Latest / The Follio Property Podcast / From First-Time Investor to Portfolio Builder: 2025 Cash Flow Strategies That Actually Work | Ep 25

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From First-Time Investor to Portfolio Builder: 2025 Cash Flow Strategies That Actually Work | Ep 25 · The Follio Property Podcast

• 0:00
  Can you really build wealth through cash flow assets? Starting investors and those that are trying to build a portfolio above two to three assets. Are you just sacrificing growth for cash flow assets? You are going to hit a wall with serviceability if your portfolio only has exposure to negative geared assets.
• 0:15
  All right, let's break it down then. You've got basic cash flow assets, intermediate and advanced strategies. What's the big difference between a co-living and a dual key? Renovating is a separate strategy, but that's really popular at the moment. Do you see this as a good strategy to implement or is there risk involved with it as well? It's a strategy that I've endorsed myself. I've never heard someone complain about having an ensuite. What a luxury that is to have.
• 0:39
  You're listening to the Folio Property Podcast. I'm Rhys Bettle and I'm here each week with my co-host, Lachlan Delahunty. If you're enjoying the podcast, do us a favor, hit like, subscribe, and please leave us a comment so we can help grow this channel. Let's kickstart it. Lachlan, can you really build wealth through cash flow assets? Cash flow assets.
• 0:59
  For starting investors and those that are trying to build a portfolio above two to three assets, must be at the forefront of the strategy. If you aren't looking to have exposure to cash flow assets in your portfolio, it is very difficult, almost impossible to build a large portfolio. What about growth? Are you just sacrificing growth for cash flow assets?
• 1:21
  There's an element of that because you're typically looking at assets with either a stronger improvement value or in markets such as regional to chase that yield. But you are going to hit a wall with serviceability if your portfolio only has exposure to negatively geared assets. And that's been an historical assumption. Blue chip assets, typically more negatively geared, typically more capital growth.
• 1:46
  But that sort of limits the ability to scale the portfolio, typically above a couple of properties, unless you're a high income earner. Yep. And what, in terms of cash flow strategy or assets, is there multiple? What types of assets, what types of strategies are there, I should say?
• 2:02
  So when we look at this race, we break it down into three levels. You've got basic cash flow assets, intermediate and advanced strategies, and depending on where the client's at in their journey will depend on what direction we take. All right, let's break it down then. Basic level.
• 2:17
  What do we mean by that? Yeah, basically cash flow assets, regional markets. So as you're seeing, there's a huge wave of regional activity at the moment. There's a lot of buyers agents there pushing that. It's a quick and easy solution for most agents and typically most investors.
• 2:33
  but it comes with some risks, and that's the volatility of the markets. Second to that, sort of medium and high density exposure, so things that have more improvement value than they do land value. Again, some concerns around that. And new built strategies, and we're seeing this work quite well in capital cities, where you're buying an asset or building an asset, sorry, that has more improvement value than it does land value.
• 2:55
  And with these basic level strategies, would this be a first-time investor looking at these usually? Typically, yeah. First or second-time investor. Like I said, the most common of those three is firstly the regional markets. Like I said, there's a mass movement to that at the moment. Townsville, Gladstone, Darwin, all Darwin's capital, we treat as a regional market. There's been a huge movement because A, it's easy to acquire property in these markets, particularly off-market assets,
• 3:25
  Huge periods of downturns and during those downturns, unable to sell property. So these groups of buyers agency go there and buy up the stock and artificially inflate the market for a short period of time. But I'm concerned if that is your only strategy, if you look back at the volatility, if you look at a market like Gladstone, we've seen significant growth since really 2020 post-COVID. Median house prices have gone from $350,000 to now $600,000, so almost a doubling event.
• 3:53
  However, the caveat there is what happened prior to that, we've seen the market go from 520,000 back in 2011 to as low as 320,000 at the start of COVID. So almost a halving event. So the volatility of those markets is extremely dangerous. And if you've got only exposure to regional markets, I'd be concerned. They're almost like a hot potato. Great in the portfolio, if it's less than 30%, you can get...
