Creating a Positive Vibe

When mortgage broker Scott Caporale and his partner, Fotini Koklas, moved to Coffs Harbour on the New South Wales north coast, they wanted to keep investing in property but their cash flow position was slightly uncertain.

“We discovered that Coffs Harbour has a shortage of uni student accommodation and… thought, well, how can we buy a residential investment property and make it cash flow positive?” Scott explains.

Scott and Fotini spoke to the accommodation officer at the uni and then started the process of working out what students would pay for a room and what facilities they’d want.

“Then we went out with the intent to find a property that would suit this,” Scott says.

The intent here is clear: a positive cash flow property wasn’t just going to present itself in Coffs Harbour; Scott and Fotini had to do their research and figure out how to manufacture a positive cash flow.

“We knew we wanted something that had renovation potential. We decided that if we could find a five-bedroom home with the ability to have at least two bathrooms…that would be ideal,” Scott says. After a great deal of hunting around, they found a five-bedroom brick-veneer home on a 900-sqm block with an inground pool.

“It already had five bedrooms and it had a large lounge room which we instantly realized we could have converted into another bedroom. It already had a three-way bathroom, so it had a bath, toilet and vanity in separate rooms, so that was ideal. And it had a laundry with a toilet in it – so we realised we could just knock out a wall, re-do some plumbing and convert it into a bathroom with enough room for a sink and a washing machine in it as well”.

Scott and Fotini bought the property for $315,000 in December 2006 and all up, the renovation bill ran to about $20,000. This also included painting the inside, adding door and window locks, installing an automatic timer for the pool and fully furnishing the property with beds, desks, chairs, curtains and all kitchen equipment.

The property is rented out by the room, with the tenants signing 50-week leases. The four smaller rooms fetch $145 per week each, while the larger rooms fetch $150 and $160 each, meaning the gross yield comes in at 13.8 per cent on the combined costs of purchase and renovation.

“The property manager insisted that all the parents go as co-signer on the leases as well, which gave us extra security,” Scott says. Demand for rooms has been strong, with all the rooms filled within two weeks of hitting the market and no vacancies to speak of since the tenants moved in at the start of 2007.

“I guess some of that was we did our homework first and we knew the clients would want broadband internet, we would pay for electricity. It’s basically all inclusive; we had a pool maintenance guy come around… and all the gardens would be taken care of, so it was a full turn-key solution.”

Scott and Fotini hold the property through a trust and it’s now delivering them a handy income boost – and the property “just runs itself”.

“After we take out our land tax and property management fees we’re looking at somewhere between $5,000 and $6,000 a year positive cash flow,” Scott says.

That’s before any depreciation claims, which Scott says are just “more cream on the top”.

And the income is increasing, with rents climbing $5 per room each year.

“This will be the third year that we’re renting this out, so there’s really a $15 increase per room in that time, so that’s been better than our expectations.”

Scott and Fotini have a broader property portfolio that mixes in some negatively geared investments and some land they’re in the process of subdividing. So the income from this property gets put to good use.

“It really provides us some cash flow that helps offset some of the other properties that may be a little bit negative or that we’re developing,” Scott says, adding that he still expects capital growth from the property on top of the income because there are “good fundamentals” in Coffs Harbour.

Scott says there’s no way the property would have delivered positive cash flow if he and Fotini hadn’t set out to create it.

“Coffs is not a place for positive cash flow property. The standard rental on that property would probably be around the $380 a week return as opposed to the $890 that we’re getting at the moment,” Scott says. “For us, it was about creating the positive cash flow rather than finding it.”

Scott believes there’s a great opportunity to do the same thing “in any university town” and he plans to look at creating more similar investments for the positive cash flow.

“There were plenty of houses that we saw that could be suitable for this… and as I’m looking around for property I often see properties and think, ‘this would be suitable for uni accommodation’ because it’s easy to add another bedroom or it’s already got two bathrooms.

“I think those deals are out there if you know how to look for them.”