What is ‘positive cash flow’? Property investment terms explained
We hear it all the time, often in shining lights and emblazoned on advertising or being told that someone 'lives' off of the income, but what exactly is ‘positive cash flow’ for a property?
It’s actually quite simple. Having a property that returns you money overall, rather than causes you to pay out funds, is known as a ‘positive cash flow’ property.
This doesn’t necessarily have to be before-tax cash flow. Many negatively geared properties provide enough tax savings to make the overall result after tax cash flow positive. For this reason, it varies from person to person. Those in a higher tax bracket who can achieve an advanced level of saving in their tax return may see a property in the positive cash flow territory before someone on a lower income. Similarly, someone that has the funds to push the LVR lower will see cash flow higher for each individual.
The most simple equation to work out what may be likely for cash flow is to look at how much rent is incoming, and how much on the loan will be outgoing. If you have a significant amount left in the remainder, then you’re more likely to be positive.
Yield does have a place in positive cash flow calculations. Higher yielding properties are more likely to provide you a cash flow, as this represents the amount of rent you are achieving against the value of the property – which suggests that your loan, and therefore repayments, are lower.
However, when it comes to the actual cash flow after all costs are considered, which is the amount that truly affects you, everything from maintenance, to property management fees, to vacancies and emergency repairs will alter the amount that you are truly cash flow positive by.
If you wanted to work out the cash flow for the property you’re considering, you’d be required to calculate all of these things in advance and then see what is left over.
So, is there such a thing as a ‘cash flow positive property’?
Yes, for an individual you may be able to own a positive cash flow property. However, it doesn’t mean that any investor who purchases that house or unit will have the same experience. Cash flow is an individual situation and as much to do with chance, such as something breaking unexpectedly and affecting the overall equation, as it is to do with the amount of rent being achieved.
Cash flow situations also change over time. As rent increases or decreases in the area, and as you alter your own in line with the market value, your return on investment will change. Some negative cash flow properties do eventually become positive cash flow and vice versa. Properties that do not cost anything to hold, but also don't provide any return, are often called 'neutral'.
