Inspire & Inform Show – Episode 8

In episode 8 of the Inspire & Inform Show Andrew will be sharing frameworks, tips & strategies on how to effectively manage your cashflow at various stages in your property investment journey – When you are starting out, whilst you are holding on to your portfolio and when you are considering your next purchase

Please see below for the full transcript of this video

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Transcript:

Andrew 0:09
Good evening ladies and gentlemen, my name is Andrew Koleda from Inspire Realty and welcome to episode eight of the Inspire & Inform Show where we aim to add as much value as we can to anyone that tunes in in the area of property finance, money management, wealth creation, mindset. And really we created this here at Inspire Realty just to really give back to everyone and share some of the knowledge and experience that we’ve gleaned through our years of investing here at Inspire. And just to genuinely add value. Tonight, I am doing the show solo so I am without my partner in crime, Mr. Colin Lee, who’s the Founder and CEO of Inspire Realty, he is currently taking a trip up to Queensland for a number of reasons. One to reconnect with a long term mentor of his, second to spend some time with his new bubs and, and lovely wife traveling to Queensland to visit some family. And of course that they’ll no doubt the some property that he’s going to look at and some research and having a look at some new areas in Queensland where we can help with our investors. So if you bear with me tonight, it’s the first time doing it by myself and please feel free to keep me company. add any comments or questions that you like into the comment boxes, any suggestions that you might have around topics for future episodes where we can continue to provide value or any questions that you might have in relation to property and wealth, and we’re very happy to tackle them for you.

Andrew 2:08
So tonight, we have a an interesting topic. It’s one that’s very near and dear to my heart as a property investor. And that’s the subject of cash flow management. I know in these episodes, I’ve been speaking about this topic a lot, and there’s a good reason for that. The reason is that it’s one of the key aspects or elements of becoming a successful property investor is really knowing your numbers, managing your cash flow, and ensuring that you put yourself in a position that you can hold on to your investments over the course that it takes to achieve your longer term property investment goals. So that’s the topic we’re going to cover tonight. There’ll be a few numbers a few charts to speak of I’m going to look at it from the perspective of both from a new investor and just starting out in their investment journey, thinking about starting to save for their deposit, for their first property right through to a more seasoned investor looking to build out their portfolio towards their long term wealth goals. And it’s interesting, there are quite a few similarities when it comes to the mindset around investing and cash flow between the more seasoned investor and the newer investor. And the story of cash flow management when it comes to property investment on well starts well before the you actually invest in property. It’s really not a moment in time. It’s a constant and evolving process and evolution that you need to make a change to your thinking and habits. And it’s really a lifelong pursuit to stay on top of your cash flow management. In whatever aspect or whatever part of your journey that you’re in. So that’s what we want to cover tonight.

Andrew 4:06
So a couple of key topics, we’re going to tackle the question that we get quite often with people coming in to speak to us on a daily basis, and that is cash flow versus capital growth. And there’s a lot of differing mindsets out there. And the the answer to that, in a nutshell, is there’s no correct answer. It’s for whom what stage they are in their investing journey. And also what are the objectives that you’re looking to achieve? So we’ll tackle some of that. We’ll also share with you what I like to call the million dollar question that we ask every single client that we speak to, and it’s, yeah, so we’ll share that with you. It’s absolutely critical to their success. And spoiler alert, it’s linked to their cash flow management. But it’s might not be a question that is obvious to all of you. So I’m going to share that with you tonight, we’re going to go through some of the tenants of cash flow management when it comes to property investment. And we’re going to look at that, through a case study. We’ll bring back my favorite couple, Terry and Linda. And we’ll go through a case study of Terry and Linda, and we’ll look at how we use the information and how we use the insights from Terry and Linda’s cash flow situation to make a more informed property investment decision. And it will speak to the question of whether, what where’s the best place to invest in property with the best suburb? what type of property is the best? The answer is it’s going to be different to everyone and one of the determining factors into that is around cash flow. And then we’ll Fast Forward Terry and In this journey and look at Terry and Linda from the perspective of a more seasoned property investor. So someone that’s got a couple of properties within their portfolio, how does the perspective around cash flow change? And what are their responsibilities as property investors in terms of their cash flow moving forward, that will continue throughout their investment journey. And then we’ll summarize and I’ll share with you some key takeaways that really came to mind as I was putting tonight’s presentation together. So that’s what we’re going to talk about, and we’re gonna base it. I’ve got a lovely picture there of the cash flow game, made famous by Rich Dad, Poor Dad, Robert Kiyosaki. And it was a really interesting way to help teach people both young and old around cash flow.

