Real Estate Investing - Cash Flow Positive Properties
Income Through Cash Flow Positive Real Estate
Cash-flow Positive Properties refers to investment properties that pays you, just by owning them. I.E., 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 you earn more than you spend on the property.
Consider this simple 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 could improve your serviceability.
Considerations with Cash Flow Positive Properties
While cash flow properties are good, it comes with downsides as well.
They can be rare. This is what investors are looking for. 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 week! It is that fast. So, unless you are constantly and consistently monitoring the property market, you will likely miss them.
Can increase your tax burden. Depending on your investment structure, the nett positive income from your rental collections, will be added towards your annual income for tax assessment. Have a chat with your accountant to find if this applies to you.
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. We have however found some areas which had experienced over 20% growth just in 2020. Ironically, this was 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), 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 AI tools which are constantly monitoring the market to locate them quickly.
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