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, it is earning more income than it has in expenses. 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 pockets after all costs and after tax deductions and depreciation, etc. IE, before taking tax deductions and depreciations into considerations, it could be costing you more (usually because of mortgage to own it)
Positively Geared Property: A property that puts money into your pockets before tax deductions and depreciation. It is generating more than you are paying, even before considering tax deductions and depreciation.
When is a Property Cash-flow Positive
In property investment, an investment property is considered cash-flow positive when the income (typically rent) you receive from the property is more than what 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 he 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 buying plans. Lenders are less likely to penalise you The more positive cash-flow the property is, the less the property will restrict your future property buying plans. Lenders will also consider this rental as your regular income stream, and this will usually improve your serviceability (how much the bank or lender will lend you).
Considerations with Cash Flow Positive Properties
While cash flow properties are good, it comes with downsides as well.
They are rare. Let's be frank. All investors want cash flow positive properties. Thus, when a cash-flow positive property becomes available, they tend to be snapped up very quickly.
They are sold very quickly. Ans because they are rare, 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, can 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 lower equity growth, compared to negatively geared properties. You'll need to hold them for a longer time, if you intend to take advantage of growth and profit by selling. However, with our research and experience, we have found some areas which had experienced over 30-50% growth in between 2020 and 2022. Ironically, these COVID19 pandemic years were also the years when all other buyers are expecting prices to fall 40%. Is this a suggestion that we should be buying when there is fear? 🤔
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 week, have a chat with us. Our team is constantly analysing and monitoring the Australian property market, and we can spot positive cashflow properties quickly. Our data analytics and research have allowed us to find some areas which had experienced over 30-50% growth in 2020-22. 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, usually within 24 hours of them being made available.