• 4:17
  You know, huge capital growth in a short period of time, but we see them as more as trading assets. Same when you look at, you know, the likes of a Darwin market. Again, a huge flavour in the market at the moment. And absolutely, I think we'll see a run in prices in the short term. But again, from 2014 to 2020, six years, that market did negative 40% growth. So again, the volatility of these markets, you know, is the risk you take. And I think you said trading strategy there, but it even sounds like you've got to time that.
• 4:46
  Correctly, otherwise you could be hit. Timing's everything. But why do people go there? Because cash flow is key. You can get north of 6% return on established property, which is almost like a unicorn. And if you're getting double-digit growth, that's the story that's been told at the moment. Double-digit growth...
• 5:03
  north of six percent yields that's a unicorn absolutely it is and it's a fantastic short-term strategy do i want 10 of them in my portfolio absolutely not because when the music stops which it will and i don't think we're too far away in these regional markets you're going to see a lot of people lose a lot of money very quickly yeah look
• 5:22
  Look, I speak to people every week and they have such similar portfolios where it is either it's highly leveraged with maybe regional markets or C-grade assets and they need to start looking consolidated in their portfolio because it's too high risk there. Look, there's a place for it. I've got regional assets in my portfolio and probably was overexposed 12 months ago in regional markets.
• 5:44
  But we just want to make sure, depending on the investor type, how much exposure? Is it 30% of their portfolio? Is it 40? If it's getting up to 50% of your portfolio, I have concerns. We need to sort of diversify and get some more capital city A-grade exposure. But yes, that cash flow is important, and particularly early in the piece.
• 6:02
  One of the other basic level strategies you said there was regarding the house improvements versus the land value. What typically should we be looking at here in terms of a strategy? And is it just purely based on house value versus land value, or are there other things you need to consider?
• 6:20
  It's a basic way of looking at it, but fundamentally, how you increase yield is getting higher improvement value than land value because what does a renter pay for? They're paying for those improvements. And if you've got a super strong land value asset, 800 square meter block, where 90% of its land value, well, those improvements, you know, we're talking about a two by one shack that may be full of asbestos. That's not gonna get a premium rent. So that new built strategy or the higher density, you're looking at, you know,
• 6:48
  typically assets that have a significantly higher improvement value than land value. And you may say, well, then you're sacrificing capital growth. That's why I don't like the higher density and often the medium density. We like units, villas, townhouses in that sort of low to medium density space, but higher density, think of Docklands Apartments, they haven't seen growth in over 12 years. A lot of people invested in those in the sort of 2010 to 14 era have lost
• 7:18
  to lose money, to invest in property, to lose money is a bad strategy. So we want to look at cashflow assets that still are going to give you capital growth over the long term, but maybe just have more exposure to improvement value in the shorter term. And that's why some of these new build strategies have worked for clients that can invest in capital cities in blue chip locations. Had a client recently that is achieving 6% yield within sort of a five minute commute to Monash University in Melbourne.
• 7:46
  in a very high growth suburb. So there you're getting that growth and that yield play. But 60% of that value of that property is in the house, not in the land. That's interesting. And I think that's where we speak about it all the time. You see these spruikers out there off the plant apartments, sometimes these house and land package areas where there's an abundance of land. So-
• 8:07
  It is important that there could be, there is a place for those assets in terms of new build assets, but you just got to be careful. You got to look at some of the other fundamentals around that asset to determine whether it's a play or not. The fundamentals still remain. So chasing scarcity. So we talk about the Wild West quite a bit in say Victoria, for example, and that when we talk about that, we're talking about likes of Melton. It's difficult to create scarcity in Melton because you can pretty much build out from Melton to Ballarat, right?
