I watched the AFL grand final on the weekend, when the Melbourne Demons won their first premiership in 57 years!
It was emotional and motivating, and I found myself cheering them on. Even though it now makes my beloved St Kilda Saints holders of the unwanted title of longest running premiership drought; 55 years and counting…
This week I want to talk about one of the biggest sponsors of the AFL which happens to be the biggest property company in the world – McDonalds.
Most people, if you asked them, would tell you McDonalds are in the fast-food business.
However, it’s more accurate to say they’re in the real estate business.
McDonalds have a real estate portfolio worth $30 billion that generates it nearly $8 billion in rental income per year.
For perspective, its rental income accounts for 36 per cent of all revenue and 55 per cent of all profit! (The costs associated with the real estate business are much lower than the other areas of the business – that’s why the profit portion is so high).
Its vast number of real estate assets is why McDonalds is such a valuable company today, but the cash flow from the fast-food business was – and is – equally as important to the McDonalds success story.
Which leads me to my bulletproof tip for this week.
CASH FLOW IS YOUR OXYGEN.
When the cash dries up, the investing is over very quickly, so make sure you:
*invest in assets that pay for themselves
*strike the right balance between growth and cash flow
*don’t let the cost of holding your investment exceed 10 per cent of your take home pay
‘Cash flow is like oxygen: run out and it’s all over very quickly.’ I’ve lost count of how many times John has told me that over the years.
Cash flow is the difference between cash coming in (such as rent or dividends) and cash going out (such as management fees, rates, insurances and bank interest).
Unfortunately, you can’t eliminate risk when it comes to investing, you simply have to manage it.
The biggest risk when it comes to investing is cash flow – it’s the difference between those who have had success and those who haven’t. It’s also the undoing of those who had success only to lose it all.
McDonalds went from owning no real estate in the 1960’s to owning $8 billion worth of real estate in the mid-nineties, and now that real estate is worth $30 billion.
But McDonalds wouldn’t have been able to experience all of that growth in its real estate asset values without the cash flow to pay for the costs of owning it.
I’m going to put up an extension of my budget tool for property investors – register here to get it in advance.
PS _ McDonalds_: Behind the Arches by John F Love is one of the best books you’ll ever read!
Capital growth will always be my number one priority with respect to real estate, but cashflow seems to be the biggest limiting factor for most people that prevents them from surpassing more than two properties. Should I be sacrificing growth for cash flow on my next property? What have your personal decisions been with respect to cash flow vs growth for properties two, three, etc.
Great questions and there’s a bit to unpack in this.
First of all, I think what stops people getting more than two properties is two things; having the patience to see property as a long-term investment and having a sound cash flow plan.
Every situation will be slightly different, but for most people the answer will be this; cash flow and growth are equally important, but the growth is going to have a bigger impact on your wealth than cash flow.
A property bought for $500,000 should grow by $50,000 per year over a 10-year period. The difference between a low cash flow property (say 3 per cent rental yield) and a high cash flow property (say 6 per cent rental yield) will be $15,000 per annum. And that’s before costs and potentially tax.
If your goal is to grow your portfolio, you want to get just enough cash flow to fund the holding costs of the property. Today, that will be a rental yield of around 4 per cent.
That’s exactly what I’ve always tried to do; buy land in high growth areas and build a house on that land that’s going to give me enough rent to cover my costs throughout the year (interest, rates, maintenance, property management, insurance, etc).
I try and ensure that – even if interest rates increase by 2 per cent – the costs of holding all my properties wouldn’t exceed 10 per cent of my take home pay.
I then get a tax refund at the end of the year for the non-cash deduction – depreciation – and use that to pay down my home debt.
That’s part of my cash flow strategy, too, and is a big reason why a lot of people don’t get to build their portfolio beyond two investment properties. My home debt doesn’t earn me any rental income and it’s not tax deductible. Therefore, I have a plan to pay it back as soon as possible and use any excess cash flow I have.
Hope that helps!