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Cash flow positive suburbs

Wednesday 10 June, 2009

Cash flow positive properties are becoming more and more common as interest rates fall and rental rates continue to rise.

The current economic 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 also falling, resulting in an upward trend of rental yield.

A cash flow positive property enjoys a net gain based on the rental income being greater than costs associated with owning the property. Many property investors aspire towards owning a cash flow positive property so they are generating a profit rather than recording a loss.

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 4.7% for both units and houses.

2008-09 has been a pivotal year for the New Zealand property market with a sustained drop in property values for the first time since 1998. This trend is continuing with our latest property statistics showing that property values fell by 8.1% during the year to May 2009, a considerable improvement on the 9.2% decline reported last month.

Cash flow positive return suburbs

With confidence low, inflation high, some property value declines, 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 property 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, we estimate there are 42 suburbs that are averaging a cash flow positive return based on our assumptions:

  • The suburb must have recorded at least 10 sales during the last 12 months in order to determine a statistically reliable median sale price.
  • $1,000 has been allowed for legal fees, building inspections, and other costs when purchasing.
  • 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.

Based on these assumptions some of the best performing suburbs are North Dunedin, Revenbourne, Mt Mera, Port Chalmers (Dunedin), Harbourside, Newton and Grafton (Auckland), and Lambton (Wellington).

View the complete list of Positive cash flow suburbs (93.4kb) in the main cities of New Zealand.

Cuts in the official cash rate and corresponding falls 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 top suburbs as seen in the rent growth graph for the top twenty suburbs.

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 for them to be positioning themselves in the market.

Cash flow positive suburbs report disclaimer

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