Cash Is King: What you need to know about investing in cash flow properties

By
4/8/2016
The most obvious benefit of a cash flow strategy is that the extra funds flow into your bank account and not out of it. Developing a passive income stream from property, perhaps to fund your retirement or focus on building a portfolio full-time, is another of the most coveted investor goals. More than that, it makes property investment possible for those without much disposable income.

While the majority of properties in Australia have the capacity to generate rental income, the typical rental income is in the range of 3–10% of the property’s value per annum.

It is unrealistic to expect any property to have both high yield and high growth over the long term as cash flow properties will typically only grow on average at a rate of 3–5% annually. However, on the flip side, rental rates will typically grow at an average of 7–10% per annum.

How does it work?
At a very basic level, to have a positive cash flow from any investment property the rent needs to be high enough to cover your mortgage repayments and property expenses.

Assuming you don’t have any other tax benefits, this means that if you borrow 80% of the property’s value at 8% interest, and your annual property expenses (such as repairs, council rates, etc) are 1% of the property’s value, then you need to have at least 7.4% (80% x 8% + 1%) rental yield to hold a positive cash flow property.

One of the main advantages of cash flow properties is the positive or neutral cash flow they generate. You can’t lose having money in your pocket. Furthermore, these properties are typically in areas that tend to have lower entry prices, as well as lower stamp duty and land taxes in some cases.

As a first-time investor, this means you would typically need less of a deposit, or income, to get started with than you would require if you were buying a capital growth property.

How do I find properties with good cash flow?
-Identify suburbs that have at least 5% rental yield and 5% forecast annual capital growth for the next five years.

-Discount all suburbs in which the proportion of rental properties is less than 10%.

-Take note of the sales history. All areas with a low volume of sales should be struck off your list.

-Be wary of towns and local economies that rely on one industry for employment.


CASH FLOW STRATEGY

Who it suits
• Retirees looking to fund lifestyle
• Novice investors on moderate income
• Investors with large asset base seeking passive income stream

Benefits
• Allows those who can’t afford negative gearing to invest in property
• Provides income to fund/balance highgrowth properties

Risks
• Income may not keep pace with costs in a high-inflation environment
• Realistic maintenance costs may not be calculated in cash flow
• Income subject to annual tax
• Low capital growth may inhibit equity growth

What to look for
• Areas with high rental demand and low vacancy rates
• Markets in consolidation phase of cycle
• New properties with strong depreciation opportunities
• Growing towns with strong employment

Also See:
Low-Income Earners Can Invest In Property
Strategy: No Time Like Now
Building a Nest Egg Through Capital Growth
 

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