Andrew 4:07
And I guess that really leads into one of the key takeaways that I wanted to share with you all tonight. And that is, you’ve got to know your numbers, you really need to invest the time. And hopefully this is one of the resources that you use to do so invest the time, effort and energy into growing your understanding and knowledge around how money cash flow, wealth actually works. And that knowledge and experience that you gain is going to help you greatly along your journey. At the end, at the end of the day, if it’s meant to be, it’s up to me, and I hope this is a great avenue for all of you out there to use to expand your knowledge around money and cash flow.

Andrew 7:41
So moving forward, I guess I really wanted to tackle that question of cash flow versus capital growth. I get a lot of people coming in to me and saying, Oh, well, I think that I want to invest in a dual occupancy, investment property. So that way it gives me positive cash flow from day one. Well, again, spoiler there is no correct answer to that. But my overarching mindset is that cash flow is really what enables you or gives you the capacity to stay in the market in the property market for as long as it takes for the capital growth, which is the part of property investment in my view, that you take out of the market. Capital growth is what where the wealth is created within property investment, but cash flow is the vehicle and the thing that we need to manage which enables us to stay in the market for long enough to allow for that capital growth to happen. So there is no correct answer whether cash flow capital growth is better is better or more preferable. It really depends on the person’s individual curcumstances. And that’s why I’ve got the for who there. Whether or not the cash flow is more important to them. Sometimes there’s a trade off between capital growth and cash flow some property asset selections are more geared towards cash flow against capital growth and vice versa. In the ideal world, we obviously as investors are going to be targeting both, but at some stage we need to, and over time, that’s likely to happen, you’re both going to get cash flow and capital growth over the long term, but what is more of a priority for that particular person or you at this particular moment, given all the factors that are involved in your personal cash flow, as well as your your portfolio’s cash flow? One or the other could be more of a preference or higher up in the priorities for us at a particular moment in time. So the, the again, there’s just really no exact answer to what’s more important The answer is they’re both important at different stages in our portfolio journey.

Andrew 10:07
So continuing on the million dollar question, this question we ask every single person that we speak to at Inspire when they go through one of our strategy sessions, and that is, how much can you afford to allocate each week each month each year, normally weekly, we like to break it down into smaller chunks towards your property investment goals. And why this is such a little bit different to I guess a lot of other ways of looking at the same question is, it’s different to how much can you afford to borrow the way that the banks assess someone’s serviceability is going to be different to what a person can realistically expect or feel comfortable in contributing towards their property investment goals. on a weekly basis, and we have a certain methodology or, or way of actually calculating that is that I’m going to share with you. And essentially, this really factors in and differentiates itself, as I said, from how much they can afford to borrow. It’s not relative to how much of a deposit a particular person has, it’s really relevant to how much that person given their lifestyle can actually afford to continually allocate towards their property investment goals.

Andrew 11:40
So how do we calculate that? Well, here’s a chart that I’ve actually shared with you all before and this is around how one of my clients what I shared with them, how to set up their accounts, but I bring it back to you tonight, because it’s particularly relevant around calculating. I guess how much you particular person can allocate towards their investment side. And I like to sort of separate it into different sides or different pockets if I’m going to steal from the Barefoot investor to try and really simplify it. And so when I find any system or framework that I can simplify, it’s much easier for me to implement and continue to implement over a long period of time. So what the exercise we run and this is something you can do for yourself at home and take it you need to invest into this. And it takes a little bit of effort. But once you actually do it once, you can continue to use this system over and over again.

