pray that we’ll get capital growth, and then we’ll be fine because everything will catch up.”
Of course, the longer you go, the harder it can be, and then you can end up sometimes selling it for a loss because you couldn’t wait long enough because of the cash-flow negativity to actually reap the capital gain benefit, so that can go backwards.
Whereas, with positively cash flow, if you’re picking the time right, you buy well, you get the right type of property in the right area, and you have the positive cash flow come through, you’re not going to be in such a hurry to sell it. Therefore, you can hold on until the time is right in the market.
Kevin:  In your experience, have you found that there are some places or some areas around Australia that are better to pick up positive cash flow properties than others?
Rachel:  Yes, but it all comes down to timing. Obviously, as I mentioned before, if you have positive cash flow, you can hold onto it to pick the right timing, but also getting in at the right time.
For example, there’s no way I’d be looking at Sydney at this point in time and saying, “Oh, yes. It’s easy to get a positive cash flow property in Sydney,” because that’s just going to be really difficult. I wouldn’t say impossible – nothing is impossible – but very, very difficult.
Whereas, when you go out a bit further and you look at the ripple effect, where housing still basically hasn’t caught up with the capital growth perspective but is getting the high yields because that growth has been kept down, then often, you’re actually riding a wave before it hits the shore, if you know what I mean.
Kevin:  Yes. What should we be looking out for as a positive cash-flow property?
Rachel:  Generally, just to be sure of what we’re looking at, the positive cash flow means that after all of your expenses, the property is still going to be putting some money in your pocket. That may be partly due to depreciation, depending on what tax structure you’re on, but also generally, it means that you’re getting somewhere around a 7%-plus yield.
If you assume that 5% is going to be gone in interest, 2% might be going into extra costs. I’m just talking about ballpark figures here, but generally speaking, you’re looking at least getting a 7% growth yield before you’d even start to put it into an analysis software to work out exactly what the end result cash-flow-wise would be for you.
Kevin:  It is a possibility that you might be able to secure a property and then add a bit of value to increase the income, which is going to make it a bit more positively geared for you? Is that a way to go?
Rachel:  Indeed, it is. That’s one of the best strategies I believe at this point in time in a lot of places, because if you can buy a property that’s run down, doesn’t have much income coming in at the moment, and you can increase the value of the property, as well as the income from the property, as well as the depreciation because of the work that you’re doing on the property, then you have three real major benefits with that.
Kevin:  I guess subdivision would fall into that category, as well as renovation, wouldn’t it?
Rachel:  It does. Granny flats are also starting to fall into that category in some areas, where people are adding an extra dwelling so that they can get some extra income. It doesn’t always add to your capital growth, but it does add to your yield, and therefore, you can hang on for a bit longer and you have more property on that lot. So, yes, there are a number of different factors, but subdivision is one of the keys where you can sometimes get a block of land for free.
Kevin:  Yes, that’s right. A big bonus, isn’t it?
I mentioned at the start, too, I introduced you as being from the website InvestorFriendlyAgents.com.au. That’s a business you’ve set up to educate agents about how to talk to investors. Are you finding that you’re having some wins there, Rachel?
Rachel:  It’s interesting; I was advertising it for a little while, but I found that I was getting the wrong type of agents contacting me – the people who were trying to sell off-the-plan properties to perhaps very naïve investors who don’t really understand what they’re getting into.
I stopped advertising; I’m basically going by word of mouth. Since then, I’ve found it really good. I’ve included property managers, but the agents I’m finding that I’m getting sourced through word of mouth. We have some amazing agents out there with very high integrity, people who are really eager to help their customers and to leverage and help investors to buy more property and sell those at the right time.
Yes, it’s really nice to actually find people in the industry where it’s got sometimes such a bad reputation, but there are an amazing number of really great, ethical, high-integrity agents and property managers out there. I love to connect with them.
Kevin:  Yes. Is there a list of these agents somewhere? Is it on your website?
Rachel:  It is. We’re still in the process. I have a number of property managers that we’re just starting to go through now, so that’s the extra arm, but we’re trying to do teams, so the agent, the property manager, even the receptionist, altogether, and do agency-by-agency.
But even though, I go out to the agents as a whole, I do the training for the whole lot of them so that they’re on the same page, I do find that I’m only going to be accrediting the people individually, because people can move on, agencies can change hands. It’s all down to checking with the person that they’ve actually got their certificate of accreditation if you’re dealing with them.
Kevin:  The website is InvestorFriendlyAgents.com.au. My guest has been Rachel Barnes.
Rachel, thanks for your time.
Rachel:  A pleasure. Thanks a lot, Kevin.