11 CASH FLOW SECRETS OF SUCCESSFUL INVESTORS

DYMPHNA BOHOLT

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C o p y r i g h t 2 0 1 0 D y m p h n a B o h o l t w w w. d y m p h n a b o h o l t l i v e . c o m

My 11 Most Favorite Cash Flow Secrets

I want to talk to you about something that is vitally important and very dear to my heart and it is very opportune to talk about it right now. Im going to share with you 11 of my top cash ow secrets. The why and the how. Because, it is so unfortunate that it takes an economic upheaval for people to start to really think about whats important and for people to focus on the core essence of what wealth is all about. This is because a lot of people get very confused about what wealth is or what success is basically it is going to be a slightly different thing for everybody. But underlying everybodys belief of what that elusive thing is, whether it be success or whether it be wealth, its actually lifestyle. Money or wealth or riches or success, they only serve to provide you with a lifestyle and thats actually what people are wanting. Whether it be a material lifestyle, whether it be a lifestyle that gives them time to spend with family or friends or gives them the nancial wherewithal to be able to travel. Or the nancial wherewithal to be able to work in an orphanage in Cambodia or whatever it might be - it is actually lifestyle. Now, lets just take that another step further. When we start talking about lifestyle, what gives you lifestyle? Is it having a lot of gold in the bank? Is it having assets? Is it owning a million dollar share portfolio? No. What actually gives you lifestyle is income. Consistent income that comes to you on an ever owing regular basis. Now to me, if I dont have to go out and work for that income and do certain tasks in order for that income to come in, then that is passive income. And that is what I want to talk to you about because thats what cash ow is. Pure, passive cash ow can be generated relatively easily. And if we have ever seen an opportune time to start focusing on cash ow and put some fantastic deals together to give you that passive income over the long term, its now. I have never seen times like this in the past 25 years when Ive been actually economically aware with any degree of knowledge of whats going on. Clearly, because of my industry, my background, my training, Ive done a fair bit of research and historical looking at whats happened in the past. But I will tell you now right here and now in the current economic climate we are poised beautifully to make an absolute fortune and to set ourselves up for the rest of our lives.
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To be able to create a passive income for the rest of our lives. Now, for some of you, you may still have a money issue where you think, well what do I want money for? Well, consider it this way. Consider it lifestyle. If this is the means to an end of a lifestyle, and to be able to live a particular type of life, whatever that is for you, then cash ow is what you need to be focusing on. Producing positive cash ow that can see you through to retirement and beyond through generations to come.
Cash Flow Secret #1

The rst one I want to talk to you about is the fact that everyone needs cash ow. It is something that it is unfortunate that a lot of people dont start thinking about cash ow until things get tough when in reality, cash ow should be a major component of your investment and nance decisions from the get go, from the minute you even consider making an investment or money of any description. Cash ow should be a major, major consideration. But its only when we had the spike in interest rates and things like that that people thought, I need more cash ow I need my properties to be more positively geared. Well, surprise. You know, when you look at businesses, it doesnt have to be just property either. Lets look at our businesses. You know, you hear the frightening statistics about businesses and how 80% of businesses will fail within the rst two years and 90% will fail within the rst ve years of operation. Now while this is scary topics we have kind of become numb and immune to those kind of gures and statistics. But the underlying core issue behind those statistics is cash ow. If you dont have cash ow, those businesses will die. If you dont have that cash ow coming in, you arent able to continue to trade. It reminds me of a very large charity that came to me several years ago now and they were talking about how to structure and set themselves up and I was talking about some fundamentals and accounting principals and what they were going to do and how they were going to raise money and what was happening behind the scenes and they made a very unusual statement to me. They said oh we dont need to think about a business model. We dont need to do that because you know, weve got all this money. All we need to do is work out how to spend it. I had to laugh because no matter how deep their pockets were if you dont have a mechanism for consistent replenishment of that pocket than that pocket is eventually goC o u r s e # 1! w w w. d y m p h n a b o h o l t l i v e . c o m

