Property Diviner

Author, property investor and financial planner Margaret Lomas rails against the shonky side of property investment: the dodgy real estate tricks that range from two-tier marketing to questionable rental guarantees, hyped off-the-plan schemes to investment “clubs” that are fronts for developer sales teams. Nearly all of them emphasise the benefits of negative gearing.

According to Ms Lomas, patient property investors prepared to do enough research can still find properties that will provide positive cash flow, once all tax deductions are taken into account. Too many investors ignore the depreciation allowances available to them.

Finding positive cash flow properties, though, is not easy and can involve looking outside many investor’s comfort zones. The accompanying video interview concentrates on where to look and what to look for.

Margaret Lomas’ latest book, The Truth About Positive Cash Flow Property, is much broader than its title might suggest, offering plenty of worthwhile advice for investors in negatively geared or positive cash flow real estate. If nothing else, it should broaden any property investor’s potential market.

Ms Lomas started investing in residential real estate with her husband nine years ago. They now have 29 properties. She admits this period has coincided with one of the all-time great property booms, but claims there is always some part of the Australian property market that is doing well, that all property in Australia doesn’t rise or fall together.

The old argument of houses versus units for investment gets short shrift: the Lomas view is that it depends on the particular market. In Perth, she would buy houses, because that is what the rental market seeks; in Mt Isa, it would be units. The difference comes from researching the target area, right down to local government population projections and the health and diversity of local industries.

The very success of Margaret Lomas’ positive cash flow investing crusade may have made following her advice harder as suitable properties are getting scarcer. Her promise, though, is that there will always be some available somewhere as the various property cycles work their way through the system.

Michael Pascoe: Is it fair to say that the core of your book is that you can still find good properties in Australia with a rental return of about 5%?

Margaret Lomas: Well no, that’s probably not really the core of the book. And I think what happens in this country today is that there are a lot of people talking about buying property with high rent returns for their purchase price, or even a 5% rent return for their purchase price. The book is about looking past that and realising that true yield on property is not just about the rental return. It’s about what you can get in terms of your tax breaks. It’s about future growth, of course, and it’s about a combination of financially calculating whether or not a single property can give you a positive cash flow, not just from the rent.

That’s still positive cash flow but to get a positive cash flow you still need a rent return of about 5%.

You do need a rent of probably around 5%, although I’ve seen properties with 4% that will still give you a positive cash flow if they have high on paper deductions. If you’re getting 3% you’ve got a long way to go to make up the difference but, yes, you still need to have a fairly solid rent return, but by no means do you need to have the 8, 9 and 10% that some people will quote to you today to get a positive cash flow.

Tony Harris has a law that everything is eventually capitalised but if the return is out of kilter with the rest of the market there is a damned good reason why it’s out of kilter or the market will eventually catch up with it.

I’d have to disagree with that on a couple of counts and although that’s correct, sometimes what I’ve discovered about property and positive cash flow is that generally when you get a high positive cash flow because it’s a result of high rent returns, it’s often in an area where rent returns are high because the demand for purchasing is low and people live there maybe because they’re itinerant and they’re coming to town to work in the one major industry such as mining and so you can command a high rent return but you don’t get much growth in your property.

Properties like that eventually will grow because outside investors will come in and buy up to get the cash flows and eventually it will catch up and then there’s nothing intrinsically that can continue to fuel the growth, so definitely, in those cases eventually it catches up and then you get to a point where you’re no longer getting a positive cash flow. However, I believe that there are a lot of areas in Australia that people don’t think about that have intrinsic reasons why they grow. They’re growing because they have an increasing population. They have a diversity of industry. They have councils who are spending money to increase the infrastructure and therefore attract more people to town and, as the population grows and services increase, then the population grows and we get a nice cycle.

Which places, where?

At the moment, I think you can find them anywhere within an hour of a major centre or a capital city. What we see happen in all cities is the prices go up to the point where people can’t afford them any more. When people begin to buy houses to live in or look for houses to rent, they start to move out of town into areas that maybe in the past were lower socio-economic groups or areas that have lower prices and maybe were undesirable in the past. They often move out of town and still commute for work, then we see pressure on those prices begin to rise but generally they’re fuelled by the intrinsic growth that I talked about a little while ago so that continues to grow.

But from your book sales success, doesn’t that mean investors have already found those places, that rental returns are down around 3% maybe 4%.

What I want people to know, and people often say to me, 'But Margaret, what happens when positive cash flow property runs out?’ It doesn’t run out, because areas come into and go out of being positive cash flow all of the time. What we see happen is we see values increase in a stepped pattern, so values will boom and plateau and boom and plateau, and in some areas where they become a little overheated, they’ll also go backwards a little bit.

Rent returns tend to go up in a smoother line and often are linked to CPI as well as demand, but it’s a far smoother line. In any 10-year period, you can see areas where sometimes we had a positive cash flow and other times we had a negative cash flow because the relationship between the rent return and the value of the property changes. If you buy into an area where you’re getting a positive cash flow you will forevermore get one because you bought at the lower price. But the person who buys the property off you may get a negative cash flow, so areas come into and out of positive cash flow, which means that at any one time there are always going to be somewhere in Australia that you can get the positive cash flow.

Well a couple of concrete examples. What’s the most recent place you’ve bought? Where? And where are you looking next?

OK. I bought my 29th property the other day and I bought that in a place called Elizabeth North just outside of Adelaide. And, interestingly enough and I almost called the book Property and the Yuck Factor because a lot of the properties that I’ve bought in the past '” when the locals hear where I’ve bought, they’ll say, 'I can’t believe you’ve bought in that area, why would you buy there?’ Many of the properties that I have bought in the past have very quickly gone on to have great growth and the demographics in the areas have changed fairly rapidly, so they’re no longer those undesirable areas. Elizabeth North at the moment has a huge number of welfare housing there so at the moment it’s a lot of Housing Trust. A couple of years ago it came to my attention because I figured that that was the kind of area that people were eventually going to start to move towards when Adelaide became too expensive.

So you paid how much to get what sort of rental?

I just bought one for $112,000 with $165 a week rent return. And it’s interesting because what’s actually happened is a couple of weeks ago the Australian Financial Review had a report about this particular area and in that report they revealed that a $10 billion housing project has just been approved for the area that’s going to reduce the saturation of state housing from the 60% that it is today to less than 20% in the coming years. And all of that augurs well for the future.

Where are you looking next?

Well I’m looking for areas just like that and I still think there’s a lot of room to move in Darwin. I also think that plenty of areas around Perth and south of Perth still have a lot of growth. If you like Brisbane, the corridor between Brisbane and the Gold Coast is closing very rapidly and the Logan Shire, which again has previously been considered an undesirable area, has council currently undertaking a beautification project and doing a lot of work there to try to change the perception of the area. You can still get in there for $110,000–120,000, with about $170–180 a week rent return.