Positively geared properties
A positive cashflow property is a property where your expenses: maintenance, interest rates, property management, etc, are covered by the rental income and tax offsets. In essence, you earn money by owning the property. What you are seeking when looking for a positive cashflow property are strong rental yields. Rental yield is the annual profit from your investment property generated over a 12 month period, as a percentage of the property value.
Calculating Cash Flow
The following calculation you can use to provide you a rental yield estimate when undergoing your property search: ANNUAL RENT / PROPERTY VALUE = RENTAL YIELD Keep in mind this does not include repairs and maintenance, property management and buying costs of securing the property. However, it will give you an indication of the potential yield for the property in years two and three.
At Search Party Property we see the value in targeting positive cashflow properties if you are looking to invest. Particularly for new investors in the market. However, what you want to be aware of, and this translates to all properties you consider purchasing, is the market you are buying. There is absolutely a big risk buying a high yield cash flow property in a regional area that has very limited if no future planned infrastructure, and is reliant on one source of resource, e.g. mining, to support the region's economy. Yes, you could be receiving the highest yield possible across the country, but you could also be completely boxed in when it comes to the selling the property if the region has changes to the working environment. Another good example of this is buying a property in a tourism town. When something like COVID hits, the earnings of the region completely fall through the floor. Your tenants can no longer afford to pay the rent because they are not working and/or they have moved elsewhere to find employment. During COVID what we have noticed is that high yield cash flow properties that have lower house values are the properties that are sustaining both tenants and rentals. The Government is taking care of the lower-socioeconomic group of people that are living in these properties, and therefore rentals are being secured. If you are keen to get in the property market, then going to a market that you can afford and receive a positive cash flow can be a good option. Along the way, if the buying is strategic, you can also see equity growth in years to come.
Finding the Balance
Getting the right balance between cash flow and the type of property you invest in will also be dependent on your current situation. In respect to your income, assets, tax bracket you fall and your future earnings potential. We would also preface this with your beliefs and experiences around property investing. Behaviours and attitudes play a big role. Some are only drawn to new properties, while others want to buy properties that are imperfect so they can add value through renovations, etc.
The Strategy of Cash Flow
Some experts in property investing don’t agree that targeting cash flow properties is a strategy. They describe it more as an outcome. We disagree. Irrespective of the label you put on it, the decision to go for positive cash flow versus negatively geared properties is very intentional and one that is derived from understanding your own personal situation and future projections and then making the decision that this is the way to go for you. In years 1 and 2 the cash flow may be hindered due to maintenance and repairs that are required - which can result in potentially raising the rental - however, the intention is for the property to return a positive cashflow so it can self sustain. This is very attractive for investors, as it allows for fluidness in their employment / personal situation, if this is something that they are seeking, as the property is looking after itself and not reliant on income to top it up. When approaching any strategy, whether it's a Cash Flow Strategy or not, it's crucial that you also think strategically about your financial structure, and investigate and review the data insights before creating your plan.