| Cashflow Strategy 101
A cash flow positive investment property is one that generates more income than the related expenses. Although it doesn’t offer any tax advantages of negative gearing, owning an income-generating rental property has many benefits.
To calculate cash flow, subtract all expenses from the income. It’s important to consider all expenses, such as repairs and maintenance, renovation costs, pest control, utilities and services, advertising for new tenants, land tax, council rates, accountant’s fees, legal fees and insurance, strata and body corporate fees, and damages caused by problem tenants.
Net rental yield, expressed as a percentage, is a more accurate estimate of your return on investment. To calculate net yield, add up all costs, calculate annual rent, subtract total costs from total income, divide that figure by the value of the property, and multiply the resulting figure by 100.
Pros of a positive cash flow strategy include a regular income stream, increased capacity making you more attractive to lenders, balancing your portfolio with other rental properties, and potential appreciation in value. However, it’s important to note that positive cash flow is added to taxable income and there are no negative gearing tax deduction advantages. Positive cash flow properties are often in regional areas, which may not have consistent long-term capital growth.
To find positive cash flow properties, search for properties located in suburbs with high net rental yields, suburbs close to universities with high rental demand and yields, and research the suburb’s key fundamentals. Do a detailed cash flow and capital growth analysis on any property that interests you, determine the maximum price you’re willing to pay for a strong rental yield, and don’t pay over that amount. Reducing loan-to-value ratio or making improvements that allow charging higher rent can turn negatively geared properties into cash flow positive investments.
Finding the right cash flow positive investment property may take some time, but using a professional buyers agent can save you from making costly mistakes.
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