The world of investment properties has a lot of terms and jargon with which people may not be familiar. You might have seen the phrase “cash flow positive properties” before. Usually, this term has a positive connotation with it because, in general, it’s an excellent thing! If you’re wondering what this term means, read on as we’ll go into what it means and how it can impact your decisions about investment properties.
Cash Flow Positive Properties: What Does This Term Mean?
In business, your cash flow is the amount of cash that you have left after receiving all your income and paying all your expenses. As a simple example, let’s say someone gave you a $100 bill for a widget that cost you $50 to make. Your cash flow would be positive, and it would be $50. Now, let’s suppose that instead of that $100, you received a $200 gold bar. Your assets would go up by $200, but your cash balance would remain the same – $0. Therefore, even though your income would be $150 ($200 value minus $50 in expenses), your cash flow would be -$50 because you had to spend $50 in cash and didn’t receive any money back.
Cash flow positive properties are similar, but a little more complicated. These properties have positive cash flow after you consider expenses, tax deductions, and depreciation. In other words, even after you pay everything (including accounting for depreciation), you’re still left with excess money!
Cash Flow Positive Properties as a Strategy
Many people suggest that buying cash flow favourable properties is the ultimate strategy because you’re always ahead in terms of real money. The reality is a little more nuanced.
Consider the following toy examples. Let’s say there’s a property that costs $1,000 a month in mortgage and earns you a rent of $250 per week. In the first year of your mortgage, most of the payment will go to interest, so you might only save $400 in equity each month. To keep this simple, let’s assume zero expenses or depreciation. $250 x 52 = $13,000 in income. You’ll have $12,000 in expenses ($1,000 x 12), so this is cash flow positive property at $1,000 in excess cash per year. You’ll also build $4,800 in equity, for a total of a $5,800 increase overall net worth.
Now, let’s assume there’s a property that costs $2,000 per month and earns you a rent of $400 per week. On that $2,000 mortgage, you might add $800 in equity each month. So, $400 x 52 = $20,800 and your annual expenses would be $24,000. In terms of cash, you’d lose $3,200 per year, but you’d also add $800 x 12 = $9,600 in equity. Your net worth would increase by $6,400 instead of $5,800, even though your cash balance would decrease.
Talk to the Experts
Your financial situation and your goals determine which property investment strategy is best. Talk with the experts at Buy Australian Property Investments to see if cash flow positive properties are right for you!