We are confronted with choices every day in business and in life, but it is not often that we take the time to sit back and consider the ramifications of what we have chosen.
Please take a moment to fully consider one of the choices you need to make as you assist your clients: have you asked them if they know what the cash flow is? By the way, if a client is referred to you by a seller, this seller may not want you asking the cash flow question! This simple question may stop your client from making the biggest financial mistake of their life. And it may cost you the loan.
When arranging a loan for an investment property, clearly it’s not your role to give advice, but you do have a decision to make. Are you going to ask them the cash flow question? Not understanding the cash flow is the most common mistake made by property investors. Test it out for yourself. Ask owners of investment properties if they knew the cash flow before they bought. In my experience more than 90 per cent will say no.
Most investors buy from a local real estate agent who doesn’t know what cash flow is, and if they do, they won’t tell the buyer. They are acting for the seller, so they won’t say anything that might lose them the sale. Other investors buy from an investment property specialist. These specialists know what cash flow is, but don’t tell the client because if it’s too high it might cost them the sale. Or they manipulate the figures with low interest rates and false capital growth figures like 10 per cent capital growth.
Some investors use buyer’s agents who again have no idea about cash flow. I know clients from several very well-known buyer’s agents in Melbourne. The agents all say they are the only company you should trust to find you the perfect investment. I ask every client if cash flow has been mentioned, but the answer is always the same: no.
Since all these agents promote the myth that you must buy in the inner city, the price being considered is often $600,000 to $700,000 or more. I remember one agent on the radio praise a young lady who was buying her first investment property for $740,000. There was not one word about cash flow in a property that would be negative about $250 a week after tax. It’s okay if the young lady can afford it, but what if she can’t? Understanding the cash flow can be the difference between a good long-term investment and an expensive mistake.
It’s too late for investors to ask their accountant after the cash flow has dried up; they should get advice from their accountant before they buy. Maybe they might get lucky and find the cash flow is affordable. But what if the money lost starts to affects their whole life? They have to find the money from somewhere, potentially putting them under great financial strain, or losing money by selling the property. Unfortunately, this is all too common.
So, are you going to ask the question that may save your client? Do you know what the cash flow is? And what will you do if they say no?
As I see it you have a few options:
Michael Sloan, founder and managing director, The Successful Investor
Michael Sloan is the founder and managing director of Australia-wide company The Successful Investor. Michael is a qualified financial planner, mortgage broker and investment property advisor. Michael holds a full real estate licence and has many accreditations and awards to his name including Mortgage Lender of the Year.
The National Australia Bank appointed Michael as an external property investment advisor to their customers; his articles can be found on NAB's website. His appointment to NAB is a reflection of Michael’s strong ethical standards and wealth of property experience.
Michael’s core values at The Successful Investor are trust and integrity as the company helps everyday Australians create wealth through well-planned property investment strategies.
Michael presents at property forums and workshops Australia-wide, teaching people about property investing from the basics to more advanced strategies. These events are educational-based, without the pressure to sign up or buy on the day. He has a direct tell-it-like-it-is style and shares his knowledge candidly. He believes property investing is more achievable than most people think. His goal is to make sure investors don’t stuff it up!
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