I’ve had a lot of people talking to me asking questions who are looking into property investment and I thought I’d put something out there in terms of some of the basic principals of property. When you go out and try property investing you’ll find a lot of people pushing their strategies and their views and it’s important to have an element of streetwise-sens and education so that you can make your own decision.
Positive Cash Flow:
Now the concept of positive cash flow is straightforward; it simply means that the property you invest in generates more income for you than you have to pay out, i.e. the rent of the property is more than any interest rates, any interest payments, maintenance bills, all property management fees that you’re paying out. So this is a good situation to be in because you’re actually going to be getting money on a daily basis or monthly basis rather than losing money, so why would anyone not do that? Well the counterview that people talk about is the link to the fact that with property there are 2 things you need to think about – the rental returns whether it’s positive or negative and also the capital growth.
Now the counter-view to it is many people will take the view that you can’t have both; if you get something with a high positive cash flow return it will be at the offset or the detriment of the capital growth yield and if you look at property most of the money, a large amount of money comes in the capital growth side. So that’s something you really need to bear in mind, now there are a lot of strategies out there around getting a combination or having a balanced view of something with a reasonably good yield but also good capital growth. And you also need to be careful with people only saying, “No you can’t,” because there are definitely situations out there if you do your research where you can get positive cash flow with some good capital growth as well, so that’s the counter-view you need to talk about, a lot of people would say, “Hey, you should only invest near the capital cities, that’s where you’re going to get your capital growth because of population increase, etc.” and a lot of the positive cash flow opportunities we’ll see are in regional towns and they’ll be a view of more risk in that.
So just bear those two things in mind, there’s definitely one common thing with positive cash flow is you’re going to need to do some research and find those opportunities, it’ll take more work so if you’re not prepared to do the work, then it’s unlikely you’re going to find the deal and you’ll end up going into things such as looking for motivated sellers, putting lots of offers out there, looking for unusual properties, really doing some research on tap-towns and finding those properties, so expect to do some more work if you’re going to get some positive cash flows but hey, it may do you some good in the long term. So those are the 2 counter-views, negative gearing, positive cash flow, make sure you understand them and think about your capital returns and rental returns and look at your own personal situations and see what’s going to work for you.
Amit Singh is a founder of Theinternationalfinance.com he share his immense knowledge of Finance in this blog.