• 8:33
  So that gives me concerns. It's not landlocked. And therefore, it's fine in a high growth market when things are going really well. Typically, everything goes up in values. But when there's an oversupply, as we'll see in that area, potentially in the short or medium term,
• 8:49
  it's very difficult to put pressures on pricing. However, the new built strategy in landlocked suburbs or areas where there's limited forecasted supply, it can be a really great strategy to achieve both capital growth and north of 5.5%, 6% returns. And that's really important when interest rates... Now, where are they at, Rhys? What's your home loan at the moment? It's in the fives now. It's probably like it.
• 9:12
  We did have Michael Keelan last week, and I think he was saying around 5.3, 5.4. Yeah, 5.4. So when you can get a 6% yield and you're paying 5.3, 5.4 for your interest rate, all of a sudden, it's getting close to neutrally geared. At a 5.3% home loan and 6% net return, a gross return on your property, surely it is positively geared. Mm-hmm.
• 9:31
  But people fail to understand the true costs of holding a property. And it's not just repayments versus your rental return. So looking at that, it would still slightly be negatively geared, which will confuse a lot of people. But it's getting close to being mutually.
• 9:48
  I know my first investment property, I had the same thing on paper. It looked like it was neutrally geared. And then once you don't take into account all these other expenses. Holding costs, land taxes, insurances, maintenance. So, yeah, it's important to do your figures on, and that's what we do, right? 100%. Intermediate level strategies. Talk to me about that.
• 10:06
  Yeah, so these are for more sort of advanced investors, certainly not going to be your first two or three properties. You're looking at dual key, multiple occupancy, co-living, value-add strategies through renovations, so trying to sort of increase the yield or your rental return through updating the property, and ancillary dwellings, so think granny flats. Yeah.
• 10:28
  So certainly not for the fain-hearted, a little bit more work, certainly those that are a little bit more sophisticated, but we've done a number of these strategies with our clients. Again, the type of clients are more advanced. They've typically got four to five properties in their portfolio and we're trying to increase the overall cash flow of their portfolio rather than having to trade properties out to increase the cash flow. Jill Key.
• 10:52
  I hear a lot about this, but it'd be interesting to understand what actually is a dual key property and what's the advantages and what's the risk? Because sometimes you hear it a lot and sometimes it can be perceived as a negative type property. But what's, yeah, talk to me about dual key. Yeah.
• 11:05
  Dual-key is in flavour at the moment because you're sort of seeing close to 10% returns on these assets. Essentially, it's one dwelling that's been segmented into two. So you've essentially got two houses on one title and you're renting both sides of the house. So just a standard residential home in a house and land package area where one side of the house is a three by two and the other side's a two by one. And so essentially you can get two tenancies within the one dwelling.
• 11:33
  They both have to be on separate meters and it has to be approved within council regulation. So huge flavor, 8% to 10% returns at the moment. People are pushing this. Don't invest in this space. Straight off the bat. Everyone's like, well, why are you getting 10% returns? Had a call on the ABC the other day ringing, just bought one in Western Australia, and
• 11:54
  It was already started construction. It was going to get 12% returns. Sounds fantastic on paper, but the saleability of these purpose-built properties, I have concerns with. Same with NDIS, which we'll speak about as more advanced strategy. When you're building purpose-built dwellings, it's great to get the cash flow on the short term. And when the market's growing and investors are buying this stock, this is fantastic. It's the resale value that concerns me. In a potential stagnant or a downward trending market-
• 12:22
  These are very difficult to sell. And this is when you see these type of assets lose 30 or 40% in a downturn very, very quickly because the buyer pool is so limited. You know, who buys these type of properties? Investors. As we've said on this podcast, you want to be buying properties that you're...
• 12:41
  end user or the person that you're going to sell that to is ideally an owner-occupier. A dual-key asset is very unlikely you're going to sell to an owner-occupier that purposely needs to fit their grandparents next door and their family in this house. It's a very limited buy pool. So when you build purpose-built assets like that, just be careful.
• 13:01
  And these types of assets, do they only exist in these new house and land package areas? For instance, I totally agree. It sounds like a very high-risk strategy from the saleability standpoint. But if you had a dual key in a city, you can bank. There's always going to be a queue of people moving in there from an investor standpoint. Do they exist or...?
