‘There’s nothing wrong with negative cash flow’
Smart Property Investment’s Phil Tarrant has spent roughly six years building an impressive $6.15 million-property portfolio from scratch, and one of the most important investment lessons he has learned is the importance of establishing a “property plan” and determining one’s tolerance for negative cash flow.
The portfolio, which has 12 real estate assets across Australia, has a current total debt position of $3.9 million, including all the refinancing, which gives the property investor a total equity position of $2.23 million on top of cash sitting in an offset account. With a loan-to-value ratio of 64 per cent, Phil admits that he and his team continue to struggle with cash flow.
“That's always a challenge, so we're fortunate that we've bought good properties which have delivered pretty reasonable yields,” Phil said.
“Our portfolio cost us a little bit of money before tax, and that's probably a nature of a growing portfolio. If we stopped doing what we're doing right now, in two, three years’ time, it'd probably be nice, neutral, even positively geared, but because we have the pedal down, we keep refinancing to secure our next assets.”
A lot of people will think that a 60 to 70 per cent loan-to-value ratio is a bit too risky to hold in one’s property portfolio, while some—like Phil—will want to utilize the equity and build a bigger portfolio.
According to buyer’s agent Steve Waters, both strategies can work to the advantage of the property investor, withit being “your own personal sleep-at-night factor.”
Steve explained further: “When you're beginning a portfolio … you need to, perhaps, leverage a little harder than your portfolio as it matures because capital [is a] finite resource, so you need to utilise it to keep going. Once you get to a baseline of properties, you don't have to really ride that LVR position too high, [but it still depends], of course, on how hard you want to go.”
Personally, the buyer’s agent isn’t a fan of leveraging high due to the risks it involves, including the deterioration of cash flow as rates continue to go up.
However, while many property investors work hard to maintain a neutral or positively-geared portfolio, he still believes that negative cash flow isn’t completely a bad thing to have in one’s portfolio.
For Phil’s portfolio, in particular, they have continuously tapped the equity over the years to continue being able to buy properties.
“There's a very good chance that anyone doing the same thing as you will run into a negative pre-tax cash flow position,” he said.
According to the buyer’s agent, there’s nothing wrong with this scenario as long as it doesn’t exceed the investor’s limitations in terms of carrying negative cash flow.
“[That’s why it is] one of the important things when you very first sit down and put a property plan together—[to work] out what is your tolerance for negative cash flow pre-tax,” Steve said, “It's a bit of timing and time in the market. I think you have to have them both.”
Tune in to Phil Tarrant’s portfolio update on The Smart Property Investment Show to know more about his acquisition costs, “boring” assets, risk mitigation, cash flow management and yearly income, as well as the inside scoop on a new property that could take the team’s investment strategy to the next level.
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