Andrew 12:43
So you need to really have a good understanding Firstly, around your fixed costs. So in terms of your lifestyle and requirements, These could include things like your electricity bill, your school fees, your guess any amount that you allocate towards holidays whether it be rents whether it be the amount of money that you are required to pay on your mortgage for your principal place of residence, it could be anything that is always going to be constant that expense or cost regardless of what you do. So that’s one bucket I like to separate it into. The second bucket is your living and lifestyle expenses. So this is your Uber eats. This is your going out for a beer on a Friday afternoon after to work or whatever it is for you. You really need to knock down into the nitty gritty. And when you’re doing this exercise, you might be really surprised what you may be able to find. And obviously, at the end of the day, this is a very simplistic way of looking at it but you deduct your fixed cost & living and lifestyle expenses away from your income and value. will be the amount of money that you’re able to allocate towards your investments each week. And so it’s a little bit more in detail when we sit down and go through clients. But it also this number once you actually do the math might be different to the amount that you’re able to contribute towards a mortgage in terms of the way that the banks assess your serviceability. This is the number that you may feel comfortable with. And you might need to run this exercise a couple of times to really drill down because that that number, obviously, we need to target that to be a positive number, but based on your living currently being in lifestyle choices that you’re making. It may be a negative number, so you may need to do some reallocations to find a number that you can actually allocate towards your investments and your investment portfolio. Each week that you’re comfortable to hold, because ultimately as property investors, it’s not. We really need to have some sleep well at night. I guess, to our investment portfolio, we don’t want to be going to bed every night going, my goodness, if a tenant moves out for one week, I’m not going to be able to hold on, I am not going to be able to meet my mortgage repayments.

Andrew 15:24
So we really need to drill down to a number that you can commit to. And it’s very important that you make that commitment. So we spend a lot of time with with clients doing that. And to give you an example of why this is so important to sit down and work out what your actual household cashflow is, even before regardless of whether you’re looking at an investment property, looking at your first principal place of residence, this is where you pay that money goes towards paying down your bad debt, or it could go towards saving for a deposit building up buffers within your portfolio every single week, month year, that amount of money gets allocated towards the investment bucket and never touches your personal side. And for me personally, that’s the way I found it easiest to manage for my own portfolio.

Andrew 16:18
So to help exemplify how we would use this information once we uncovered and unpacked it, I’m going to use Terry and Linda as a case study again. So Terry and Linda In this scenario, they each couple know kids, each earning $80,000 a year per annum under a PAYG arrangement, so they’re not self employed or anything like that. They have $100,000 deposit, and their bank through consultation with their mortgage broker has told them that they can afford to purchase a property worth $500,000 and for the ease of math, I’ve said that they are required to pay a 4% interest rate, and they’re going to take out an interest only loan for an investment property. After doing the calculations, they we’ve determined that they have a comfortable investable income of $150 per week. And this is probably a good moment to touch in and say that anything that I’m about to share with you is general information only doesn’t constitute advice because we really don’t know any of your individual circumstances. So what could they afford to to actually hold over the long term, and this is where it gets a little bit interesting. So I pulled out a little snippet or a snapshot of one of the systems that we use here at Inspire and if it’s something that you’re interested in doing this exercise for yourself, we’re very happy to facilitate that. Please visit us at www.inspirerealty.com You’d be able to schedule a session with myself Colin or one of our other strategists to go through this with you. But in the case of Terry and Linda, they’ve got their hundred thousand dollar deposit. And they go through and they purchased their investment property. So I’m not going to go through every single number & calculation he but what this does is on the left hand side, we assume that we can target a property at a 3% yield. And we’re looking at what it would cost the for Terry and Linda to hold on to that investment property after all of their expenses paying their interest and all the other costs that are associated with holding on to this property at a 3% yield. And you can see here that the gross weekly cash flow from this property not factoring into depreciation or tax or negative gearing or anything like that, it would cost them $282 a week. But if we look back At Terry and Linda’s situation, we can see that they have an investable income of $150 per week. So what if we targeted a property at $500,000 that had a 5% rental yield? Using the same calculations, we can see that that property now cost them before tax $110 a week. So what I mean for this is to sort of demonstrate is that for Terry and Linda in their situation, with the investable income amount of $150 a week, they have a choice here, if they were to target potentially a lower yielding property, which may be a little bit more focused towards capital growth over the long term. Well, they can’t afford to comfortably hold it based on that situation. So either they need to change their cash flow from a personal household level or Potentially, as a strategist, I might be more inclined to try and help them to target a property that has a 5% yield, which is within their comfortable cash flow requirement and try and find them the property in a location, a state, a suburb, that’s going to give them the best long term capital growth prospects, but also never falling beyond the low that 5% yield, because that’s what they can comfortably afford to hold on to over the long term.

Andrew 20:33
So you’ll start to see as you think about this scenario, there is no one correct answer whether we should focus on cash flow or capital growth. We should focus on both but at different times during our portfolio growth and for different people in different circumstances. It always varies, so that’s why it really pays to dig into this deeply for your situation and not too many people think about these things. on a day to day basis, and that’s why it really pays to spend some time with someone that either understands this or and probably both have done this before for themselves that have some runs on the board.