• 13:19
  No, because it's older established areas typically don't have the land to be able to do so. And it would be a massive over capitalization on a blue chip parcel of land to do so. So where they typically are found sort of out in the greenfield areas where you can pick up land very cheaply because the construction of these is significantly higher. You know, you're looking at seven, 800,000 to build them. So people are trying to pick up land for three or 400.
• 13:46
  your valuation on that's probably around a million dollars, yet you spent one, two, one, two and a half. So you're building well below replacement costs, which I have concerns about. Yep. Co-living, you mentioned that in the same intermediate strategy. Is that the same as dual key? What's the big difference between a co-living and a dual key?
• 14:05
  Very different. So pro-co-living. Co-living is looking at renting out individual rooms within a dwelling. And you can do this both in the established market. Obviously, it creates a lot more work and that's why we look at renovating as a separate strategy. But that's really popular at the moment because we've seen a market where there's a shortage of properties around Australia. So people are trying to create rooms in established homes.
• 14:30
  We're seeing it done extremely well at the moment in Victoria, again, in university catchment areas where you can build a house, retain its merit as a family home, but rent out individual rooms. So what does that look like? A four bedroom, four bathroom dwelling. And it's as simple as that. Each bedroom has its own ensuite. There's a common share kitchen, dining and living area. And each room is rented out individually.
• 14:54
  Yeah, and we've actually gone on a look at some of these houses and it looks and feels like a normal house. It is, and that's what's so important is about that. When that property's taken back to the market, you can sell that to a family. I've never heard someone complain about having an ensuite. What a luxury that is to have. And the cost to do so in proportion to the return you get is very favorable. I've done this strategy personally in the established space, property in Leaderville,
• 15:19
  It was a four bedroom by one, turned into a four by three, rented out each room for $400 a week. So the yield, my rental return went from $800 a week to $1,600 a week. So it's a strategy that I've endorsed myself. Now, you mentioned there as well, renovations or that value add strategy. We've done an episode on this before.
• 15:40
  I get numerous calls a week off the back of your Instagram posts on adding value to properties. So I want to be cautious so I don't get inundated with calls off the back of this, but talk to us about this. Like where, what can you be doing from that front to increase the yield on these cash flow assets?
• 15:58
  Yeah, it's like I said, to increase cash flow on properties, you need to increase the value of the improvements. So what are tenants prepared to pay for? So again, and the argument is, should I do renovations straight off the bat when I buy a property or do I wait to get some capital growth and use that value?
• 16:18
  Really, again, it depends on your strategy because if you're going to hold something long term, then you're better off doing the works up front. If it's more of a trading, then you're probably better off doing it before you exit. So not doing those works up front. So the quickest wins I see in properties, we've spoken about previously on the podcast, is laundry conversion. So increasing the amenity through bathrooms. So what does that look like? Laundry is a bit of dead space typically in most homes.
• 16:40
  So a laundry conversion into an ensuite or a bathroom, straight away you've increased the usability from either a three by one to a three by two or a four by one into a four by two. Straight away you're going to increase your rental returns somewhere between 20 and 30%, straight off the bat.
• 16:56
  I did that. That's impressive. Okay. I don't want to touch too much on this because we've done episodes on this before, but let's go to the advanced strategies. Advanced strategies, we heard on previous podcasts, commercial property, huge flavor of this at the moment, concerns in trying to do this in this sort of sub one, one and a half million dollar space. Commercial property, as we've touched on the podcast, is a huge part of the market.
• 17:18
  It's all about the strength of the tenancy. Once you start getting sort of C and D grade tenants, what does that look like? Could be a coffee tenant, could be an hairdressing tenant. Not to say there's any problems with that, but they're not recession-proof businesses. And in commercial, you have huge vacancy risk. And if a property is vacant for three, six, nine, 12 months, that kills your entire cash flow strategy.
