You hear a lot about the tax benefits of negative gearing when it comes to property investment, but how about the alternative: positive cash flow?
If you’re planning to purchase a property as an investment, you first need to be clear about your investment strategy. Here we take a look at what’s involved with a positive cash flow investment so you can see whether it’s suitable for you.
What exactly is a positive cash flow property investment?
When an investment is negatively geared, the costs associated with it exceed its earnings. On the other hand, when we talk about an investment with positive cash flow, this simply means the income is greater than the cost of owning it.
Say, for example, you own a rental apartment which brings in $33,000 a year. Your expenses for things like loan interest, maintenance, and property fees total $15,000 a year. This means your investment has a positive cash flow of $18,000 a year.
High rents and low interest rates are the conditions usually needed for a property to achieve positive cash flow. The longer you own a property, the lower your loan interest will become and the more likely it is to become positively geared.
Some investors hold a positive cash flow property and use the profits to help offset the losses from any negatively geared properties. However, it also offsets the tax benefits from negative gearing since income tax will apply to any net profit.
Make sure you maximise eligible deductions to minimise the amount of tax due on a positive cash flow property.
Your investment strategy
So is a positive cash flow property suitable for you? You need to consider your investment objectives and choose a property which fits with your strategy.
Positive cash flow means you have more cash free for renovations or buying additional properties, but the long-term capital gains are likely to be smaller than with negative cash flow properties.
Also keep in mind that positive cash flow properties are hard to find in certain areas. They typically exist in locations where there is high rental demand but less potential for long-term growth. This could be a housing development near a mine or another specialised industry, for instance.
Here is a summary of the pros and cons of positive cash flow property investments:
- Often come at lower prices, meaning lower stamp duty and taxes
- Income can be used to pay off your loan, renovate, or make new investments
- You may be able to grow your property portfolio faster thanks to the extra income
- Any profit is subject to tax
- Typically found in areas which lack economic stability, so may carry higher risk
- Often less potential for capital gains
Once you crunch the numbers, you may well find the choice is between short-term profit and long-term growth in value. A financial adviser can help you decide whether a positive cash flow property would be a good investment for your portfolio.
- A positive cash flow property means you make more from income than you pay in expenses.
- This type of investment is generally good for short-term profit but may lack long-term capital growth potential.
- You must pay tax on any profit but you can minimise this with certain tax deductions.
- Make sure any investment property purchase is in-line with your investment goals.