Cash flow positive property
Are you looking to replace or supplement your income, now or in retirement?
A passive income stream is an alternative way to earn money rather than a traditional wage, salary, pension, or superannuation. The ability to generate passive income through regular rental payments is a major attraction to property investment. This extra cash flow can supplement retirement income, provide flexibility to a work schedule, or offset rental payments for those who choose to ‘rentvest’.
There are two ways to create surplus income in property: either through seeking areas with high rents that exceed all expenses or by having a property with lower expenses. Obviously, the level of borrowings will also impact the interest repayments and therefore the cash flow of the property.
What is a positive cash flow property?
Unlike a negative cash flow property, a positive cash flow property is an investment that earns more than it costs to own. For example, if your rental apartment brings in $36,000 a year in income with yearly expenses, maintenance costs, and principal and interest payments of $12,000, your positive cash flow would be $24,000 a year.
Positive cash flow on a property typically occurs when rents are high and interest rates are low, or after you’ve owned a property long enough that you’ve made a significant dent in your principal.
One strategy many investors use is to buy a positive cash flow property to help offset the losses from a negative cash flow property. However, bear in mind that you must pay taxes on any profits you make, although these can be minimized by the property’s eligible deductions and potentially any loss on the negative cash flow property.
When could positive cash flow be right for you?
When deciding if a positive cash flow property is right for you, it’s important to look at your investment objectives as well as the availability of properties in your desired areas.
Sometimes positive cash flow properties are hard to find and may be located in areas of high rental demand but with lower growth than negative cash flow properties – for example, housing developments near specialized industries such as mining.
As with any investment, there are pros and cons associated with a positive cash flow property. While earning a profit from day one is a key benefit, positive cash flow properties may not have the same growth potential as negative cash flow properties.
Pros of cash flow property
1. Positive cash flow properties can offer lower prices, stamp duty, and taxes.
2. Positive cash flow can be used to pay down your principal, for renovations, or for investment in other properties.
3. Positive cash flow from your property can supplement your income and help build up your portfolio faster.
Cons of cash flow property
1. You must pay taxes on any profit generated.
2. Could be more volatile due to being located in less economically stable areas.
3. Positive cash flow properties may be perceived as having lower capital gains potential.
TIP – Be sure to do your research and consult with a trusted financial advisor who can help you decide if choosing positive cash flow is the right strategy to help build your portfolio
Alternative passive income strategies
High rental yields cannot be looked at in isolation to provide passive income. An investor would also need to own quite a few properties to create any kind of substantial income stream once expenses were taken out. A sounder income stream from a property can be obtained by assembling a well-balanced portfolio throughout a working career that is consolidated or sold off to pay the debt down when entering retirement.
During a working career or in the ‘acquisition phase’, an individual has access and a certain capacity to borrow funds from a bank to leverage into investment properties. Seeking investments with both growth and yield components will assist the ability to grow a portfolio of property over this time.
When an investor heads into retirement or the ‘consolidation phase’ of their lifecycle they may start to reduce their portfolio or sell off some property, and use the equity from the sale proceeds to pay down the mortgage on the other properties still held. With the reduced debt and interest payments, the residual portfolio can become cash flow positive and supplement the income of the retiree or part-time worker. The inherent quality of property in this type of portfolio reduces the risk of traditional positive cash flow properties.
Avoiding potentially risky positive cash flow properties, and developing a balanced portfolio of capital growth and cash flow-orientated properties will mean that an investor may have more options at retirement. This can provide the passive income needed in this stage of the lifecycle and beyond.
This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.
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