Property Cash Flow Basics For Creating Passive Income
Buying real estate is similar to running a business – good performance is derived from your ability to generate cash flow.
For a property investor, this means eventually living off the passive income that your real estate generates. Therefore, it is especially important that you map out your ability to build a portfolio that will deliberately achieve this level of success from the get-go. Because let’s be honest, we’re not going to be able to rely on a pension in later years to give us the basic security we want or need.
The good news is, we don’t have to take huge risks to get a sensible return; after all, you can get home loans well below three per cent and easily find a six per cent return. What this means is your real estate ownership is completely covered by the tenant’s rent without you having to dip into your own pockets.
CASH FLOW BASICS
Let us start with some cash flow basics.
There are three parts to the cash flow riddle: your wage, the taxman, and your tenant. If your tenant can pay the rent and it covers your mortgage, you are doing well.
Your own cash flow is freed up, so you are not constantly forking out to hold your property. The longer you own real estate the more likely this is to occur.
Having a combination strategy that includes both cash flow and capital growth will provide you with serviceability and equity as a borrower, and will allow you to continue to move forward, so focusing only on yield is a flawed approach.
Equity and servicing allow you to buy more properties, borrow more money and keep building your wealth.
POSITIVE AND NEGATIVE
Often investors hear the terms ‘positively geared’ or ‘positive cash flow’ but are not sure exactly what they mean.
The easiest way to understand these terms is that positively geared properties occur when the rental return and tax breaks cover your loan repayments and outgoings, leaving your wage or income unaffected.
Positive cash flow properties are self-funding, and you do not need your tax deductions or your wage as the rent pays for everything.
Conversely, negatively geared properties occur when the rental return and tax deductions are less than your loan repayments and outgoings, placing you in an income loss position on the property.
There is, however, the underlying expectation that the accumulated losses will be more than offset by the capital growth on the property. In this circumstance, the rental return is not considered as important in the decision process, and you should also have a wage that you are happy to access to help cover the mortgage.
Many people today find the right negatively geared property and ownership may only cost $50 per week.
The key benefit associated with negative gearing is that the loss attributed with ownership of the property can be offset against other income earned, reducing your assessable tax income, thereby reducing your tax payable.
The result is that the cost of owning the property is being funded by your tenant (in the form of rent), the Tax Office (in the form of tax savings) and your surplus cash flow.
Ultimately, most investors will aim to be positively geared in the long run. As your rents increase and debt on your property drops, you can even begin to replace your wage with rental income.
FIND THE BEST RENTS
I recently had two clients buy a property on the same street. My first client paid about $600,000 and bought a high-pedigree piece of real estate and received $700 per week in rent, which is a pleasing return.
My other client decided to pay less and bought an inferior property with inferior inclusions for $550,000, believing they were getting better value given the $50,000 price difference but not realising the fixtures, fittings and design matters in real estate to renters.
My second client is now only getting $450 per week. The difference in rent is huge. Yes, they were comparable properties in terms of price range, but one was superior and true value for money, while the other fell into the cheap category and is now in a race to the bottom.
The superior rent allows that client to pay off debt faster and fast track their wealth creation.
ESTABLISH YOUR CASH FLOW PLAN TODAY
Moral of the story? Cash-flow is king when it comes to being a successful property investor. Learn how to build a strong and profitable property portfolio by mapping out a clear cash-flow pathway at our free property investing seminar.
Our expert coaches will explain all the components required to create a strategic and robust property plan so you can move forward fast.
By Sam Saggers
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Welcome to the BEST of ‘21 series on the podcast! This is week 3 of my four week holiday – and I can’t wait to bring to you my predictions for 2022 in the coming weeks. For now, here’s one of the most downloaded episodes of 2021.
Only 1% of people really succeed with real estate investing. So why do 99% of people fail – and what do you need to do to ensure you’re not one of them? If you own real estate already, today’s show just might burst your bubble. We explore property management and reveal what type of buyer you actually are. Nobody really wants to own anything, because when you own something you have to be accountable for it. So in this episode, we will talk about how to navigate the property owning journey. Because often the conversation in real estate is centered around buying and selling. But what about the big part in the middle? Welcome to Episode 78 of the Urban Property Investor!