Andrew 21:17
So moving on to if Terry and Linda, were already property investors, what we need to consider from a cash flow perspective, and this is the level of detail that I definitely go with my own portfolio, and I help our clients to think about it from this level is we start to see as we grow out our portfolio, how the cash flow from each property interacts with each other. So over time, we can adopt strategies, things like maybe we target something that has a really poor cash flow or low yield, that’s our capital growth, but we couple that or pair that with a property that has a high income Cash Flow. And we both we need to start to look at considerations around both pre tax and post tax as you can see here, and I’m not going to go through the calculations how this all works in at this stage because we’re a little bit short on time. But very happy to do that in future sessions around what we can actually afford to hold. But obviously, as many of you listening would know, property does have some taxation benefits, and that’s why we can see from a portfolio level here, our cash flow is negative $52 a week pre tax but after tax, we’re at $9 a week positive and that’s because we’re getting some depreciation and negative gearing benefits flowing through.

Andrew 22:47
So what are Terry and Linda’s responsibility? let’s fast forward again when it comes to cash flow, once they’ve actually purchased their investment property or properties. They’re responsible for tracking the property’s income and expenses. Obviously, most most of you property investors out there will have someone managing that property. They send you through a nice statement each month and each financial year. But it’s your responsibility as a property investor to check all of those figures and make sure everything’s up to date, and to track that and that’s going to help you obviously a lot, not only from making decisions about where to move, what to change, etc, but also from a perspective of being able to send through the details through to your accountant, come tax time. They need to stay on track if their investable income amount has changed over time, because one of the objectives and it sounds relatively simple, but once we work out our fixed expenses and our living & lifestyle expenses. Over time, our focus is to be growing our income as we expand our careers and progress through that. And that could significantly change the amount of investable income and could be a trigger point as we review a person’s portfolio periodically to potentially look at their next purchase. They need to make sure as their portfolio grows, that they keep enough buffers in place. And it’s going to be the amount of buffer that each person needs to keep, it’s going to be very much in line with that individual’s risk profile. So some people are a little bit more conservative and want to grow their wealth a little bit slower. Some people are a little bit more aggressive and want to take more risk and therefore keep a lower level of buffer. But it’s always very advisable to have a detailed conversation around how much is the right amount of level of buffer for you, and to give a personal example of this, I’m very happy that I had this thinking and foresaw this, come through the covid 19 pandemic, I had significant amount of buffers in place, which thankfully, I haven’t had to draw from, should I, one of my investment properties be untenanted for a while, and I have to pay the full mortgage with no income coming in. That, again, is going to add to that sleep at night factor but it’s up. It’s our job as investors to know this plan for this, and then through our cash flow management. And that’s going to give us the peace of mind to continue with our plan towards our longer term wealth objectives.

Andrew 25:40
They’re also in charge of looking for ways to improve their portfolios cash flow, and that can be done in basically only two ways either reducing our expenses or increasing our incomes. And one good example of that at the moment A lot of people have taken out a loan over several years ago, they may not have taken this opportunity to review their mortgages. My understanding is banks are fairly open at open to refinancing business at this current time. And our biggest expense as a property investor is the amount of interest we’re paying on our loans. So it’s a really good opportunity for that at the moment to look at reducing your expenses through potentially speaking to a, I guess, a more investment savvy mortgage broker, to reviewing your finances and looking to reduce the amount of interest that you’re paying. So that’s an example of how Terry and Linda over time needs to be on top of their cash flow to look at improving that to allow for future investments.

Andrew 26:52
Okay, so what else does effective cash flow management do and knowing your numbers. It allows you to do one of my favorite things in the world. And that is some What if analysis by knowing my numbers and knowing the amount of cash flow and my cash flow position on each individual property and from a portfolio perspective, it allows me to think of try on new strategies. For example, if I wanted to add a commercial property into the mix, I could throw some numbers in there and see what my portfolio potentially what my portfolio cash flow would look like, after including that asset or if I wanted to make another addition of an additional residential property, it’s going to allow me to think about what’s going to be my cash flow position after I make that purchase, and going to give me a good indication of whether or not I’m going to be able to hold on to that property over the long term as per my overarching strategy.