ing to dry up. That is what it amounts to. So they were missing the biggest part on running a charity and thats longevity. The ability to be able to do good for an indenite period of time. They, without help, were going to become a splash in the pan charity that would have no legs in two, three, four, ve years time. Thats why, on an ongoing basis, everybody does need cash ow. From a real estate investing perspective, and obviously that is my passion and that is what Im going to spend the most time on. What you can do with cash ow is you can actually couple it up with other investments. Positive cash ow properties can be coupled up or boxed together or grouped together with maybe investments that can have a greater growth potential. But across the board you need cash ow to be able to have longevity. So thats my rst point. And part of that point I really want you to take on board that this is something that you should consider in every property in every market no matter what else is going on around the world. Whether we have a global position or we dont have one, or whether market prices are going up or whether they dont cash ow gives you longevity. Cash ow gives you the ability to be able to continue to invest, to be able to continue to have this elusive lifestyle that you are after. The second point I want to make, my second secret about cash ow, is the fact that it needs to be consistent and passive. I talked to many business people and you know, we talk about positive cash ow and things like that. I say that Ive got a really good cash cow and they might be talking about a particular business or something. So I ask What do you actually do to earn that income? Do you serve coffee? In one particular case I was talking to a guy who owned a coffee shop and he said oh yes, I still work four days a week and I do this and I do that. So I needed to determine just how passive that business is really? Is it really a cash ow to you or have you bought yourself a job? When he added up the hours he worked and what he was getting back from it he found out he really only bought himself a job. Whereas when you look at real estate and the ability to be able to buy a property that produces you more income than it costs you, thats a real cash cow.

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Honestly there is very, very little work that has to go into the continued ownership of a property. Particularly if you have it managed, as I do. Any of you who have known me for sometime you will know that I am not a big proponent of managing properties yourself. The reason for that is I think most people do it very, very badly. Myself included. So I would much prefer to manage my managers than mange my tenants. Im too much of a softy when it comes to tenants, Im afraid. So I manage my managers. When you have a property under management its important to lay down the ground rules. It is important to state to them what your expectations are, what your obligations are, when you want to be run and when you dont. When you want to hear whether a tap is leaking or not or whether they have a certain limit that they can make decisions on for maintenance and those types of things. Whether they have a delegation to get three of the best quotes and then make a decision to which is the better one; to make a choice whether to repair something on a property - that type of thing.
Cash Flow Secret #2

A positively cash owed investment on a year by year basis, on a operational basis, doesnt cause you very much grief, doesnt need you to be on the job so to speak very much at all. To me, that is pretty passive. That is the style of passive income that I chase and real estate just does that so beautifully. Some businesses can do that for you as well, but I just want you to watch when you are talking about businesses how much it actually ties you up to earn x amount of income. Obviously the least amount of time and effort that you spend on that business for the greatest amount of passive income coming in, or income coming in, cash ow from it. Then the more and more passive that particular investment. The better cash cow it is. So when you are considering a business as a cash cow, as it can be, then just make sure that you are taking into account how much physical time and effort is involved in earning that income. And of course it has to be consistent. Having multiple cash ows and multiple positive cash ow properties or multiple cash cow businesses spreads the risk of any one of them having a down turn. So the consistency can actually be gained by having multiples of the similar type of cash cow, positive cash ow property. And you know, I deal with a number of builders and
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developers and I got a lot of mates in the industry and things. I look at some of them in particular and I think, you know, you are just rolling on your cash ow. No, thats not actually quite right terminology: they are rolling on their turnover. This is what has happened over the last couple of years. We have seen a lot of the builders, developers that are screaming along and they are getting great growth and theyre building more and more houses and putting more and more people on and they are building bigger and bigger developments and opportunities and those types of things. But in reality, what they are actually relying on is the turnover, not the prots, of their projects. So what happens is when the market is going up and when their sales are good and the economy is rolling and there is lots of turnover, they appear to be doing really, really well. But when you actually do the accounts for those clients, those builders developers, they nd that those prot gures arent there. Their growth is just growing out of control and whats happening is they are actually relying on turnover to pay for the last project. Now, that is a recipe for disaster. But honestly, it is a recipe that I have seen happen over and over and over again. So I want you to be cautious of that. Dont rely on turnover to create your consistent cash ow. Actually step back a little bit and make sure it is actually prot that is coming in that is giving you that passive income or that cash ow. Because when you hit a turn in the economy and when you hit a roadblock like weve just had whether it is a slow down in demand, the turnover of properties for instance isnt as uid as it has been in the past then those builders and developers theyre the ones that go broke and theyre the ones that get themselves into difcult positions and those types of things. So just be mindful of that. It really, really stresses just how important this process of cash ow and cash ow from prot actually is. So my second secret, when it comes to cash ow is consistency, multiples and cash ow from prot not from turnover.
Cash Flow Secret #3