• 17:41
  So it's more advanced. And for our clients, we typically have it for more developed and established portfolios. Those that are trending later towards life where we can invest in solid blue chip A-grade tenants. We typically do so later in a client's journey where we can invest in A-grade blue chip tenants. So that's where commercial sits for us.
• 18:04
  Other things in the advanced level is more subdivision development, might be retained sub, sell off the land, invest that into the front house so then you've got a positively geared asset. We've rolled that out personally and with other clients. Room sharing, room sharing is very different to...
• 18:19
  dual occupancy and co-living. Room sharing is very much building commercial built dwellings for the purpose of renting, so it's almost like build to rent. And then other specialist plays include student housing or NDIS, which, again, do so with caution. NDIS has been a massive wave of interest in this, particularly post-2019.
• 18:42
  Pretty much did a PhD in NDIS because we thought this would be a very interesting space. Again, comes with huge caution because you're building very purpose-built dwellings. And you can't lock in the tenant. This was a huge problem and hence why we didn't go down this space. You can't force someone, particularly with a disability, to live in your house for 10 or 15 years. And that's the value of commercial property. You want to lock in an A-grade tenant for 10 years. That's how you increase the value and that's where you increase your returns and guarantee your returns. Can't do that in NDIS.
• 19:11
  Because if they want to move somewhere else, you can't lock them in. So you're backing the fact that they're going to want to live in your property for the next 10 to 15 years. And it's a purpose-built dwelling. It's not very saleable back to the open market when you look to target own occupiers. So just from what you've said there on the advanced strategies, it sounds like NDIS, we already touched on earlier, but that's, in your eyes, that's a big no.
• 19:32
  commercial there's obviously a place for that but generally the clients that we we deal with is probably a little bit later on in their their journey correct talk to me more about and i don't want to confuse it with the co-living but the room sharing piece that that's probably the one i'm not sure is do you see this as a a good strategy to implement or is there risk involved with it as well
• 19:52
  Very much for, again, advanced investors. And there's a place for NDIS if you specialize and that's all you do. There's some operators out there that have done really well, but they're linked up with a provider so they can almost guarantee the lease. Same with commercial property. It is more specialized and has a place. Room sharing is like a commercial property. You're engaging in development, typically going out there and building a boarding house or something, might be in close proximity to university and it becomes student accommodation.
• 20:20
  So it is a really good strategy if you specialise in this space. And we've implemented some of these developments. They've done well, but they are commercial construction that comes with, you know, a completely different requirement from the council, completely different. You know, we're talking fire safety, sprinkler systems. It's an advanced strategy, very different to multiple occupancy or co-living, where you can do so under the residential framework and approval compliance process.
• 20:49
  It's really just building a residential house and renting out the rooms individually. That can work for more intermediate strategies. Again, that commercial boarding house student accommodation is far more advanced. And we can do a whole episode on this, but our listeners probably want to stick to the basic and or intermediate strategies.
• 21:08
  Yep. And I think we will do a breakdown of each of these strategies in a later episode. So please put in the comments if you'd like to hear us do that at a later date. Okay. So you've talked through the three-prong approach in terms of basic, intermediate, advanced strategies.
• 21:23
  Now, you mentioned, especially on the regional play on the basic level, that you don't want to have your whole portfolio filled with these assets because it's high risk. Regional, that is, right? What about cash flow? What sort of portion of your portfolio should have cash flow assets? Can it be all of it to help grow that portfolio? Or is there sort of a percentage that you would stick to if you're an investor?
• 21:45
  It really depends on where a client's at in their journey. And I just don't want to put a caveat over straight away because people are like, tell me, tell me. But to give you an example, a huge mistake I made in my investment journey, straight off the bat, we typically invested at the beginning of the business 12 years ago for more sophisticated investors, higher net worths. And that was very much a negative geared strategy because they pay far too much tax.
