When it comes to property investment and development, having a solid cashflow strategy is paramount to thriving in both prosperous and challenging times.
One individual who truly understands the importance of such a strategy is Drew Evans, Director of Caifu Property, a renowned property investment and development firm.
With a focus on small profitable developments and effective strategies, Mr Evans has garnered a reputation for helping clients make money in the property market while maintaining a level-headed approach.
Today, we’ll delve into one of Caifu Property’s live client projects to showcase a brilliant cashflow strategy.
This particular strategy involves duplex development, and as we explore the case study, we can see why this approach is gaining popularity among savvy property investors.
Once a duplex development is completed, property investors have several options at their disposal.
They can decide to sell one side and keep the other, sell both duplex halves or retain ownership of both sides.
The flexibility this offers is what makes duplex development so appealing as part of any property portfolio.
In this study case, investors chose to sell one side of the duplex and use the proceeds to pay down the debt on the other side.
This strategic move significantly increased their borrowing capacity, allowing them to continue building up their development pipeline.
Let’s take a closer look at the numbers to better understand the value of this approach.
The duplex property in question was acquired for a total acquisition cost of $869,800.
It features a six-bedroom, four-bathroom, two-car design, and sits on a 700sq m block of land.
Upon subdivision, each duplex half sits on a 350sq m parcel. T
o determine the cost base of each duplex half, we simply divide the total purchase price by two, resulting in a cost base of $434,900 for each side.
The investors put down a 20 per cent deposit, allowing them to borrow 80 per cent of the purchase price, which amounted to $695,840.
Dividing this by two, we find that the loan amount for each duplex half was $347,920.
After completing the construction of the duplex, the investors placed one side (let’s call it Duplex A) on the market for $689,000.
While these numbers are gross figures and do not account for potential expenses like taxes, agents’ fees, interest whilst under construction, etc., they serve as a helpful illustration.
We’re stressing GROSS numbers purely to drive the point of the strategy across.
So, assuming a sale price of $689,000 for Duplex A, we subtract the cost base of $434,900, leaving them with a substantial gross profit of $254,100.
However, it’s crucial to remember that he still has the initial loan of $347,920 to consider.
After deducting this amount from the sale proceeds, the investors walk away with $341,080 from Duplex A.
Now, let’s shift our focus to the other side of the duplex (Duplex B), which the investors decided to rent out.
Currently listed at $520 per week, the gross rental return on the cost base of $434,900 is an impressive 6.2 per cent.
However, when looking at the return on the debt he has, which is $347,920, the gross return jumps to an outstanding 7.8 per cent.
This shrewd strategy doesn’t stop there.
In this case, investors also plan to use a conservative 50 per cent of the net amount they receive from the sale of Duplex A (after paying capital gains tax and agent’s selling commission, etc) to pay down the loan on Duplex B.
This approach allows them to significantly reduce the debt on Duplex B and frees up borrowing capacity to move on to their next project.
With the new loan amount on Duplex B at $177,380 and a gross rental return of $520 per week, the yield on the new debt surges to 15.2 per cent.
This well-executed cashflow strategy enables investors to generate a gross profit of $254,100 from the sale of Duplex A.
By allocating 50 per cent of this amount to pay down the loan on Duplex B, they can achieve a gross yield of 15.2 per cent on that property.
This not only sets them up for future financial success but also empowers them to continue growing their development pipeline.
Drew Evans’ expertise at Caifu Property demonstrates how a carefully thought-out cashflow strategy, such as the one employed in the duplex development showcased, can be a game-changer for property investors.
By combining smart property choices with strategic financial manoeuvre, investors can navigate rough times and ensure a robust and thriving portfolio.
As with any investment strategy, it’s essential to consider individual circumstances, but the underlying principles of financial fortitude remain universal.
So, if you’re a property investor seeking to bolster your cashflow and secure your financial future, take inspiration from Drew and explore the possibilities of duplex development.
If you’d like to learn more about Caifu Property and its services, visit their website or connect with them on Instagram and Facebook.