Why high cash flow can be a false idol


First published 26/04/2012

With the staggering number of investors in pursuit of properties with great cash flow it seems almost unthinkable – high cash flow can sometimes hurt you. Here’s four issues many investors never even consider.

Properties with high cash flow are what many investors are after – and it makes sense. The better your cash flow, the easier it is to make loan repayments and persuade the banks to extend you further mortgages.

While there’s no disputing the many advantages that cash flow grants investors, blindly pursuing only cash flow has drawbacks. In fact, there are a number of acute disadvantages to having high cash flow. 

  1. Because you are generating an income from the positive cash flow, you pay tax along the way. You get taxed on this extra income and money in the tax man’s pocket is going to make it hard for you to create serious wealth.


  1. Because these properties are usually in regional or outer areas, they can be quite sensitive to economic cycles. Therefore, compared to properties located closer to the centre of major cities, these properties will generate lower capital growth over the longer term.


  1. There are also potential higher costs associated with maintenance and more tenancy problems due to socio-economic factors.


  1. From a finance perspective, it can sometimes be harder to get higher LVR loans for some regional properties due to postcode restrictions imposed by lenders, mostly due to their smaller populations. The result is lower leverage which will reduce your return. 

Property investors who are into cash flow properties may have one or many of the following reasons:

  • They want to use the cash flow generated from these properties to balance the lack of cash flow from growth type properties;
  • They feel more comfortable with the property prices of cash flow properties, many believe most growth type properties are over valued.
  • They don’t trust capital gain tomorrow, it may not be there in the future, at least you can count on the cash flow today.
  • They are unwilling or unable to use finance resources to cover negative cash flow for a few years until their investment property turns cash flow positive;
  • They want to enjoy the journey of property investing by seeing money coming in every month instead of waiting for a big payout one day.
  • They believe income is the final determinant of capital gain. Without rental yield, there is no substance to the property value, so investing for yield is safer than growth.
  • Some speculate that high enough yield can generate good demand for cash flow properties, hence higher property values.

Whether these reasons are correct or not is not important, what matters is whether you think its right for you. There is no one best way to invest.

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  • Bill Haltis says on 26/04/2012 01:01:29 PM

    I wonder how long you can hold a negatively geared investment especially in the current economic cycle? With the right structure in place you can deal with tax issues and the good news is that you do not have to buy in regional areas to achieve positive cash flow.

  • Kathryn Lambkin says on 26/04/2012 03:39:15 PM

    You do not have to buy in regional area to achieve positive cash flow.
    I've bought a house opposite the train station. It's about $150K cheaper than those 500m down the road, but it still rents for the same amount!
    Converting your houses to two half-houses or adding a granny flat are great strategies.
    I'm finding there is a big demand for 6-month, fully furnished accommodation including utilities is very popular. Sometimes people just need to move to an area to work for a short period, and are happy to pay a high weekly amount to avoid the high cost of furniture removals, furnishing an entire house themselves and paying connection costs for electricity and internet. Obviously managing this type of property myself helps, so I'm not paying a week's rent in agency fees each time I change tenants. I haven't had a single day's vacancy between tenancies.

  • Pascoe says on 26/04/2012 06:29:37 PM

    Yes and it will always be 150k cheaper (and more) than those 500m down the road.

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