Positive cash flow property is the dream of many property investors, however it is also one of the most misunderstood concepts around. So what is positive cash flow property? well a brief explanation is that the property’s rental cash flow is higher than its expenses. If this is not the case and the expenses of the property is higher than the rental cash flow, then it is negatively geared and thus is costing the investor money.
Positive cash flow factors
However there are a number of factors that need to be taken into account for positive cash flow property
- The investors tax rate
- The depreciation of the property
- Other tax deductions
If you take all the above benefits with the added rental income it must outweigh all of the expenses associated with the property
Common Expenses:
- Loan repayments
- Insurance
- Repairs
- Property management fees
- Tax
- Accounting fees
If the property is able to pay for all of its expenses and still have a positive income it can be considered positive a positive cash flow property. The benefits of a positive cash flow property is that you can have an investment that increases in income without costing you money to run it. Positive cash flow property is an investment that does not compromise your lifestyle by continually costing you money.
Finding Positive cash flow property
There are a number of factors that should be considered when searching for a positive cash flow property.
- Where to Look
- Property type
- Tenant rates
Where to look for positive cash flow property
- Outer suburbs of capital cities – These areas deliver the highest yields and have the greatest rental growth
- Regional area – large regional centres are good because they offer cheaper investment opportunities. However capital growth is lower.
- Niche Markets – These typically centre around industry like mining, timber mills, or other large industry.
Top tips when searching positive cash flow property
When researching your property you must put the time into searching and testing properties to see if they add up to a positive cash flow. Below is a list I use when looking into positive cash flow property:
- Population of the town or centre (be careful if numbers are under 20,000)
- Rental rates – who much rent will I get for it (ask the real estate agents in the area)
- Employment – is there strong employment in the area. Industry to support the community.
- Property type – I mostly stay with 3-4 bedroom houses as they bring the best return. (this is dependant on location)
- Infrastructure – Is the area planning large infrastructure projects as this will bring rental demand ( the local council website should tell you)
If these factors come together then you can start to search for your property. When buying property for an investment I am a strong believer that the property is won or lost in the purchase price. For example one property I purchased needed a complete rewire of the electrical system as the old wires were dangerous, because the outer coating on the wires was rubber and just fell off if you moved it. (this should be checked in older houses). The replacement cost was $6000.00 so this had to come off the purchase price or I would have lost $6000.00 because the work had to be done. So a proper viewing of the property or property report by a building inspector is essential.
Positive cash flow – does it add up
- Take the currant interest rate and add 1 per cent (for example: 5% + 1% = 6%)
- Calculate the return on investment: Rental – All expenses = return on investment.
- If it is higher than 6% (using the 1% rule) then the property is likely to be cash flow positive.
- Double check and ask your accountant.
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