Investing without cash flow
Question from di updated on 6th March 2017:
I have $300,000 capital and I am debt free. But I have no cash flow. I am thinking of purchasing a rental property with positive cash flow and then using the property plus income to finance second one and so on. What's the possibility of above? What are the details that I should consider?
Our expert Kris Pedersen responded:
This is not an easy one! From experience, what happens in these situations is that clients still struggle to be able to finance property number two. The reason for this is that the first property can prop up the second from both an equity and servicing point of view. But, in most cases, lenders are also loading living costs on the borrowers when assessing servicing and that means that servicing struggles to work.
In the last property cycle (pre-GFC), there were a number of low doc /no doc products which were priced relatively close to bank interest rate pricing. This meant that it was possible to make this work. However, these days while these products still exist, changes in regulation much more is required to be able to obtain them. Alternatively, the pricing is considerably more expensive. This means that most people don't use it for buy and hold investment purposes.
Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.krispedersen.co.nz