Create Positive Cash Flow
If you're researching investment property, you've probably heard the term ‘positive cash flow'.
Positive cash flow is one of the most popular strategies for property investors, along with negative gearing; although the two could not be more different.
A positive cash flow property makes you a weekly profit from the get go. This is because your total rental income is greater than the property’s holding costs, such as loan repayments, maintenance and council rates. So, once you put down a deposit on the property and have a tenant move in, you should immediately be making money.
Once the property goes up in value, you can use the gain in equity to place another deposit on a similar property and start making money on that one too. Over time, you can raise the rent periodically and, as the debt is paid down, your cash flow becomes more and more positive.
But, if the rent for some areas is higher than mortgage repayments, why doesn’t everyone who lives there just buy properties instead? The main hurdle for a lot of long term renters is saving the deposit for a property up front. Not to mention costs like stamp duty that they then have to worry about. Some might be single parents or carers, or simply do not feel they can take on the long term responsibility of a mortgage at that time.
Also, a suburb or neighbourhood may attract more renters than buyers for other reasons. For example, a mining town may have a lot of people on temporary work contracts looking to rent, but not planning on living there long term. That creates extra demand and pushes rental prices up. Same goes for an area near a University; students want to stay during term time, but not buy units.
Therefore, if you happen to own property in the area, you have probably paid the lower purchase price and can command top rent.
Most investors aim for a gross rental yield of six per cent or more when looking to make a profit.
To calculate the yield, first figure out the annual rental income. That’s the weekly rent times 52. Then divide that figure by the property's value and multiply by 100.
Let’s say a property costs $380,000 to buy and generates $450 a week in rent. The annual rental income is $23,400. Divide that by $380,000, multiply by 100 and your yield is 6.15 per cent. That should be cash flow positive.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au.
Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing.
His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.