For new readers: Do NOT APPLY … this was my 2009 April Fools Day Joke 🙂

Thanks everyone for your comments and support for the first money-making opportunity that I have ever announced on this blog! I wanted my loyal readers to have first opportunity. Sure, it’s a bit unusual (horse racing), but it comes from a trusted source … and, we never know where the next opportunity will come from 🙂

However, Expressions of Interest have now CLOSED!

But, stand by as there will be a follow up post announcing how The System works and what it means for you next Thursday …
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This is the fourth – and, final – installment of our series on the three types of Positive Cashflow Real Estate:

1. Tax Cashflow

2. Fake Cashflow

3. Real Cashflow

After introducing Tax Cashflow “cleverly designed to make Negatively Geared real-estate look like a good deal”) we spoke about manipulating the amount of deposit that you put into a property to ‘force’ it to produce a kind of ‘Fake’ Positive Cashflow.

This kind of cashflow comes at the expense of: (a) cash – you are typically forced to put in a lot – and, (b) returns: typically, the more cash you put into an investment, the lower its return.

So, what is the secret? Simple, it’s to look for a property that produces …

Real Cashflow

For some unknown/stupid reason, we look at property exactly the wrong way around:

We let the bank and public opinion of the day tell us how much capital (i.e. deposit) to put in; then we look for the greatest tax benefits; then …

… we buy!

Of course, there is no ‘secret’ to Positive Cashflow Real-Estate at all: we should simply ALWAYS treat ANY property acquisition as though it were a business … and, we would NEVER buy a business that needs to be manipulated in order to make money:

First, it must produce cash …

… then we can ‘tweak’ the income statement and balance sheet for greater tax benefits and return on capital.

It’s exactly the same with property; the problem is that we:

(a) Buy in the wrong market – we buy when everybody else is buying and property is too expensive, and

(b) Buy in the wrong sector – we buy what everybody else is buying – residential real-estate, which rarely produces positive cashflow … and, when it does, it’s usually a ‘dog’ when it comes to appreciation.

So, here is the real 7million7years Patented Positive Cashflow System:

1. Look for real-estate that will produce Real Positive Cashflow with a reasonable deposit (say, 10% – 35%); typically, this will be commercial real-estate … BUT, in the current market (low prices and low interest rates) you will probably find some residential real-estate nuggets if you look hard enough. Just don’t forget to lock in the interest rate, or you may find your diamond turning into a lump of coal as interest rates rise again.

2. Then, tweak the deposit that you actually put in according to the Fake Cashflow return that you want to get: in the Making Money 201 wealth accumulation phase, I recommend putting in ‘just enough’ deposit to break-even (perhaps with a buffer for contingencies, unless you have the spare income to cover these elsewhere) and then using you spare cash to buy another!

3. Then, take every tax deduction that you can get! Accumulate the extra Tax Cashflow that you get until you have enough accumulated to put down as a deposit on another property.

If you buy right … then manage your capital and tax right … you will have a large and Positive Cashflow real-estate portfolio before you can say “negative cashflow sucks lemons”.

If you can’t find one now, you ain’t looking hard enough 😉

This is the third installment of our series on the three types of Positive Cashflow Real Estate:

1. Tax Cashflow

2. Fake Cashflow

3. Real Cashflow

Last week we discussed the first of these (Tax Cashflow), cleverly designed to make Negatively Geared real-estate look like a good deal. As I said:

By allowing you to pay less personal income tax, the promoters of these schemes will show you that the property can pay it’s own way (Neutrally Cashflow or Neutrally Gear) or even Positive Cashflow!

Unfortunately, it’s all on paper … and, it relies on you earning a high income … and, will probably only work for one or two properties because you won’t have enough personal tax to ‘save’ for more properties than that.

Today, I will introduce you to a simple, but powerful concept that will allow you to take any piece of real-estate and create positive cashflow … it’s so simple, you’ll wonder why you didn’t think of it sooner 🙂 But, you’ll quickly see why I call it …

Fake Cashflow

If you want a property to produce positive cashflow without doing a lot of work and research, use the 7million7years Patented Positive Cashflow Formula:

Pay Cash!

