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10-05-2009

Postive cash flow properties

  1. News
  2. 2009
  3. May
 
A cash flow positive property is one which enjoys a net gain based on the rental income being greater than costs associated with owning the property. These costs may include the expenses associated with purchase, legal/ management fees, rates, electricity and upkeep of the property. A cash flow positive property is often what many investors aspire towards, with their investment property actually generating a profit rather than recording a loss.

The current conditions are creating a market where positive cash flow properties are now becoming more common. Property values have fallen in many regions while at the same time some areas are showing increased rental rates and interest rates are falling.The combined effect is that rental yields are trending upwards.
During 2004-06 rental yields were eroded due to house and unit values increasing at a faster pace than rental rates. Since early 2007, when weekly rents started to increase at a faster rate than dwelling values, yields have been improving. On a gross basis rental yields across New Zealand are averaging 4.9% for both units and houses.
2008-09 has been pivotal for the NZ property market with a sustained drop in property values for the first time since 1998. This trend is continuing with QV’s latest residential property statisticsshowing that property values fell by 9.2% during the year to April 2009, a slight improvement on the 9.3% decline reported last month. Across New Zealand property values are now down 9.6% from their peak in January 2008.
The year on year change in property value across the Auckland area has improved from -10.1% last month to -9.0%. The Wellington area -8.5%, Hamilton -8.8%, Christchurch -9.6% and Dunedin -8.0% have also improved from last month. Tauranga is the only main centre to worsen further with the year on year decline slipping to -9.9%.
Cash flow positive return suburbs across New Zealand
With confidence low, inflation high, some value declines having been recorded, more and more investors will be looking to purchase cash flow positive properties in order to reap the benefits of a return from their property and to also capitalise on future property value growth. With vacancy rates dropping, positive rental growth and value growth being minimal, it is anticipated that more and more properties will be moving into cash flow positive territory.
On a net basis across New Zealand, QV estimates that there are now 42 suburbs which are averaging cash flow positive return according to our assumptions. A number of assumptions/scenarios have been used to determine the areas that are likely to provide positive cash flow:
·         The suburb must have recorded at least 10 sales during the last 12 months in order to determine a statistically reliable median sale price
·         An allowance of $1,000 has been allowed for legal fees, building inspections and other costs
·         The scenario assumes that interest rates are at 5.79%
·         The loan to value ratio (LVR) is set at 80 percent meaning the purchaser has a deposit of 20 percent
·         Miscellaneous expenses (e.g. management fees and rates) are set at 1 percent of the purchase price
By using these assumptions and scenarios we have derived a list of suburbs nationwide which are likely to return a positive net cash flow. Some of the best performing suburbs are North Dunedin, Revenbourne, Mt Mera and Port Chalmers in Dunedin; Harbourside, Newton and Grafton in Auckland; and Lambton area in Wellington. View the complete list of Positive cash flow suburbsin the main cities of New Zealand.     

The latest cut in the official cash rate and the corresponding fall in home loan interest rates signal things are looking up for property investors. Falling interest rates are making residential property investment more attractive to investors especially since house prices also continue falling. At the same time rental rates are rising in some suburbs as seen in the rent growth graph.

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The most important thing to know when seeking a property based on a positive cash flow strategy is how much income is required to offset the expenses associated with owning the property – this will vary from buyer to buyer depending on their own financial situation. It is also important to ensure you research the rental market and get a firm understanding of what the expenses associated with the property will be and pay the best price possible for the property.
Over the next six months property values are likely to show further declines or flatten; setting the scene for an improving ratio of prices to rental rates. For those investors who are seeking properties where the rental income will cover all the costs associated with owning the property, now is a good time to be positioning yourself in the market.
The cash flow positive suburb statistics is an output from QV Insider’s Area Analysis section. QV Insider gives you access to extensive customised area information for analysis and decision making. The Area Analysis tool allows you to research and make decisions about suburbs that you may want to invest in. You can search statistics on current median sales, rents and rental yields; understand values and trends in the area that you select.
Statistics and data sources:
QV Insider web site: https://www.qvinsider.co.nz/
 
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