Real Estate Investing - Cash Flow Positive Properties
Income Through Investing in Cash Flow Positive Properties
Cash-flow Positive Properties refers to investment properties that pays you, just by owning them. IE, there is nett income from the property.
Cash Flow Positive Property vs Positively Geared Property
Cash flow positive investment property is sometimes confused with positively geared property. There is, however, a major difference:
Cash Flow Positive Property: A property that puts money into your pocket after all costs and after tax deductions and depreciation, etc.
Positively Geared Property: A property that puts money into your pocket before tax deductions and depreciation.
When is a Property Cash-flow Positive
In real estate investment, an investment property is considered cash-flow positive when the income (typically rent) you receive from the property is more than you spend on the property.
Consider this simplified example:
Peter bought a property for $500,000. He spends $20,000 annually on the property (council rates, insurance, mortgage interests, repairs, etc).
And collects $500 a week from rentals. That is an annual rental income of $26,000 ($500 x 52 weeks).
As the total collections ($26,000) is more than the outgoings ($20,000), this property is considered $6,000 positively geared.
Benefits of Cash Flow Positive Investment Properties
The obvious benefit is obviously the extra income coming into your bank. It is a passive income generator. But the biggest benefit is, such cash flow positive properties are also less likely to limit future property acquisition plans. Lenders are less likely to penalise you if your property is cash-flow positive. Lenders will also consider this as your income stream, and will usually improve your serviceability.
Considerations with Cash Flow Positive Properties
While cash flow properties are good, it comes with downsides as well.
They are rare. All investors want cash flow positive properties. Thus, when they become available, they tend to be snapped up very quickly. We've seen good positive cash-flow properties being sold in under 1 day! It literally flies off the shelves. So, unless you are constantly and consistently monitoring the property market, you will likely miss them.
Can increase your tax contribution. Depending on your investment structure, the nett positive income from your rental income, will be added towards your annual income for tax assessment. Have a chat with your tax accountant to find out how this affects you. Remember paying extra taxes is a good sign that your investment is making money. Also remember to set aside some income for taxes.
Location and growth. Properties which are immediately cash-flow positive from day one, tend to have low equity growth. You'll need to hold them for a long time, if you intend to profit by selling. Through our research, we have found some areas which had experienced over 30-50% growth in between 2020 and 2021. Ironically, these COVID19 pandemic years were also the year when most people are expecting prices to fall 40%. 🤔
Other factors to consider when getting a cash flow positive investment property:
High Entry Cost. You have to factor in property stamp duty (approx 5.5%, depending on state), conveyancing/legal, mortgage, building and pests inspections fees.
High Exit Cost. Real estate agent fees (approx 2%), sales conveyancing, property staging, etc.
Capital Gains Tax (CGT). If CGT applies to you, up to 50% of your profit from the sale will be included into your annual tax returns. Your accountant will be able to give you the appropriate advice for your circumstances.
If you're after a cash flow positive investment property that makes money for you every month, have a chat with us. We have constantly monitoring the Australian property market to find positive cashflow properties quickly. Our data analytics and research have allowed us to find some areas which had experienced over 30-50% growth in 2020-21. If you love some DIY, ask about our property buying alert subscription service, which can give you early access to these cash flow positive properties the moment they are available.