Now, this isn’t a stupid idea, it’s actually a valuable – and, under-appreciated [AJC: pun intended] – Making Money 301 wealth-preservation strategy … and, it works because it eliminates a (actually, usually THE) major expense on your investment property: mortgage interest.

Without interest, the chances are that your property will produce enough rental income to cover vacancies, repairs & maintenance and other typical costs, yet still produce a very healthy profit … perhaps even a livable income for a MM301 ‘retiree’.

The problem, of course, is that the rest of us – those still trying to accumulate wealth – (a) don’t have enough cash to buy much (any?) real-estate outright, and (b) real-estate’s growth is typically just around inflation-to-6.5% (depending upon who you believe) … hardly earth-shattering.

But, we don’t HAVE to pay cash for a property to produce this kind of positive cashflow return, we just have to decide how much cash to put in … as best explained by Shafer Fincancial in a comment to a recent post:

Here is how it works. Most folks, including myself, advise re investors to make their properties cash flow for safety (comparing your costs with the rents received). So if one person can get a loan for 7% and the other can only get a loan for 9% in order to make it cash flow, the later will have to put down more capital (down payment). If you are leveraged at 80% LTV and a property cash flows you only have to tie up that 20% capital. However, if you are having to put down 25% to make the property cash flow because of a high interest rate on the loan then you have 5% more capital tied up in the property for the same capital appreciation.

$100,000 property
Person A cash flows with $20,000 down payment
Person B cash flows with a $25,000 down payment

Think about it:

You put 0% down and you have a negatively-geared ‘dog’ … and, if enough people do it, a future real-estate crash (a.k.a. ‘credit crunch’)  on your hands.

You put 100% down and you have a positively-geared ‘retirement investment’ that ‘only’ grows with inflation (unlike CD’s – which ONLY provide some income).

… surely, there is a ‘break-even’ point somewhere between the two, where the property will cashflow positive, but you only have to put in a deposit and you can borrow the rest from a bank like a ‘normal person’?

Yes there is, and we ‘twist’ the Shafer Financial example (he was talking about the ‘cost’ of different interest rates) to illustrate the point very nicely: Property B may be a ‘dog’ with a 20% down payment @ 9% interest, but if you just up it to a 25% down payment also at 9% interest, you lower your monthly mortgage payment just enough to make it break-even on a monthly (or yearly) basis, or even cashflow positive.

So, fiddle the numbers on a spreadsheet (with the help of your accountant, if necessary – they LOVE this kind of stuff!) and you will find the break-even point (i.e. the point where the property JUST starts to cashflow positive) and if you can afford the deposit, perhaps you have a ‘winner’?! 😉

But, it comes at a ‘cost’ or two:

1. You need to come up with a bigger deposit … which, means that you may not be able to buy as big/many properties as you like, and

2. The more money you put in, the lower your overall return (annual compound growth rate); again, Shafer Financial explains nicely:

The interest rate on mortgage debt on investment property does curtail capital appreciation …

$100,000 property
Person A cash flows with $20,000 down payment
Person B cash flows with a $25,000 down payment

Property appreciates 3% for five years. Aproximiate value of $116K.
For simplicity stake; No excess cash flow for five years (unlikely)
No tax advantages.

Person A ROI= 12.47%
Person B ROI= 10.4%

Having to put that extra $5K down to make the property cash flow cost you 2% in the return department. Note that the property only appreciated 3% per year, yet the rates of return were 10% and 12%!

Now in the real world you must account for the cash flow over time and the tax advantages to compute ROI. But this is a perfect example of how interest rates effect return. Also, note that the higher the leverage (above 75% LTV for most folks) the higher the interest rate is likely to go. So, there is usually a break even point for leverage/cash flow that takes into consideration the interest rate.

This is that ‘leverage’ thing that makes real-estate such a wonderful investment, producing returns (for well-selected / purchased real-estate) well above the naysayers moans that real-estate only grows “according to inflation” or “6.5% a year” (depending upon who you believe).

So, the problem with Fake Cashflow is that – while we can ‘force’ a Positive Cashflow out of almost any piece of real-estate by simply putting more of our own cash in it up front – it tends to reduce leverage, hence reduce our overall returns. This is why I call it ‘Fake Cashflow’ …

There has to be a solution … and there is: see you in the final installment in this series, where I show you how to find ‘Real Cashflow’ 🙂