When I first meet with a potential property investor I always ask them “What type of property would you buy if you were to buy a property today?” Most people suggest that they would buy a property around their local area, and more often than not, that they would but a negative cash flow property. First time property investors don’t usually have the knowledge to know too much about the fact that this property would be costing them on a weekly basis just to hold the property. Well, what if your investment property could actually generate a positive cash flow rather than a negative cash flow?
A property with Positive Cash Flow means the rental income from that property will cover all of the outgoing cash costs (interest, council rates, body corporate, agent’s management fees and so on) associated with that property.
A property with Negative Cash Flow means the rental income from that property does not cover all the outgoing cash costs associated with that particular property. That is, it makes a loss.
It is important to note though, that a Negative Cash Flow property for one person is not necessarily a Negative Cash Flow property for another. The same goes for Positive Cash Flow properties. Your own personal situation will determine what aspect the property has. Therefore it is extremely important to ensure that the property you wish to purchase best suits your personal situation.
So why not focus on properties that generate a Positive Cash Flow? The reason being is that generally, Positive Cash Flow properties have a low Capital Growth aspect. Again, your individual situation would determine if properties with a higher Capital Growth aspect would best match your requirements.
The advantages of Positive Cash Flow properties:
1. Increased Income
2. Can reduce risk
3. Balance a property portfolio
4. Easier to obtain finance for
The disadvantages of Positive Cash Flow properties:
1. Increased tax
2. Slower capital growth
3. More volatile
The advantages of Negative Cash Flow properties:
1. Tax deductions
2. Stronger capital growth
3. Stronger rental demand
4. More stable
The disadvantages of Negative Cash Flow properties:
1. Constant input of funds
2. Long term strategy
3. Higher financial risk
Before negatively gearing a property consider whether you can support the additional and ongoing out-of-pocket expenses. Be aware that if interest rates go up you can’t offset this by increasing your rent. It might not be a problem now when life is all smooth sailing, but what if your personal situation changes? You don’t want to have to sell your investment property before any capital growth kicks in.
If you either don’t have the time or if you’re just not able to investigate the criteria of a particular property to ensure that it best suits your situation, think about engaging the services of a property professional who can remove the guess work. As buyer’s advocates we work with you to assess your financial situation, and then help you to develop a property wealth plan that will go on to secure your financial future.
If you want to know more about positive cash flow properties then you need to read our eBook on the subject. It explains everything you need to know about the pros and cons of a positive cash flow property, and explains how it can be the gateway to your investment success. This kind of information is usually only known by investors with years of experience, but we wanted to make it accessible for you, so we’ve made it available as an exclusive offer!