With mortgage rates the lowest they’ve been in decades, it’s never been more affordable to own a property. But finding positive cashflow properties – that is, homes that actually put money back in your pocket each month – is the real Holy Grail for property investors.
So just where can you find these property goldmines?
Nathan Birch, co founder of BInvested, says your first step may be a little hard to swallow, as it involves a serious reality check.
“It’s very important not to get lured into bait advertising here – there are a lot of property spruikers with glossy brochures, fancy suits and sales gimmicks that will try to tell you a property has a positive cash flow, without taking everything into consideration when calculating expenses,” he explains.
“It’s essential that you take into account all the expenses, including council rates, water rates, strata fees, property management fees, insurance and so on in your weekly cash flow.”
Crunching the numbers on a positive cashflow property
On an average $400,000 apartment renting for $450 per week, an investment may at first glance appear to be positively geared.
If you’re paying a mortgage interest rate of 4.5% on a loan of $320,000, your interest-only mortgage repayment would be just $277.
However, once you factor in the additional fees of owning the property, it paints a different picture, as it could add up as follows:
When you combine your mortgage payment of $277 and ownership fees of $165, the total is $442.
On a weekly rent of $450, you’ll still make a few dollars per week off of your investment – but you won’t exactly be living in the lap of luxury!
Finding positive cashflow and capital growth
Finding a property that delivers positive cashflow shouldn’t be the only priority on your list, Birch advises.
It’s also important to seek out real estate opportunities that will grow in value over the long term.
“I don’t always necessarily chase a positive cashflow from the outset, but it is important to have a neutral cashflow that will increase and become a positive cash flow with rental rate increases,” he says.
“Buying properties that are positive cashflow in capital cities can be difficult, so what I strongly recommend is that people build a foundation portfolio of 10 properties to get them started.
These 10 properties should be worth around $200,000 each, and should be located in suburbs of Sydney, Queensland and Melbourne, he adds.
“It is important to research the markets to understand what you are buying. Sometimes, I see people buy into deals like student accommodation and the like, but I wouldn’t recommend these riskier purchases,” Birch says.
“Instead, aim to buy your residential ‘bread and butter’ properties to build a strong portfolio. These will go up in value over time, then you can use that equity to reinvest.”