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August 21, 2023

Understanding Cash Flow Before Purchasing an Investment Property

Choosing to purchase an investment property doesn’t just happen on a whim; there’s lots of thought, planning and consideration that goes into the process. Even if an opportunity arises out of the blue, most investors first consider the impact on their cash flow and how they’ll fund the investment.

Keep reading as we help you understand cash flow before purchasing an investment property.

What is cash flow?

Cash flow isn’t just how much money you have lying around but refers to the movement of money in and out of your financial position. Take a business, for example: over a financial year, a business may be profitable, however, throughout the financial year, its cash inflows might be low or sporadic.

Your cash flow can be categorised as either positive cash flow or negative cash flow.

Positive cash flow

A positive cash flow indicates that your outgoings are less than your incomings.

Negative cash flow

By the same principle, a negative cash flow indicates that your incoming cash is insufficient to cover your outgoings.

How does an investment property affect cash flow?

Property investing affects your cash flow in a number of ways.

Firstly, to purchase the property, you may need to borrow funds. For this, your existing cash flow will be used to determine your serviceability of an investment loan as well as determine how much of a deposit you may be able to save. However, for the purposes of an investment, some people may be able to use an existing property as security for a second property.

Secondly, the prospective property’s rental income will also be taken into consideration for loan servicing and by you as the investor. Understandably, you’re going into property investment to make money, not lose it — however, investors look at their financial return in two main ways: their cash flow or income and their capital growth over time.

How to calculate cash flow on an investment property

To identify a property’s cash flow, investors may choose to use the cash flow equation:

Property income – property expenses = cash flow

To be able to fully understand your property’s potential cash flow outcome though, you need to know all the costs of holding the property. This isn’t just the investment loan costs, but will also include things like your council rates, maintenance costs, property management fees, insurance charges and body corporate fees (if they apply).

Understanding the property’s rental income is also important. Property investors may fall into the trap of running projected figures based on what they believe a property’s rental yield will be rather than what the property rents for. Also, you may not necessarily have tenants in the property for the full fifty-two weeks of the year, so it is important to understand how vacancy may impact your investment property’s cash flow.

Should I look for a positive cash flow property?

The cash flow strategy that you adopt will come down to your personal financial circumstances and investment objectives. This is where an accredited financial planner or accountant will be best placed to guide you through developing a lucrative strategy.

While most investors would understandably like a decent cash flow from their investments, sometimes, negatively geared properties may provide potential tax benefits to the investor while the property continues to grow in value over time.

The difference between positive cash flow properties and negatively geared property

A positive cash flow property is one where the total income exceeds the expenses it costs to own it, whereas a negative cash flow property doesn’t produce sufficient rental income to meet all the owner’s expenses. When you own a negative cash flow property, this strategy is known as ‘negative gearing’.

Are tax deductions available on all investment properties?

Regardless of the cash flow of a property, as an investment, tax deductions may be available to apply against the property’s income.

Find out more about your cash flow potential with an SDA investment property

Particularly in a rising interest rate environment, understanding the cash flow of a potential investment property is more important than ever. Specialist Disability Accommodation properties operate outside of the traditional rental market as they’re purpose-built properties to support NDIS participants with very high support needs. Through SDA funding, private investment in NDIS homes provides additional payments from the government, and the properties are often tenanted by multiple NDIS participants on individual tenancy agreements, making the cash flow potential different from a traditional investment property.

Generally, SDA properties are highly cash-flow-positive properties.

To find out about how the potentially high rental yields, greater rental demand and capital growth potential of an SDA property may support a strong rental return for you, start a conversation with the team at Apollo Investment.

Get in touch with our team for more information now.

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