While positive cash flow properties can pay for themselves and put money in your pocket simultaneously, there are some notable cons that people often forget to consider.
For example, sometimes an investment property that is cashflow positive and yields profits in the short term may not be the best strategy for you if capital growth is your main focus.
So, to help you weigh up your options before going ahead here’s everything you need to know about positive cash flow properties, including their advantages and potential risks.
What Is a Positive Cash Flow Property?
Positive cash flow properties are investment properties that generate more income than what they cost to own.
Luke purchased his first investment property for $625,000. He paid a $125,000 deposit and took out a home loan for the balance of $500,000.
He manages to secure a tenant who pays $905 rental per week plus water and electricity.
His investment property weekly expenses include the following:
- Home loan repayments (interest plus principal at 4.2% per annum): $622 per week
- Property management fees (around 5% of the rental income): $46
- Repairs and maintenance: (around 6% of the rental income): $55
- Council rates: $25
- Insurance: $14
- Council rates: $25
So, his total weekly expenses amount to $787.
This means that Luke is earning $118 per week after he has paid his expenses – making his property a positive cash flow property.
Three Types of Positive Cashflow Properties
Finding an investment property that will generate a positive cashflow is not always easy to find.
The three main types of property that are used for a cash flow positive investment strategy are:
- Established properties in positive cashflow areas
- Dual occupancy properties
- Granny flats (mini homes)
1. Established Properties in Positive Cashflow Areas
You need to examine what the housing demands and rents are in an area.
This is done by evaluating the future prospects of an area, such as:
- vacancy rates,
- days on the market,
- supply and demand ratios,
- vendor discounting,
- rental yield,
- demographics, and
- population growth.
A particularly underrated place to invest is in regional areas, like Dubbo, Tamworth and Wollongong area, where there is rental demand ( example only). These can be good options because prices are generally lower than in capital cities such as Sydney or Melbourne.
2. Dual Occupancy Properties
Dual living houses and duplexes are dual income properties. These property types provide an excellent opportunity for a positive cash flow as you can generate a rental return from two separate tenants on one property.
These positive cash flow properties entail splitting a house into two. Each property has its own kitchen and bathroom and exists as an independent dwelling.
However, property investors should note that these properties are only allowed in particular council areas if the land exceeds a pre-determined size.
Examples of dual occupancy properties can be duplexes or dual key houses.
3. Granny Flats
This positive cash flow property strategy works by the same theory of creating a dual-income off one lot thanks to two separate tenants.
Pros of Positive Cash Flow Properties
Besides the obvious benefit of generating a profitable income, various pros are associated with a positive cash flow property.
1. Properties With a Positive Cashflow are Self-Sustaining
In this case, the property pays for itself, so you don’t need to dip into your income or savings to cover the expenses.
2. Positive Cashflow Property is Scalable
Property investors can use the profit from their cash flow positive properties to buy their next property sooner.
Positive cash flow properties increase your serviceability, making you a more attractive borrower. This means it will be easier for you to be approved for your next property investment.
The other option is to use the positive cash flow to pay off the loan quicker.
3. Reduced Risk of Low Cash Flows
Suppose you lost your job or are no longer fit to work. If that’s the case, you wouldn’t be at risk of having to sell your property.
In fact, your positive cash flow property can help you navigate unemployment by bringing in rental income.
If you had a negatively geared property in your property portfolio, you would have to cover the loss with your personal income. A loss of income resulting in a lower cash flow could force you to have to sell this investment property prematurely.
Cons of Positive Cash Flow Properties
As with all investment strategies, cash flow positive properties come with their own risks and pitfalls.
This is particularly true if it’s not managed correctly.
1. More Cash Flow Equals More Taxable Income
Obviously, if your property is generating income, you’ll have to add that income to your annual assessable income which will increase your tax liability.
However, by claiming tax deductions on your rental property expenses and depreciation, you can reduce your tax liability.
2. Your Investment Property Might Have Perceived Low Long Term Capital Gains
Unfortunately, if your properties are positioned in rural areas that are positive cash flow properties, there’s a potential that it may not generate much capital growth.
This is generally because the property market in regional areas tends to be more volatile. In other words, property prices fluctuate relatively frequently.
So, there’s not much economic stability compared to properties close to city centres.
3. Rising Interest Rates Could Cut Your Positive Cash Flow Short
If you have a variable interest rate home loan and interest rates rise, your rental income may no longer be sufficient to cover property management fees.
In light of a volatile interest rate, it may be worth fixing your interest rate for a while to avoid this.
If you’re considering investing in a positive cash flow property for future growth thanks to high rental yields, keep in mind that there are some high-risk factors in the mix.
Some people can achieve positive cash flow real estate independently, but many investors achieve prolonged success by engaging a mortgage broker to help them find the best home loan to maximise the likelihood of generating positive cash flow.
At The Mortgage Agency, we combine our expert knowledge to match your individual circumstances and financial goals. From loan costs to interest rates to mortgage repayments, we will help you with every step of the process.
Don’t hesitate to contact us to expand your property portfolio today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.