My third secret, comes down to dealing with objections. I see a lot of people around Australia particularly (and the world too), and they come to me particularly because Im so strong on cash ow and I really stress the importance of having passive income and positive cash ow in your properties portfolio.
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A lot of people come to me and they say I dont know that thats the right thing for me to do. I dont believe I need positive cash ow properties. They might have the objection that I have a fantastic job. I love doing what Im doing and I dont want to change. So anymore income for me is useless. I would be better to go out and buy properties that increase in value so that I am building wealth because my income is taken care of. Well, that is certainly a consideration and you know, building wealth may well be a core important strategy for that particular person but cash ow is equally as important. At least to the point where they have enough passive income to be able to replace whatever it is with their job anytime they wanted to. Its a safety net. What if something happened that they couldnt do that job? What if something happened that that job was taken away from them? What if something happened that they just lost interest in whatever they were doing? They became disillusioned with whatever they were doing? Passive income and positive cash ow gives you choices. It creates a safety net or buffer that will see you through any recession. It will see you through any obstacle. It just gives you those choices to be able to have the lifestyle that it brings. Thats what everyone is actually after. Whether it be in the form of money or material things or whether it be in the form of time and having fun and being able to spend more time with your family and things like that, that is the lifestyle component and that is what cash ow gives you. On the other hand, you might have somebody that says well I hate my job. I really get it. I understand why I need cash ow and I want to replace my income as much as possible. Well, they need to be focusing even more heavily on passive income properties and positive cash ow properties and creating that income so that they are not reliant on something that they hate. It does give them that buffer and it gives them those choices. Some people say to me well, you know, if I earn a passive income from my properties that means I have to pay tax on it. Ive got a job and Im already in the highest tax bracket and I just dont think thats the right thing. Excuse me, if youre paying tax then are you not making money? There is lots of mixes of the two; of cash ow - of real positive cash ow and tax negative negative gearing.

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I guess for someone like that the optimal position there is to have a safety net that you can fall back on whenever you need to so youve got that passive income to cover yourself just for the in case situation. But the ideal investment thereafter is going to be an investment which is positive cash ow. So the cash you get puts money in your pocket every year but because of the high depreciation deductions and the ability to be able to claim tax deductions for not spending any money pushes the investment into tax negative so that way they get the best of both worlds. They get the actual positive cash ow and its not a nancial drain on them but they pick up the tax benets as well. Thats a really cool accumulation strategy that most people in those circumstances where they are pretty happy with what they are doing, they have got their choices, they have their buffer in place and they are on track for wealth building and they consider they need the tax deduction than that would be the ideal investment. But Im still not a big believer in negative gearing for the sake of negative gearing because it relies on market conditions that may or may not continue. Whereas at least if its cash ow neutral its not hurting you, its not costing you. The other objection that I hear quite often is, Oh, Im too old to be doing that sort of thing. Or Im too young to be doing that kind of thing. What a load of garbage! You are never too old and you are never too young. Admittedly the nanciers put a little bit of a restriction on you at the young end of the scale in that they wont lend to you if you are under the age of 18, but that doesnt or hasnt stopped a number of very enterprising 17 year olds getting out there and doing joint ventures with adults or people who are not minors as they are. At the other end of the scale quite often people will advise you not to get out there and make a difference because gosh, horror, you are over 50 or you are over 60 or whatever. Age has no barriers. It is all about you and what you want to do. Lending institutions dont have a huge barrier to age. What they will do is they will lend more on an asset lend than an equity lend rather than on an income lend. They will borrow a little bit against you from an age perspective that way, but it does not mean that you cannot get out there and change your circumstances. I dont care what age you are! Take yourself back ve years. Are there decisions and investments and actions you think Geez, I wish I had done that. Of course there are. Well, project yourself forward ve years. You know, if you dont start making those decisions
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and creating that passive income in your portfolio now and actually getting out there and taking action, it doesnt matter what age you are, its going to have an impact, it is going to have a massive impact on the position you are going to be in a year. In two years, in ve years time. So, what does it matter what age or what nancial standpoint you are actually starting from? Cash ow is important regardless of your age, your nancial standing, whether you love your job, whether you hate your job, whether you have got equity, whether you dont have equity. Focusing on having a cash ow component in your overall portfolio is vitally important.
Cash Flow Secret #4

