Why cash flow positive property is a con!


Are you a sucker for a juicy, clickbait headline like me?

Maybe like the one I have just used…

A promise of endless cash flow would have to be the fakest headline in property investment advertising.

It is the bait that lures you in, in the hope that you are snapped up by the salesperson.

After all, who doesn’t want more cash flow in their lives?

But as I will explain shortly, positive cash flow is only an outcome and not a strategic way of investing.

It is a very superficial way of looking at investing and only takes into consideration one of a multitude of factors.

I would also argue, whilst important, for mine, cash flow should initially be a secondary consideration.

There is always an argument around capital growth vs cash flow in property circles, but in my opinion, it is really a non-argument.

Let me explain.

The Theory

The theory is simple to understand.

Invest in assets that once you’ve covered the loan payments and ongoing expenses using the rent you have received, you have money left over.

Do it often enough and you may even be able to replace your income….. supposedly.

Having a property producing additional funds each year is certainly an appealing prospect.

But you must ask yourself would an additional $5,000 or $10,000 each year really change your life?

You may even find that promised profit doesn’t eventuate, especially after removing tax and adding an interest rate rise or two.

You are left with a property that is neutral or slightly positive that it is likely not growing in value at all.

This scenario leads to one of the most common quotes we hear as Property Strategists…..

“It has not grown in value, but at least it is not costing me anything.”

The big problem is they have made cash flow a primary focus and comprised capital growth.

A similar outcome of neutral or positive cash flow could have been achieved with a higher growth asset, despite the lower rent initially.

You could achieve this outcome;

  • Putting down a larger deposit
  • Paying Interest Only initially
  • Adding value through a simple cosmetic upgrade or two
  • A combination of all of these. 

Residential Property

As an investor, you must understand that residential property in Australia is primarily a high-growth, lowish yielding asset.

In most cases, it is also considered to be a relatively low-risk investment.

With so many entry and exit costs, it is also much more beneficial as a long-term investment.

Many investors and salespeople attempt to change these principles to achieve the desired outcome.

They do this by promoting;

  • Buying Off the Plan with rental guarantees
  • Looking for Dual Income Properties
  • Secondary locations with no growth but good rental income
  • Adding a Granny Flat

These types of investments add further risk and change the investment profile for residential property altogether.

That is largely why 92% of investors never get past their first or second property.


Source link

Call Us Now