Positive Cashflow Investing
A Positive Cash Flow property is a property where monthly income exceeds holding costs.
Cash flow Positive Property investing is generally contrasted with negative gearing (or negative cash flow), where the income returns do not offset holding costs, and the investor uses the tax treatment of the loses to their recoup some of the short fall.
The main argument for Positive Cash flow Properties is the advantages of owning income-generating assets rather than having to put your hand into your pocket and fund a shortfall on a negative cash flow property.
Calculating Cash Flow
Cashflow is simply equal to income less expenses
- Advance rent
- Late rent
- Insurance payments from loss of rent
- Monthly Mortgage Payments
- Maintenance and repairs
- Body-corporate / property management fees
- Taxes and charges
- Repairs and maintenance
- Costs associated with finding new tenants
Pros and Cons of the Positive Cashflow Strategy
- Having access to a monthly cash flow has an obvious appeal and can therefore be an excellent entry point for beginner investors.
- Cash flow properties can balance your portfolio as the extra cash can be used to pay the shortfall that may be associated with holding properties that have negative cash flow but high capital growth potential.
- Positive cashflow properties increases your serviceability towards a loan and can make you more attractive to lenders.
- Properties that are cash flow positive AND appreciating quickly are often touted as the ‘holy grail’ of property investors. Mining towns have offered up some impressive examples in recent years. However, such properties are difficult to come without the right tools and technology.
- The positive income generated is taxable and so it can be difficult therefore to build real wealth off income alone.
- Cash flow positive properties are sometimes associated with lower levels of capital growth over the longer term although this varies from property to property – careful research can find examples that demonstrate a healthy yield and strong capital growth potential.
Defining your search criteria when looking for cash flow properties
For many the only way this will occur is to buy a property in a high rental yield area or to wait until enough of the loan is paid off and for rental yields to rise over time.
Taking out a smaller loan as a percentage of the purchase price (e.g. at a 60% LVR instead of 80-90%) can ensure immediate positive cash flow surpluses.
The property however, can still be negatively geared for tax purposes after deducting depreciation, which is a tax-deductible expense albeit a non-cash cost.
7 ideas to help you achieve cash-flow deals
- Look for suburbs with yields of 8% to 16% and analyse the highest net cash-flow
- Focus around the 154 mining towns around Australia, then narrow your search to those within your budget, cash-flow and yielding expectations.
- Initiate your search around properties within a 3-5km range of Australia’s 154 universities, which have a strong rental market, and potentially high demand.
- Change a negatively geared property to a positive cash flow property by either reducing your expenses or increasing the income it provides.
- Buy 20-40% under median and look to drive yields up.
- Buy dual income properties for example those with granny flats.
- Fix interest rates when they are at low points in the cycle.