Something that is equally as important is your cost of funds or your cost of money. This is actually my fourth secret. To capitalize on the interest rates at any particular time. We are going through a period of time right now where interest rates are at 40 years lows and the great news about that is whilst our cost of money is certainly cheaper, theyre expected to stay down for a little while too. Which means that most of us can get ourselves in order, put ourselves in a position where we can capitalize on xing in on those interest rates for a substantial period of time in the future. Im not one for xing interest rates per se and if you had asked me 12 months ago when the interest rates were starting to rise, as many people did, you would have heard me say that I dont believe in xing interest rates because in the long term I believe that going with the ow and picking up on the variable interest rates actually serves you better. Now, having said that, when we look at the current situation, and I look at interest rates right now and where they are and what is likely to happen on an economics basis around the country, then I would have to say that now, if ever, is the time to actually x interest rates. Or at least in about three months time. Because what we are going to see there is a settling in the market. We will start to see interest rates at all time lows, absolutely, but there will be a lull before the economy actually starts to turn around and noticeably turn around. It has already started if you ask me. But when you look at the media and the public perception it will take a little bit longer for the effects of the turn around to be felt, lets say. So, xing interest rates can be a good thing right now and if you are asking me for a period of time I would say between three and ve years. However, when you start looking
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at interest rates and xing interest rates you have to got to be careful as to the type of property that you are xing your interest rates on. If you x interest rates on a property that you intend to sell within the xed interest rate period then there still can be penalties depending on what the interest rates have actually done in the meantime and depending on what kind of loan you have actually signed up for. Because even if interest rates increased doesnt mean you can necessarily get out of the loan at a lower interest rate without fees. Some banks you can and it depends on what kind of loan you actually sign up for as to whether that is possible or not. Not on properties that you are considering selling, if you are looking at manufacturing growth on a particular property. Lets say you are renovating it or you are strata titling it or you are subdividing it for instance and you are making your property worth more as a result with an objective to go back and extract some of that equity out of the property to go on and buy more property, then again, a xing interest rate may mean that you cant do that. It may mean that you wont be able to go back and get the equity out until the term or the xed loan is actually nished. Now again, this is not something that is across the board with all banking institutions and it really depends on your strength as an applicant when you apply for the actual loan in the rst place. Some banks will certainly restrict you from going back and extracting equity from a property that has a xed rate interest loan on it. Now when we are looking at interest rates, I often talk about the rule of two when we start talking about what is positively cash owed. Basically the rule of two is the purchase price divided by a 1,000 multiplied by two. This is the minimum amount of weekly rent that you require to make a property positively cash owed. But of course now, with the interest rates being so low the rule of two doesnt actually apply. The rule of two now works at about 8% as a rule of thumb and yes it depends on individual rates and individual circumstances and things like that. But roughly it works at 8%. So every percentage lower than that on an interest rate means that the rule of two no longer applies. Instead of being the rule of two it is going to be the rule of 1.2 to 1.3 depending on where the actual property is. So what that means is the purchase price divided by 1,000 multiplied by the 1.3 mark is the minimum amount of
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rent that you are going to need on a weekly basis to make that property start to be positively cash owed. I mean that is kind of the break even point if you like. So when you start looking at interest rates now in the fours and the ves, what we are seeing is a whole lot more properties now are positively cash owed. This is a fabulous thing for portfolios and replacement of income and recession income and having that safety net in place so that your life now becomes choice rather than that have to decision as in you have to work, you have to do this, you have to make decisions based on monetary purposes rather than making decisions based on because that is what you want to do. This is what cash ow across the board does for you. It gives you that freedom, it gives you that lifestyle. So capitalizing on the low interest rates is certainly something I would be recommending right now and a period of xing of around about that three to ve year mark is about the order I think you should be looking at depending on the properties you are selecting and how long you want to hold those properties. Obviously, if you can go in and x an interest rate at say in the ves or late fours and you have got a return on your property of somewhere in the eights that is automatically positively cash owed and there is a lot of those properties around. You have just got to look for them. And the great news is that a lot of those properties now are not necessarily in way out regional areas, they are in prime locations in major capital cities around Australia. So it means that you can have a fantastic growth investment as well as something that is positively cash owed.
Cash Flow Secret #5

Which brings me to my next point, and this is secret number ve. What we have experienced over the last little while is we have seen rents grow up considerably in major capital cities. Being able to take advantage of a low interest rate on a prime location on a property that is positively cash owed and combine that with the fact that there is upward pressure on the rental returns on these kinds of properties you have a win/win situation all the way around. Over the last few years we have seen rents escalate and in some cities in some areas absolutely sky rocket. Now, I dont expect that to continue indenitely but I do expect it to have a little bit more of a run yet and that certainly is something that we can see throughout 2009 and pass easy off into 2010.
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There is such a difference between demand and supply, where our demand is much, much greater than our supply of both properties available for owner-occupiers and properties available for renters that the upward pricing on both of those two items does have to move. In some areas I believe it is absolutely going to sky rocket from a housing price perspective. From a rental perspective there is certainly a steady upward pressure on rent. So I would expect your properties over say xing your interest rate for three to ve years your rent would continue to go up over that period of time. So if you are locking in your minimum positive cash ow on those properties, what you are doing is you are limiting your downside and sky is the limit on your upside because you can still improve the property, you can still increase the rents on the property. The rents will likely go up naturally anyway, particularly in the more prime locations in the major capital cities. I dont believe that will necessarily be the case in some of the regional areas and the more marginal areas but certainly in the more built up metropolitan areas that is denitely what you are going to see because that is where we are experiencing a higher and higher demand and a lesser and lesser supply of product. So of course the market forces will just push that up inevitably.
Cash Flow Secret #6

