One of the key things we need to understand as property investors is how cash flow works for us, now and in the future.
While we all invest in property to create wealth, our short-term cash flow needs will differ wildly, and so the information or advice that works for each person may also differ.
Property investors need to understand cash flow in order to grow their wealth now and into the future in a way that will allow them to live off their passive, rental incomes.
Here we discuss the three different stages of cash flow that as a property investor you could be in.
The first is…
Negative Cash Flow
What does this look like as a property investor?
Negative cash flow means that after all your tax deductions, all of your incomes and outgoings, at the end of the day, your property is taking money out of your pocket. It’s draining your wealth and not increasing it. It’s not providing enough, or any, tax deductions and is costing you money.
A classic property of this type is an older build, or second-hand property that doesn’t depreciate in value and therefore doesn’t provide that depreciation tax deduction.
Rent wise, it’s making less than 3.5% gross rental yield, and is zapping your cash with things like repairs, maintenance and so on.
This is not the kind of property any of us should be investing in.
At the other end of the spectrum, we have the second cash flow stage which is …
Positive Cash Flow
This type of property is making around 6% gross rental yield, perhaps slightly less due to current interest rates, and as an investor you’re happy.
But, if you have bought this kind of property in a place that’s 50km from the CBD, or in a regional area that has hit its peak of growth, the rent rates won’t increase in the way you need them to in order to create wealth in your future.
If you have sacrificed location for yield, it will impact you later on in your investment journey. Location is a better indicator of future wealth than a property out in the sticks with no prospect of attracting wealthy renters.
This leads us to the third and final stage of cash flow which is smack bang in the middle…
Growth Cash Flow
To get a positive cash flow after tax, so that’s after all costs and deductions, you’re looking for a gross rental yield of between 4.5-5%.
A good kind of property for growth cash flow is brand new, because you will get a depreciation and the tax deduction that comes with that. And that doesn’t mean you’ve lost money. You’ve made money via your rental yield, but can still claim a land value depreciation tax break, which might take your overall income on that property from $2000 to $5000. A great result.
Don’t sweat the loss of land value. A great location will push unit prices up, as will the quality of a building, over time. Plus, the right location – so 1km from the beach or 10km from the CBD – will attract good tenants willing to pay high rents and able to handle regular rental increases.
That regular rent rate hike will ensure your cash flow grows into the future. The rents won’t stay static. They’ll increase as the area becomes more attractive to live in, as property prices go up and it’s more expensive to buy there, but great to rent in, and as areas are flooded with good income prospects and a high liveability score for residents.
Let’s Get Your Cash-flowing
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