Chapter 19
Buy, Fix Up and Rent

This strategy is appropriate when renting the property generates a positive cash flow, and the investor seeks long-term capital growth.

Therefore, the strategy will be to have the property re-appraised, draw out the equity and duplicate the process. Although the process sounds easy enough, there are a few issues that will need to be considered before you rush out and purchase your next property.

Can you afford to hold the property?

This is especially relevant if the property has a negative cash flow. Careful calculations of your holding costs should allow for potential vacancies, broker fees, taxes and insurance fees.

What's the best LTV (loan to value ratio) to have?

This will depend on your personal objectives. When you re-appraise the property, the amount of equity that you draw out will determine your LTV. There is no hard and fast rule here.

A higher LVR of 90 per cent means that you can apply more leverage and acquire more properties sooner. The danger of this is that your properties may be cash flow negative, and therefore the more you accumulate, the more 'out of pocket' cash will be required to service the holding costs.

You can therefore adjust the loan size to suit your capacity to service the holding costs. For example, an 80 per cent LVR will make your loan repayments lower, therefore requiring less of your own money to hold it.

If you have purchased correctly, the new value of the property should allow you to maintain an 80 per cent LTV and still be able to draw down your original cash outlays.

You are then free to purchase your next property and shouldn't have too many problems with your friendly bank manager.

Generally speaking, if the property does not generate a positive cash flow with 10% to 20% equity (your money), then it may be wiser to sell it