Investing in property is a popular strategy among everyday Australians seeking to build wealth and secure financial independence. One investment strategy that has garnered significant attention over the past 2-3 years is cash flow positive property investment.

To determine if a cash flow positive property is suited to your investment property strategy, it’s important to understand what such a property is, how it can be useful and when it is detrimental. This media piece will provide the answers you are seeking.

Below you’ll find our comprehensive analysis of this investment approach, its benefits, drawbacks, and considerations for potential investors. This article will delve into the intricacies of cash flow positive properties, supported by relevant Australian data and statistics, to guide everyday Australians in making informed decisions.

What is Cash Flow Positive Property Investment?

Cash flow positive property investment refers to an investment where the income generated from the property exceeds the expenses associated with owning and maintaining it. This means that after covering mortgage repayments, property management fees, maintenance costs, and other related expenses, the investor still earns a positive net income.

For instance, if an investor’s rental income from a property is $2,500 per month and their expenses total $2,000 per month, the property is cash flow positive, providing an additional $500 in monthly income.

The Pros of Cash Flow Positive Investment Properties

1. Immediate Income Generation

One of the most compelling advantages of cash flow positive properties is the immediate income generation. Investors start earning additional income from day one, which can be used to cover living expenses, reinvest in other assets, or pay down debts. This immediate return on investment provides financial flexibility and security.

According to CoreLogic, rental yields in regional areas like Hobart and Darwin are currently higher compared to capital cities, making them attractive for cash flow positive investments.

2. Financial Stability and Reduced Risk

Cash flow positive properties offer a cushion against market volatility and economic downturns. Since these properties generate surplus income, investors are less reliant on capital gains for their returns. This reduces the risk of financial strain during periods of market instability or when property values stagnate. For example, during the COVID-19 pandemic, many investors with cash flow positive properties were better positioned to weather the economic uncertainty due to their steady rental income.

3. Ability to Build a Property Portfolio

The additional income from cash flow positive properties can be used to acquire more investment properties, allowing investors to build a diversified and robust property portfolio. This can lead to exponential growth in wealth over time as multiple properties generate income and appreciate in value.

For example, an investor with a cash flow positive property in a high-yielding suburb of Brisbane may use the surplus income to purchase another property in Perth, thereby diversifying their portfolio.

4. Tax Benefits

Cash flow positive properties can offer tax advantages. While the income is taxable, investors can claim deductions for expenses such as interest on loans, depreciation, and maintenance costs. These deductions can offset taxable income, potentially reducing the overall tax liability. The Australian Taxation Office (ATO) provides guidelines on allowable deductions for property investors, which can be substantial in reducing taxable income.

5. Lower Dependence on Capital Growth

Investors in cash flow positive properties do not need to rely solely on property value appreciation to achieve their financial goals. This reduces the pressure to sell during market peaks and allows for a longer-term investment strategy focused on income generation. Properties in areas with stable rental demand, such as near universities or major employment hubs, often provide consistent rental income irrespective of market fluctuations.

The Cons of Cash Flow Positive Investment Properties

1. Lower Capital Growth Potential

Cash flow positive properties are often found in areas with lower capital growth potential. While these properties generate income, they may not appreciate in value as quickly as properties in high-demand urban areas. This trade-off can limit long-term wealth accumulation through capital gains.

A great working example can be found with regional properties, or those in outer suburbs, that might offer higher rental yields but may not experience the same level of capital growth as properties in Sydney’s Inner City.

2. Higher Risk of Vacancy

Properties that are cash flow positive due to high rental yields might also be located in areas with higher vacancy rates. This can pose a risk if tenants vacate and new tenants are hard to find, leading to periods of no rental income and increased financial pressure. The Australian Bureau of Statistics (ABS) reports that vacancy rates in regional areas can be higher compared to metropolitan areas, posing a risk for investors.

3. Management and Maintenance Challenges

Cash flow positive properties, particularly those in regional or lower socio-economic areas, may require more intensive management and maintenance. This can increase the time and effort required from the investor or property manager, potentially offsetting some of the financial benefits. For example, properties in regional Queensland might yield high rents but could also face higher maintenance costs due to wear and tear or distance from major service centres.

4. Limited Market Liquidity

Cash flow positive properties in less sought-after areas may be harder to sell quickly if needed. Limited market demand can lead to longer selling times and potentially lower sale prices, affecting the investor’s ability to liquidate assets when necessary.

As a working example, an investor looking to sell a high-yield property in a remote part of Western Australia might face challenges finding a buyer promptly compared to selling a property in a central Sydney location.

5. Potential for Lower Quality Tenants

Higher rental yields can sometimes be associated with lower-quality tenants or areas with higher tenant turnover. This can lead to increased management challenges, potential damage to the property, and higher costs related to finding and vetting new tenants.

As an example, in my experience, Investors in high-yielding properties in certain parts of Adelaide might experience higher tenant turnover rates, leading to increased administrative and maintenance costs.

Is Cash Flow Positive Property Investing Right For You?

Investing in cash flow positive properties offers a range of benefits, including immediate income generation, financial stability, and tax advantages. However, it also comes with potential drawbacks such as lower capital growth, higher vacancy risks, and management challenges.

For everyday Australians looking to purchase property as an investment, it is crucial to weigh these pros and cons carefully and consider their individual financial goals and risk tolerance. By understanding the nuances of cash flow positive property investment, investors can make informed decisions that align with their long-term wealth-building strategies.

Resources for Further Information

For those interested in further exploring cash flow positive property investment and maximizing their investment potential, the following resources offer valuable information and tools:

1. CoreLogic Australia: Provides comprehensive data and analytics on property markets across Australia, including rental yields and capital growth trends.

https://www.corelogic.com.au

2. Australian Taxation Office (ATO): Offers detailed guidelines on tax deductions for property investors and other tax-related information.

https://www.ato.gov.au/Individuals/Investments,-including-rental-property/Rental-properties/

3. Real Estate Institute of Australia (REIA): Provides industry insights, market reports, and resources for property investors.

https://reia.asn.au

4. Property Council of Australia: Offers research, policy updates, and resources related to the Australian property market.

https://www.propertycouncil.com.au

Investing in property is a significant decision that can impact your financial future. By arming yourself with knowledge, seeking professional advice, and carefully considering your investment options, you can make informed choices that enhance your financial security and success. If you’d like the Buyers Advocate team at Kitty & Miles to do the heavy lifting for you to ensure you purchase the right investment property for your future goals, please email support@kittyandmiles.com.au and we’ll be sure to assist you.