Now Im going to let you in on my secret number six which is something that most people really dont get the impact of until you have an economic condition like we have now with a tightening of the market. It is actually putting yourself in a position where you are recession proof. So recession proong yourself. And this is best explained and looked at when you look at the US economy. I have properties in the US as most of you will already know. The types of properties that I have concentrated on, all but one, are positive cash ow properties. They are predominantly blocks of units or multi family homes as they are called over there. They have been relatively insulated from anything else that is going on in the market place over there. We have seen house prices drop dramatically in some areas, but they are the areas that have had massive increases over the last little while. They are the areas that have had property prices go up and up and up based on greed and based on the fear of loss rather than based on any economic fundamentals that supports the market.
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So you have had these property prices going up and up and youve had interest rates at affordablish kind of pricing. You have had lending policies that have been extreme where banks have been lending 110% on the value of the property and value has been very, very lax in the valuations of these properties. So what youve had is a massively over inated escalating prices in some areas, but these are mainly the owner-occupied type housing. They are not your core fundamental properties that are your multi family cash ow positive properties. So in some areas, yes, you have had dramatic falls in the property market and that is to be expected given what has gone on over the last little while. But what is not being told is the underlying current in the market is that there is a lot of properties that are good, strong, positive cash ow properties that are still holding their value and predominantly that is the type of property that I have owned. Predominantly I have bought positive cash ow properties that are multi family homes that have yields in excess of 15 to 20% and they are just getting more and more positively cash owed because there hasnt been an slump in the rental market. While they havent had a mass of upward lifting the rentals that we have here, they havent fallen either. So my properties have continued to be positively cash owed. Now anyone who would have taken on board my strategies in the US and have gone out and replaced their income with positive cash ow properties and Im talking particularly about my American clients. They are totally recession proof from whatever is going on over there. It doesnt matter what the price of the property is doing. It doesnt matter what the market is doing. It doesnt matter what the stock market is doing or their hedge funds because their properties have recession proofed them. Now whilst over here in Australia the economic upheaval has not been anywhere near as dire as it has been in the US, the same applies; those people who have concentrated on good strong positive cash ow properties in their portfolios are recession proof. There is a much greater demand for these properties than there is supply, you are not seeing huge vacancies, in fact you are seeing the exact opposite. Were at all time lows when it comes to our vacancy rates in major capital cities. We havent seen this low of vacancy rates in the last 20 years in the residential market. We have in the commercial market in some areas like in Brisbane and in places like that over the last ve years. But that will start to swing as well. When we start to talk about the residential market, we have not seen these low vacancy rates right across Australia that we are seeing right now.
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Now, what that means is that by having these positive cash ow properties in your portfolio it doesnt matter what else is going on because you are recession proof. Obviously if you are concentrating on a strategy of debt reduction as well as positive cash ow then youre going to put yourself in a position where your lifestyle is guaranteed regardless of whatever else is going on around the world. Thats a very nice safe position to be in and that is what positive cash ow does to you. That is what cash cows do. That is why I love talking about this topic because I know what it does for people. I know the difference it makes in your lifestyle. You know, Ive seen it happen to people over and over and again you know my students who have taken on board the impact of positive cash ow and the impact of what that extra income actually means to you and how you can start to take advantage of that because you look at the unemployment rates and things like that and how it is devastating if you are one of the people that have lost jobs and looking to join the unemployment ranks and things like that. But the fact is real estate can you get out of that. For some of you this is going to be the best opportunity that has ever existed in your whole lifetime or ever is likely to exist. Whether you do or you dont have a job it doesnt have to mean that you are stalled. It doesnt mean that you cant go out there and buy properties. It doesnt mean that you cant take this as a huge opportunity and get out there and change the way you do things. Change the way you earn your income forever. It doesnt matter then what happens in your life. I know I get pretty excited about this but I have just seen it change so many peoples lives when they get this and they start little by little by replacing $5,000, $2,000, $8,000, $10,000 worth of their passive income and then all of a sudden it is like wow, you know, I dont actually have to work anymore should I choose not to. That is an amazing thing. If you need to be combining cash ow with growth strategies to build up your equity to be able to continue to invest, fabulous, make that happen. It means yes you are going to have to sell a few along the way, that you are going to have some controlled sell offs. But the overall strategy is one of income replacement and I think that is a very safe recession proof position for people to be in.

