Positive Cash Flow Strategy 101
Positive Cash Flow Strategy 101
Hey there! At JKL Real Estate, we believe in making property investment strategies as simple and family-friendly as possible. Let’s dive into the world of positive cash flow properties and how they can benefit you.
What is Positive Cash Flow?
Simply put, a positive cash flow property is one that generates more income than it costs to maintain. This means the rental income exceeds all the expenses related to the property. While you won't get the tax benefits of negative gearing, the steady income stream can be a significant advantage.
Calculating Cash Flow
Calculating cash flow is straightforward:
- Income: The rent you receive.
- Expenses: All costs associated with the property.
Positive cash flow happens when your expenses are less than your income.
Total Property Expenses
Make sure you account for all possible expenses, such as:
- Repairs and maintenance (plumbing, electrical work, etc.)
- Renovation costs
- Pest control
- Connecting utilities and services
- Advertising for new tenants
- Land tax and council rates
- Accountant’s fees, legal fees, and insurance
- Strata and body corporate fees
Understanding Net Rental Yield
Another way to assess cash flow is through Net Rental Yield, which is a percentage that gives you a clearer picture of your return on investment. Here’s how to calculate it:
- Add up all your costs.
- Calculate the annual rent.
- Subtract the total costs from the total income.
- Divide that figure by the value of your property.
- Multiply the resulting figure by 100 to get a percentage.
For more details, check out our separate article on "Rental Yields".
Reducing Your Loan-to-Value Ratio (LVR)
By lowering your LVR, you can ensure an immediate positive cash flow. Even if a property is negatively geared for tax purposes (after deducting depreciation), it can still provide positive cash flow. For more on this, see our article on depreciation.
Pros of a Positive Cash Flow Strategy
- Steady Income Stream: Perfect for first-time property investors.
- Improved Borrowing Capacity: A positive cash flow makes you more attractive to lenders.
- Portfolio Balance: If you have other properties that aren’t cash flow positive, a positive cash flow property can balance your portfolio.
- Potential for Faster Appreciation: These properties can appreciate in value more quickly as they are more attractive to investors.
Cons of a Positive Cash Flow Strategy
- Taxable Income: Positive cash flow is added to your taxable income.
- No Negative Gearing Benefits: You miss out on negative gearing tax deductions.
- Regional Risks: Often, positive cash flow properties are in regional areas, which might not offer consistent long-term capital growth.
Turning a Negative into a Positive
You can transform a negatively geared property into a positive cash flow investment by reducing your LVR or making improvements that allow you to charge higher rent.
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