Westwood Conveyancing

Property Investors - do you want a positive or negative cash flow property ?

Should I choose a positive or negative cash flow property?

The debate between positive and negative cash flow property rages, yet there’s no definitive answer.

From a purely financial perspective, the majority of people would opt to have a property that pays its own way, doesn’t require them opening their own wallet each week and is growing in value at the same time.

However, not every investment property will fit into this desirable category.

Many high capital growth areas offer poor rental yields that are indicative of poor cash flow levels. Similarly, many high cash flow areas have poor growth. It is wise to seek a balance between the two.

Firstly, you will want to consider your level of disposable income.

If you have spare cash and can cover the difference between the holding cost and the rental income, then you may be able to buy negatively geared property.

If you do not, then it may be better to consider positively geared property.

The second factor you should consider is how long you’ll be earning a good income for. This is often determined by age and career security. If you are close to retirement or expecting to see a drop in income, then a negatively geared strategy may not suit.

In a situation like this, you’d be looking more for positive investment options.

However, those far from retirement may have enough income to cover the shortfall by supplementing funds from a wage or salary.

Do not allow a negatively geared property to drain you financially and push you to the wall. But be wary not to be overly tempted by a strong rental income that may not be backed by capital growth – particularly if your strategy is for overall gains.

Your portfolio

It’s all about how much it costs you to hold and your overall strategy. Many investors plan to have a negative cash flow property offset by a positive cash flow one.

Over time, it’s also likely that negatively geared properties will move closer to being positive as rent increases and the mortgage is paid down. This will shift those properties from being taxing to generating an income.

Remember, it’s less about being on either end of the polarity, and more about how it balances with your personal level of affordability and overall goals for your portfolio.

The first property is usually a launch pad into investing, which means that many use it for its strong capital growth over the medium term to then refinance into another investment.

The cash flow at the point is merely circumstantial and, provided it is not problematic, for some it will be the best approach to focus on growth assets.

Those who have not factored cash flow in may find unexpected expenses, such as interest rate changes, maintenance costs and repairs, quickly causing their cash flow to be thrown out – this can be particularly devastating if you’re already paying out more than is comfortable each week.

Investors should consider the impact of property vacancies and repairs regardless of their cash flow projections.

Remember, negatively geared properties can still be cash flow positive after tax.

While those on higher incomes often look to negative gearing benefits to offset their own tax, it's worth remembering that your overall cash position is important, and even properties that are negatively geared can have positive cash flow.

Source  :  http://www.propertyobserver.com.au/sponsored/first-time-investor-series/39638-should-i-choose-a-positive-or-negative-cash-flow-property.html

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