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Cash Flow Secret #7

My seventh secret involves investing in more built up areas. Now this is something that changes from time to time. Previously, and when I say previously I am talking around 12 months ago, 18 months ago, two years ago, ve years ago - I was very strong on cash ow wherever it comes. Whether it be in a regional area, whether it be in a mining area whether it be wherever. Obviously I talk about due diligence and making sure that the town is sustainable and that your rent is sustainable and all of those sorts of things but the absence of growth on the property or low growth area didnt concern me as much as the cash ow that came from those properties when I was looking for cash ow for positive properties. But now, with the market conditions that exist now I believe that there is more reason to concentrate on bigger metropolitan built up areas. Because never before, at least in the last 20 years have we been able to buy positive cash ow properties with the yields that we can get now in built up areas that we see right now. Im talking Brisbane, Sydney, Melbourne, Adelaide, Hobart, Darwin, Perth, Canberra, everywhere. All the major, major capital cities. These properties are positively cash owed. This was unheard of before. Particularly in places like Sydney. To be able to buy something in Sidney that is positively cash owed in a strong area that has the expectation of strong growth that is a recipe for success that is a license to print money. You cant you havent been able to get that in the last 20 years in Sidney whereas now it is possible. And it is possible not at extreme prices. I mean you could get it previously but you might have to go and spend a couple of million on a large block of units or on a commercial industrial estate or something like that. But now, you can buy it with a $400,000 property. This is enormous. This means that you can create it, you can build it, you can have it, you can combine it with the low interest rates and the increasing rents and you can get something that only gets better and better and better. So my push now and my seventh secret is; there is more of a movement now with the current market conditions to come back to more built up metropolitan areas where you can get that positive cash ow but you are buying it with a property that has the expectation of growth as well, natural growth, regardless of whatever else you might do to that property.
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Cash Flow Secret #8

Financing is another thing when you are concentrating on more built up metropolitan areas. It is much easier to nance a property in a built up area than it is if it is in the more regional areas. The banks have been loaning yes they have contracted their lending policies, and what that means is it is tougher to get a loan in the country than it is in the big cities. In the more built up the areas the banks take the opinion that they will be able to sell the property more easily because there are more buyers in those areas than there are in more regional areas plus they can sell to an owner occupier as well as an investor whereas in some of the regional areas, particularly the mining towns, the market is more from an investor market than an owner occupier style market. So theyre certainly favoring the more built up areas than the more regional areas and this means it is better all around to be focusing on those types of properties right now. Why give up the growth when you dont have to. I mean previously, yes we had to do that. We had to look for income properties in areas that were going to give you the income replacement characteristics. Whereas now we can nd them in areas that are also going to give us the growth as well. Previously if you didnt look for growth you looked for a different style of property. You are going to look for income you look for a different property in a different area whereas now you really can combine the two. You can go out and you can buy something that is positively cash owed that has the potential to be renovated or subdivided or strata titled or developed or built on or whatever too as well as getting something that holds its own. It is positive cash ow that puts money back in your pocket. This is fabulous, especially when you start looking at that type of thing in places like Sydney. When I was down in Canberra recently, there was one of my students and he bought a couple of properties in Sydney, one he has completely nished and the other is one he still he is working on at the moment. They were both strata titling deals, both of them were positively cash owed, both of them were in Sydney and I think one was about $19,000 positively cash owed and the other one was around net $40,000, I think from memory. I cant quite remember the gures now, but thats fabulous. Thats an entire income, thats the ability to start to have lifestyle. Now thats in two properties. Now admittedly yes, they were blocks of units. But at the
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same time that is setting yourself up for retirement. That is setting yourself up very, very nicely to be able to do anything you want to do, have anything you want to have you know, experience anything you want to experience and thats what cash ow gives you. It gives you that lifestyle.
Cash Flow Secret #9

My secret number nine is to look for the tell tale signs. Some properties are clearly going to have a higher yield than others. So when you are looking for income replacement and lifestyle style properties and cash ow properties that can give you that lifestyle then you should be looking for different types of properties. Now, the easiest characteristic to look for is a multi. Whether it be a multi dwelling or whether it be a multi commercial. The more rental units you have coming in from the one purchase, the more positively cash owed that property is going to be. The more yield it is going to give you. The return on investment is going to be exponentially more on a multiple income stream property. Now, that can be a block of units. It can be some strip shops, as in strips of shops. It can be industrial warehouses, it can be ofce blocks, it can be retail shops. It can be high rise apartments, it can be duplexes, fourplexes, sixplexes, six packs, whatever you want to call them. The more income you can have coming in, the greater the return is going to be on that property. There is combinations of commercial and residential together. They come in all different shapes and sizes. But certainly multis are going to give you a higher yield and be more positively cash owed than anything else. Areas where there is a higher yield, obviously, are going to give you a greater cash cow style property. And what I mean by that is, more built up areas which are sought after, like for instance, around universities or around hospitals or around caf strips or around the beach quite often as well, particularly with short term stays and things like that. Then you go to the other extreme and you are looking at mining towns where there is more of a demand for rental and not so much of a demand for purchase. People have to live there, they live there to get the higher return but they dont necessarily want to live there forever and a day and own property there. So, you know, the higher yielding areas are something to watch out for as well.

