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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