• 22:10
  Look at a doctor, they want to get as many tax breaks as they can. So high growth, high land value assets, but it's massively negatively geared. And therefore, I followed suit on very much a low income. So I bought one property, it was in Inglewood, Western Australia. Fantastic. It was a development site, but the yield on it was like two and a half percent.
• 22:31
  It took me another three years before I could buy another property because the cash flow was so negatively geared, the bank weren't going to fund me anymore. And that becomes a huge problem. So straight away, you hit a barrier. So early in your journey, it's really important to have high exposure to cash flow assets,
• 22:49
  with capital growth in mind, because, and that's for those that wanna build out multiple properties, we're talking three, four, five properties in their portfolio, because the bank looks at your serviceability, and if you don't foresee your income increasing significantly over the next two or three years, then we need to manufacture cash flow through the portfolio. And that's getting these assets to neutrally gear, or close to neutrally geared, as quickly as possible. And often it's not gonna be right off the bat, and understand that's why time in the market's really important.
• 23:17
  Because when we started buying in Perth, yields for established properties were sort of 3% and for units it might have been 4%. But as rents start to increase, and that's why we track this data so closely, you see rents rise, therefore your yields rise and it becomes more favorable from your portfolio point of view.
• 23:38
  Now units in Perth, for instance, are at 4.5%. We're seeing the rise of that in Melbourne. Melbourne houses are still at 3.5%, units are at 4.5%. But we're starting to see that increase to 4.7%, 4.8% as we see rents rise. So to answer your question, Rhys, early in your journey, it's important to have a high exposure to cash flow assets.
• 23:58
  tipping maybe the first two or three assets, your timing markets to not buy assets that are going to have negative growth. And we still want to keep a huge eye on capital growth assets. But we need to have a focus on it. As we progress and the portfolio gets larger, we start to increase exposure to more land-healthy assets. And that's when we want to get the blend closer to sort of probably 50-50. But in your first two or three assets, it's likely going to be 75% weighted towards cash flow assets. If...
• 24:26
  Caveat there, if the goal is to have a large portfolio. Yeah. And it's about timing markets as well. So one of my recent purchases, a cash flow asset, it was probably 50-50 in terms of land versus dwelling.
• 24:41
  it's just completing now and it's already gone up 20% from when I started. So actually timing the market, and it was a blue chip area, but timing the market actually helped from a land value appreciation standpoint as well. And the yield's obviously going to benefit from the new build too. Yeah, well, that's, so new build strategies, it comes, it's almost like,
• 25:01
  new build properties off the plan, it's like the devil. You can't make money, people are trying to rip you off left, right and center. And there's a pool of people out there that absolutely have no regard for their clients and are just, typically fronts for builders, they're going out there and selling you on this investment dream but have no sort of thought or pre-thought of how to invest or build out a portfolio. But it's not always a bad strategy and that's, your example's perfect, if you time the market well,
• 25:26
  You know, your deposit in that scenario would have been low upfront costs because you're only paying for the land. Therefore, your stamp duty is significantly lower. You've portioned out the build over a period of maybe two years because it probably took longer than you expected. So your 20% deposit was delayed over a two-year period, right? Right.
• 25:45
  So by the time you've actually had to pay for that property in full, you're already 20% in front in the market, plus you're getting probably 12% to 13% depreciation year on year because it's a brand new property. So there is a space for that if time well and if in the right market. Lachlan, to wrap it up, what's, for a first-time investor or someone early on in their journey, what type of cash flow assets should they be looking at? Basic level strategies.
• 26:10
  but not being too exposed to the one segment. What I mean by that, the easiest place to generate cash flow at the moment is in the regional markets. That's fine maybe for one, two assets, but make sure not 100% of exposure is in regional areas. So I'd be encouraging people to get a blend for their first two to three properties of basic level strategies.
• 26:30
  Thanks for that, Lachlan. You've been listening to the Folio Property Podcast. If you liked what Lachlan said today and you want to learn more about the basic intermediate advance strategy, please get active in the comments. We've got a load more that we'd love to speak about on that front. So yeah, speak to you next time.