Andrew 27:53
Again, just a reminder to to look at it from a global perspective. And that introduces the concept that we spoke about before of pigeon pairing which is buying a more cashflow, heavy property. So a better cash flow property to help support a more negative property in terms of cash flow, but with better prospects of capital growth, it allows me to think about if it’s the right time, within a particular property to value add, and that might be through a cosmetic renovation or more of I guess a bigger renovation, and allows me to consider things like land tax, which is which sort of leads to the I guess, another topic that we’ll speak about another time around diversification. So I could do some What if analysis around if I bought another property in New South Wales, I might have to start paying some land tax every year because land tax is a state based tax. What impact would that have on my cash flow of my portfolio? And the other thing is going to being on top of your numbers is going to know whether or not or what is the level of liquidity within your portfolio. So over time, your portfolio all things being equal will appreciate in value. This means you’re effectively lowering lowering your loan to value ratio or how much you owe to the bank against how much your portfolio was worth. And to give another example of recent times, as I’ve done a refinance with one of my loans, I’ve been managed to able to extract some equity out of that portfolio, some liquidity. So what I’ve done is I parked that simply into an offset against the loan, and I have some extra cash that’s available to me Should I need it and that’s just simply added to my buffer. So over time as your portfolio grows and your loan remains the same or goes down, you start to have some equity available to you. But that’s one of the challenges for us as a property investor, if we don’t really know our numbers and our cash flow, we might not have access to that funds.

Andrew 30:12
So that we’re speaking to an investment savvy mortgage broker, along with doing your own analysis is really going to pay dividends when it comes to that side of your cash flow. So we’re actually running right on time. This time, it must be that the fact that I’m doing this alone

Andrew 30:33
But a couple of key takeaways I really want you to take out of this. I know I’ve gone through a lot of numbers, a lot of a little bit of jargon as well. I hope that it’s been clear and concise, but if it’s something that you’re not understanding, you’re not really sure of or just like a little bit of information on please do reach out to us on one of the comments, of the posts that you’re watching, whether it be Facebook or YouTube, more than happy to help. But the key takeaways is, you really are, although you’re an investor, you really are running and or are planning to run a multi million dollar property business. And you need to treat your property business with the same amount of respect that it deserves. So you really need to treat it that way. You wouldn’t run a multi million dollar business in any other industry without knowing your numbers without knowing your cash flow and without knowing that you could meet any obligations that you that you had in terms of cashflow, and continue to keep the business running for as long as it possibly can or as long as you desire it to and your property investment business should be no different.

Andrew 31:48
Despite what many people say or many people’s perspective, to be honest with you, property investment is not a passive investment. Although may not take as much time from you as running any other type of business, it still requires you to invest some time constantly over your journey, which remember is going to be a 10, 15, 20 year journey, you need to invest the time to stay on top of your cash flow. And just like creating a household budget, it’s difficult at first, but once you get it up and running, you’ll reap the benefits and it’d be easier to maintain. And again, property is a long term investment. and managing your cash flow buys you time in the game for property to do what it’s done over the last 40 50 60 years, which has shown that it’s grown at 7% on average, that doesn’t mean at all times or in all markets. But the managing and staying on top of your cash flow is going to give you that a ability to stay in there and stick at it over the long term and had the peace of mind that you have the capabilities within your budget within your personal cash flow to be able to do that. And you cannot outsource this you can outsource the the doing and the implementation, but you really cannot outsource the understanding Because ultimately, no matter which advisor which strategist or which mortgage broker or which financial planner or which solicitor that you speak to, you are the only one that’s responsible for your financial future. You’re the one that’s making the decisions. You’re building the property portfolio. So you can outsource the implementation, but you really cant outsource the knowledge that’s that’s really up to you. And we trust that these sessions of Inspire & Inform goes, play some sort of role into expanding that knowledge, expanding your understanding, expanding your financial literacy, so that you’re going to be able to make informed and competent and confident decisions towards your better future. So that’s our aim out of all of these Inspire & Informs.

Andrew 34:26
Again, if there’s something that you want to discuss or go into a bit bit more detail with either Colin, myself or the rest of the team here at inspire, we’re very happy to help. If not, feel free to ask any questions that you might have any suggestions about how we can add more value topics we can cover in the future in the comments, wherever you’re watching this, and other than that, I hope you have a fantastic evening.

Andrew 34:54
And I believe next week as a little teaser, we’re going to be bringing one of our other team members at Inspire on and we’re going to be having a chat with them to dig into their personal story because I think that’s very relatable for you all. So really looking forward to that next week. And that’s all from me tonight. Hope you have a fantastic evening. Bye for now.