Laura Chugg first started paying rent from the age of 16. Ever since then – out of necessity to begin with – she’s been magnificently obsessed with managing money smartly. From the early days of earning $5.88 per hour to now coaching and helping people invest in real estate, Laura has seen a wave of change and growth. With investment properties in her portfolio that have quadrupled in value (buy well never sell), and a raft of lessons learnt along the way, Laura shared with us some of her most powerful Property Investor Tales.
Welcome to the Best of 2021 – Urban Property Investor style! Today’s episode – the Secret Language of Real Estate – was the SECOND most listened to episode in 2021, and it’s a doozy!
There is a secret language to real estate that most investors do not know. Knowing that most real estate is not worth touching, how do you then listen to the “secret language” of properties that are desirable. This episode explains this secret language so that you buy desirable real estate that will not only provide quality housing to people, but help you crack the code of real estate. Enjoy!
Rose Pengilly had done a lot of real estate investing before getting professional coaching with Positive Real Estate. In her own words, Rose felt like “a bit of a mess” with “no real plan”. “I was just doing my own research and I didn’t have any professional coaching.”
Rose shares the challenges of a messy portfolio, and also the challenges of cleaning that portfolio up. After purchasing three pieces of real estate in Brisbane, Sydney and Melbourne, Rose shares the anxiety and lessons from her experiences.
This is an incredibly honest and real conversation from a successful property investor, and one that anyone – beginning, intermediate or advanced investor – will be able to relate to in one way shape or form.
Welcome to the BEST OF ‘21 series for the Urban Property Investor!
Episode 33 was THE MOST DOWNLOADED Episode of 2021 by far. You voted with your earbuds! So if you’re new here, this is the one that everyone wants … and if you’ve already listened – then I reckon you’ll pick up some more nuggets the second time around.
Here’s what I said at the time –
Do you want to beat the banks at their own game? In this episode, I want to show you how to master financing your property portfolio. Yes, finance is the key to capital, and the more you can borrow sensibly, the faster you get to crack the code of real estate wealth.
Carolyn Weston has always desperately wanted to invest in real estate. Growing up in a modest family, she didn’t believe that hard work would necessarily be enough to create wealth. In her marriage, she was constantly rebuked for wanting to invest. After separating, her low income, marital status, and two young children made it extremely difficult to get a loan. But that didn’t stop her.
Not only did Carolyn make some incredibly tough decisions in order to enter the investment market, she has stuck to the task for over 10 years to the point where she is now one of our coaches at Positive Real Estate. A single mum who couldn’t afford becoming a client of PRE to begin with, to now being one of our team and a mentor and coach to so many Australians who enjoy the riches of Carolyn’s experience.
This is the last show of 2021, and what a year it has been. We had lockdowns, vaccinations, hysteria, and massive changes in the real estate market. And now we are left in a pretty bizarre place as real estate investors as we go into 2022. So what can we expect from the upcoming year? That’s why we are dedicating the final episode of the year to 2022 predictions.
Melissa Cowan is 31 with two investment properties. After buying her first IP off the plan, she very quickly purchased her second. How did she do it? It’s a great story of risk management and understanding your threshold for stress. So many of my previous guests have said “I wish I started investing earlier” – well here is that investor – and what a great story it is.
Once you’ve listened to this episode, I’d love it if you hit the subscribe button so you get notified every time a new episode drops.
This is the Christmas edition of the Urban Property Investor. Is your portfolio set up to handle market kryptonite? On this episode, I discuss 13 ways to get more cashflow. From spatial transformation to hotelification, this episode will get your imagination buzzing over the Christmas period. This is one of the best lessons I can possibly teach you, so I am giving it to you as a Christmas gift, whilst I’m swimming with turtles on Lord Howe Island.
Dani & Craig Skinner have an incredible life and investing story to tell. Dani was born in Ghana and grew up in Zimbabwe, and met Tahree-born Craig in Newcastle before they courted in Sydney, got married, and moved to Brisbane.
Before I knew of Dani and Craig, they had already purchased four investment properties. But they weren’t happy with their portfolio, which was a mix of older real estate in low performing areas. But having the wrong type of real estate didn’t stop Dani and Craig from keeping their eyes on the prize. Having felt like the bank “owned” them, Dani and Craig transformed their portfolio into higher performing assets and now have a sensational range of assets that is helping achieve their family, financial and lifestyle goals.
You can’t help but be inspired by this power team. Enjoy!