A positive cashflow property can put more money in your pocket and help you achieve your investment goals sooner.
Firstly, lets define positive cashflow before we talk about the advantages. A positive cashflow property is an investment property where the annual rents exceed total expenses, after tax deduction and depreciation.
The biggest advantages of having a positive cashflow property in your portfolio, is that it pays for itself. It covers expenses and provides additional income for further investment. The second greatest thing about positive cashflow is that you can benefit from both income and capital gains, which makes this property strategy quite popular among successful investors.
But, not all positive cashflow properties are created equal. Here are 3 things to consider when searching for a positive cashflow property:
1. Location
Positive cashflow properties typically have higher yield but slower capital growth. They are found in regional or urban fringe locations which have a smaller population and offer cheaper rents to local residents. Positive cashflow properties at these locations tend to be cheaper to buy, so less capital investment is required. The location must be supported with population growth and other demographic growth drivers, so avoid mining towns or other 1-industry towns, because growth only lasts as long as there is work in the area.
2. Capital Growth Potential
Remember to look at the growth drivers for the location, as this will determine whether the property will have any capital growth. Research the local economy, employment rate, population growth, supply and demand ratio, vacancy rates, rental yields, infrastructure and local amenity. All of these growth factors are connected; i.e. a growing population will increase demand for housing and encourage growth in property values. Infrastructure and amenity will support a growing population and encourage more growth in the region. If new jobs are being created for locals, the population will remain stable and household incomes will increase, which in turn supports higher rents that increase in line with inflation.
3. Property Type
The property type can affect the overall profitability of your positive cashflow investment. Many high-risk properties offer high yields, but very little or no capital gains. Avoid high-risk property types such as serviced apartments or student accommodation. Don’t purchase a brand-new property, if the only thing that makes it positive cashflow is the depreciation schedule. Tax deductions are the main reason why the property is positive cashflow, but you don’t want to put all of your eggs in one basket. For positive cashflow to be sustainable, the property type must be a standard residential property, which is both in high demand by local residents and relatively unaffected by changes in the economy or tax laws.
When considering an investment property with positive cashflow, it is important to make sure it is suitable to your specific financial goals and objectives. Remember to do your due diligence and if you need advice, JR Prosperity Partners can help you decide if this is the best strategy for you. Contact us today on 1300 522 562 or email: team@jrprosperity.com.au .