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I always like to look for debt reduction opportunities as well where I can buy something, I can do something to it, sell off part of it and then use that income to reduce the debt on what Im keeping. Obviously the lower the debt on what Im keeping the more positively cash owed it is going to be. When I talk about the rules of two the rule of 1.3 as it is at the moment with the current interest rates, what Im including in that calculation is paying interest on 100% of the mortgage, 100% of the purchase price plus the costs, plus any renovation costs or anything else that you might have. Plus you have 100% borrowing on that. Now obviously the lower your debt on the property the more positively the cash ow is going to be. So if you can do something to a property or buy a property with a specic purpose of maybe cutting it in half or selling half, maybe building on subdividing and building on part of it and selling it off. Or not even building, just selling the land, and using the income that you get from the sale of that extra bit to reduce the debt on your existing hold obviously what you are left with is going to be more and more positively cash owed. So you know, that is denitely a strategy that you should consider as your overall plan to move forward because not only does it manufacture growth but it also gives you the opportunity to reduce debt. Ultimately, when you are through with your wealth building and you come out of the wealth building phase and you are into the consolidation phase again you do want to have low debt. So you know, a cross over period between wealth building and consolidation will mean debt reduction for you. That may be a controlled sell off, it may be more manufactured growth strategies with a review to reducing debt with the prots. You know, during the last few years of that cross over period, but obviously whilst you are in that wealth building phase and you still increasing our portfolio and increasing our income and increasing your wealth and those types of things then a high level of debt provided the cash ow is there to service it is not such a bad thing. What you are actually doing is maximizing your potential, maximizing the use of OPMs (other peoples money) to get you to where you want to go. It is an acceleration process. But there does come a point in time where you think, you know what, if I own what I own now and had it without any debt that would be it. You know, Id be perfectly happy. I would have everything that I want to have and do and see and everything else and that is probably just enough. So you will come to that point in time. But for many of you it is
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still a little way away, not necessarily in time, in effort. Getting out there and putting these practices in place. You know, when I start talking about characteristics and tell tale signs of positive cash ow properties something that comes to mind is just a simple holding onto your properties. Many of you know my motto is real wealth comes from accumulation not trading. I live by that motto. However, there are some circumstances and some situations where its desirable to actually sell properties. Particularly when that sell off constitutes the ability to get a prot. Obviously you want to pay your taxes and whatever else. But then use that extra equity, that extra income prot to reduce debt on existing properties that are core properties that you want to hold long term. I mean thats the bigger picture to get to that position where you are totally freehold. Where you own everything outright. But the debt in the meantime is a means to an end and it is a very useful means to an end. Properties, and I can give you example after example, but properties that are purchased today with the rent that they have got on them today go up in value over a period of time but so to are the rates, they will get more and more positively cash owed the longer you hold the property as well as increase in value. So even in marginal areas where you have bought specically for income and not for any kind of growth increase at all, they will still go up in value. If you bought properties as you can today, in built up areas such as the core cities as I have mentioned and you have been able to buy them today if they are positively cash owed, that is going to be the worst day of your life. That might sound really funny, but it is, every day thereafter gets better and better and better. Every day after the initial purchase the rents go up, the value of the thing goes up; you know your position on that property continues to improve. So if you can come in at day one and be positive and come in at day one with a great deal, then that deal just gets better and better and better the longer you hold it. When you start to realize that, you start to see the compounding effect on that, you can make some difference really quickly. The trap that most people fall into is they go and use that equity and go off and do silly things with it. They would get the equity and put it into another property that is negatively geared. Or even worse go and buy something like a car or go and lose it on a share trading deal or whatever and yes, I know, Im biased.
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That is actually what accruals the property, just keeping the thing over the long term even if you make a really ordinary decision in the property market. It will eventually come good. It will eventually be worth more. It will eventually have more and more income on that property. So just a simple hold the damn thing policy is a policy that will really see you well over the years.
Cash Flow Secret #10

