When it comes to purchasing an investment property, it’s important to know if the property will have a positive or negative cash flow.
While some investors prefer positive cash flow properties, other prefer negative.
But which one suits you?
It all comes down to your own individual investment strategy and this will vary from person to person and will also depend on the property itself.
Let’s take a look at some of the strategies and reasonings are behind positive and negative cash flows.
Cash flow positive properties
Essentially, cash flow positive properties are the way to go for those looking for financial freedom.
They are great if you don’t want to spend a lot of time developing properties or for those looking to avoid the losses from negative cash flow properties.
Cash flow positive properties can be low risk if you do your research properly and find properties in good suburbs with the opportunity for growth.
Essentially if you are looking to make money even if the market is falling, and your property is losing value, then having a positive cash flow strategy may be for you.
Properties are typically cash flow positive when rents are high and interest rates are low.
They will generally occur if you buy a property with a minimal loan figure, or once you have owned the property long enough to have made significant payments towards the loan principal.
There are numerous things you need to consider when basing your investment strategy around cash flow positive properties.
This includes any taxes that need to be paid, whether the area is more volatile to price increases and decreases, if you want large capital gains, whether you want to supplement your current income and whether you want to build your portfolio quicker.
Cash flow negative properties
You may think the idea of the property paying itself off is great and wonder why other investors look towards negative cash flow strategies.
Essentially a negative cash flow property is when the income doesn’t cover the expenses and you need to kick in some funds from your own pocket.
Investors often purchase negative cash flow properties as the income isn’t as important to them – it’s capital growth they are after.
There are tax benefits to negative gearing, however these may be offset by the capital gains tax when it comes time to sell.
There are of course issues that come with negative cash flow properties that investors need to be aware of and need to have contingencies for:
- A lost job means that you can no longer prop up the costs of the property
- If the market is in, it may mean you can’t sell the property without incurring a financial loss
- An increase in maintenance or repair costs can suddenly put you into financial difficulties if you need to find the extra money to cover the costs
- You may have trouble growing your portfolio. The more money you put in from your own pocket means smaller loans for additional properties
From month to month, investors may find they are putting in extra money to cover expenses or that they have extra money to play with.
If you are planning to go exclusively with either a positive or negative cash flow strategy, you will need to have some solid strategies in place, especially if you were to lose your job or the rental market falls significantly.
It is always wise to speak to your accountant or financial advisor before deciding on a property strategy.
Ensuring you have the right strategy in place for your own circumstances and finances will mean you can reach your financial and property goals quicker.