Finding positive cash flow properties 101

Many first time investors do not wish to have property acting as a drain on their finances.

That is, they don’t want to be paying out of pocket every week to maintain the home. While neutrally geared or even slightly negative cash flow may also be acceptable, many want property to actually provide a return.

If you want to know what positive cash flow is, you can read our quick guide here.

whether or not you want a negative or positively geared property is down to your strategy. If you’re still deciding, you can read Mark Armstrong’s comparison of the two and how capital growth may vary. Terry Ryder also explains that it is possible to achieve good capital growth and positive cashflow in the same property, if you know where to buy.

It’s also worth bearing in mind this insight from Albertus Waldron that banks can actually be somewhat wary of positive property.

What a cash flow positive property looks like is unique to every investor and their financial situation. Due to negative gearing the tax bracket that you are in will affect your after-tax yearly financial situation. The amount you can afford as a deposit, the interest rate, you decisions around renovations and a number of other personal choices and situation aspects will determine your overall cash flow outcome. For this reason, there is no hard and fast rule, or specific investment property, that it makes sense for every person.

These personal differences are what makes up the final result, or your net cash flow. That is, the amount of money you make once all your own expenses and outgoings are taken into account. The gross cash flow or yield, which is what most people discuss as it is the universal figure, is the money you make without taking into account ongoing costs.

You must reflect on your personal circumstances to see how each of these elements will have an effect.

Similarly, there are things to look for when purchasing, and things to consider doing once you own the property, that can assist your cash flow. These are worth bearing in mind when in this "finding" stage, as you can consider whether they are viable early on.

BEFORE PURCHASING

Rental yield

The first stop for many is to check out the percentage figure called a rental yield – the amount of rent earned as a proportion of the property's price. The higher it is, the more it seems to get investors talking. Consider this an initial barometer, but don’t think low rental yields are enough to rule out areas with otherwise strong drivers.

We regularly discuss the problems with relying on headline figures that are not always specific to an area, and this is no exception.

Know how to calculate the rental yield yourself, and the factors that influence it, if you are intending to use the figure. Here’s a quick explanation of the rental yield.

Specific high yielding property types and locations may include:

• Mining towns
  
  
• Regional areas
  
  
• Student-dominated rental areas
  
  
• Furnished rentals
  
  
• Short stay apartments

Apartments

With lower price points to purchase, but not always as proportionately low rents, apartments can sometimes be worth consideration. When looking at individual markets across Australia, by and large apartments tend to yield more than houses.

If you have enough capital, buying blocks of units, rather than units individually, can often offer better returns. If you’re still not finding what you’re looking for, then some investors do turn to commercial property. You can read more about investing in commercial property (from retail and leisure to offices and industrial) in our designated commercial pages.

Speak to your broker and accountant

Understand the likely repayments you will need to make and how this can be affected by putting more money down as a deposit. Your broker should be able to assist you with this.

Your accountant will be able to explain to you how the property you are considering may work in terms of your income, and will lay out the claimable expenses. Bear these in mind when purchasing, including depreciation.

Here’s a list of what landlords can claim on tax.

Back of the envelope calculations

Undertake some preliminary calculations for the properties you consider prior to purchasing. This will help you compare the cash flow possibilities in a number of locations. There are a range of online calculators that can be used as a rough guide to get you started.

Get to know the rental market

Know the price point that will make your cash flow work, and make offers with this in mind.

You should also understand the concept of a vacancy rate. If the property is vacant for a long period of time then even if the rental yield is high you could face a lower overall cash flow position.

While in some cases a higher vacancy rate through certain periods can be offset by short-term high paying tenants (such as is the case for some holiday rentals), you must be prepared to plan for this in advance. You can see the vacancy rates for free on www.sqmresearch.com.au.

Remember, rental markets change over time. Rents may increase or decrease, with demand shifting. This will affect your cash flow situation. Even if tenants are willing to pay significant amounts of money now, demographics and demand do change. Be prepared, and aim to be forward thinking in what that rental yield will look like over the time you wish to hold it.

Undertake the necessary inspections

Your outgoings certainly affect your cash flow, so it’s worth knowing what these may be upfront. Be aware of strata costs, potential pest damage and any repair work or renovation required. Add these into your calculations.

AFTER PURCHASING

Much of the effort after purchasing will revolve around two things – reducing costs and increasing your income (rent).

Getting more rent for your property

Hiking the rent can quickly lift your cash flow, but it must be done within the bounds of your tenancy law and it must be justifiable – else you will find complaints from your tenant, or a vacant property.

Here are some ways you can boost the rent and, in turn, your cash flow.

Common strategies to consider include:

• Renovations (to either include more desirable features to command a higher rent, or to add an extra room)
  
  
• Adding a secondary dwelling or granny flat to rent separately
  
  
• Furnishing the property
  
  
• Renting by the room
  
  
• Small developments

Reducing costs and fees

Much of this will be in the planning and upfront considerations, ensuring no major repairs you haven’t calculated into the equation are required. Remember, scrimping on important repairs is usually a false economy – irritating your tenant and potentially leaving your asset limping for re-sale.

Go through your list of expenses each year and consider where these costs can be minimised. While some are non-negotiable, for instance strata fees, others are up for debate. Some even go so far as to self-manage to avoid the management fee. Just remember, you largely get what you pay for – particularly with property managers that come cheap. If self managing is a consideration, then it will likely affect the location in which you choose to buy.

MUST READ: 16 ways to maximise your cash flow and protect yourself financially