My secret number 10 is about having no limits and not being reliant on the market. This is where I think a lot of people get too caught up on what is actually going on at the time even though I am sitting here talking about how wonderful it is to be in the market right now. You can make money in the market anytime anywhere if you know what you are doing and it is really a matter of analyzing that market and sticking to the fundamentals; holding that positive cash ow position or at least neutral as your benchmark to get into a property in the rst place. Always try to buy something that you can do more too. Im not someone in big favor of buying something that is completely nished, beautiful, done and I have no control over. Those of you that know me know that I am a little bit of a control freak when it comes to my properties, but thats why Im in property. Thats why Im not in shares - I cant control the market. Whereas with my properties I can, I can make it worth more; I can paint it, I can change it, I can break it up into little pieces, I can do things to the property. By putting yourself in a situation where you have always got a plan B is very, very easy in the property market and it is not in other industries. So I mean I think thats why Im personally attracted to real estate over any other market. Having properties that you can manufacture growth on as well as having a bench mark of being positive cash ow from the beginning is very important and that non reliance it can gain, I guess it comes back to recession proong. You are not reliant on external forces because you can do all the due diligence you like and if you are betting on something going up in value that is outside your control, at some level that is gambling. At some level you have to recognize that that is exactly what you are doing. Whereas if you are buying something in todays pricing that is positively cash owed you kind of cant lose because things are only going to get better. If you are buying something that is positive cash ow in todays prices that through the due diligence and everything else that
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you have done, has the potential for increase, great. Because now all that extra is upside, it is not gambling anymore. If you are going to do manufactured growth always do it on a situation with current pricing, never, ever, rely on an increase in pricing to make your prot on a deal. It is a really big trap that a lot of builders and developers get into and they lose money as a consequence because they are relying on a rising market to give them a prot. That is not how you make money. You make money by doing feasibility studies in a static market. If you can get into properties that are positively cash owed today then you can afford to hold. You can afford to do anything you want with that property. It is the negative ones that will kill you.
Cash Flow Secret #11

Now my secret number 11 is all about serviceability. If you go out and you try to buy a whole heap of investment properties which is what a lot of people do and I know many of you reading this are going to be in situations where you already have negatively geared investment properties in your portfolio. Be that as you may, you get to a point if you are focusing on that type of strategy where you simply are so tight, you just cant get out there and buy anymore. You cant seem to get out of the rut. You have to work like crazy on the side just to be able to afford to be wealthy. You might be asset rich, but poor as a church mouse. So concentrating on those styles of properties and that type of strategy to me doesnt make a whole lot of sense. Whereas when you are focusing on positive cash ow properties each property improves your position, which it does because each property is more and more positively cash owed; what that means is that the roll on affect and you being able to get out there and buy the next one and the next one and the next one is actually a whole lot easier. So what you are actually doing is by each property that you buy you are improving your position, you are improving your ability to be able to continue to borrow, to continue to buy. You know, every time you buy a property it is like getting a pay raise and of course, when you get a pay raise we all know what that means with your ability to be able to go off and invest and do more things and how the banks like you even more. Thats exactly

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the same thing every time you buy a property that puts more money in your pocket than it costs you it is like a pay rise. But its a pay rise that you can control. Its a pay rise that you have complete ability to be able to determine how much it is and when it is and how often you can have them. Its fabulous. It puts all the control back into your court. So I want you to take on board the things that I have talked to you about and taking on board the sheer importance of positive cash ow and what it means to you in your overall portfolio, its the difference between an easy life and a tough life. Life has got a lot of very prominent speakers that you know, life is tough but positive cash ow properties make it a whole lot easier. They are the things that give you lifestyle. They are the things that give you the ability to be able to make want to decisions, not have to decisions. And when you get to that point and you are making totally want to decisions, and youre in a situation where you can make a difference to both you and your family and everyone around you and everybody that you touch or focus on or put any energy into at all, your life is totally different. You are a different person. Youre energized, you are focused, you have got purpose, youre happier, your life is totally different as a result. It is positive cash ow properties that will do that for you. More so than any other industry. More so than a business. More so than the stock market, more so than having money in the bank. It is something that until you have lived it, until you have experienced it you just cant put your nger on how amazing and how much of a difference it actually makes to you. It starts with your next property. It starts with your very next deal. I hope the 11 secrets that I have gone through with you are going to help you with that process and that you are going to start to put those action steps into place, having some focus, having some of that breath of energy back in your life to make this happen because it really is fun. Its a whole lot of fun and it is rewarding and gratifying and it is something that anybody can do in any circumstance starting from any educational perspective, any nancial perspective. None of those things matter because it is something that you can make happen for yourself regardless of your current situation.
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Bye for now.

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