Property Rentals.

March 23

These days, as shares and managed funds ride the rocky road of volatility, it seems that investors are turning to property to provide an investment portfolio to not only keep pace with inflation, but also provide cash flows into retirement.

Australian property is the choice of many investors due to its tangibility and its performance over time.

Today there are spruikers, advisers, gurus and experts in abundance - all keen to impart sometimes dubious schemes to investors who are hoping to make some impact on their financial futures. For many years people have believed that a property investment is likely to entail a weekly cost. We often see advertisements offering property which will cost the investor, say, $50 or $60 a week. And it’s true that in many cases, in the early days of a property investment, unwary investors often find themselves with expenses which exceed income - and the resulting tax break provides only partial relief. The investor has to supplement the income received in order to meet expenses, until they have paid off some of the debt and increased the rents.

Investing in property does not have to mean losing money or even making a commitment each week (as is required with a negatively-geared property). Buying negatively-geared property places enormous importance on capital gain – you must achieve a large capital gain to make up for the losses over time. During periods of high inflation chances are that you will recover your losses - but what if inflation remains low, as it has for the past 10 years?

The answer is to be sure that the property you buy is “Positive Cash Flow”. To satisfy this criteria, the property has to return cash in your pocket, every week, from day one. This concept may be foreign to investors who are used to contributing money to their properties - but it is highly possible with property of every type, providing you do the research before you buy.

There are two ways that you can achieve positive cash flow from property. The first way is through positive gearing – this is where you find property whose rent returns are high in proportion to the purchase price and cover all the expenses on the property. The resulting gain (the cash left over after all expenses are met) is then taxed. Typically, property like this is found in regional areas based on one industry where renters are abundant. In addition, buyers with substantial cash deposits can also see a positive gearing situation, as their expenses are minimized due to a lower loan expense.

Positive cash flow property is another way to see a weekly cash flow, and this exists where you find property with a high amount of on-paper deductions. This type of property can be found anywhere and is ‘property based’ rather than ‘area based’. Often you can find positive cash flow property in the midst of negative cash flow, where the property in question has been renovated or otherwise has a lot of depreciable items. Positive cash flow property will have income which - when added to the tax breaks you get from claiming expenses and depreciation - outweigh the outgoings (loan interest, rates, body corporate fees, etc).

To put this into perspective, imagine this: If a property costs you $40 a week (after tax), then you are limited in the number of properties you can buy to the amount of your surplus income. But, if a property gives you $40 a week, then you are only limited by your existing equity (or cash available).

In addition, cash in your pocket equals more available funds to pay down any debt, while cash out of your pocket potentially slows up debt repayment. You are then more quickly in a position where you have increased your equity in a property and made room for further investing.

Finding positive cash flow properties is not easy, but not impossible either. New or near-new property of any type, where depreciation benefits are available in the early years, are the most likely to provide a positive cash flow for you. Older properties in areas where capital growth has been suppressed but the rental market is still active can fit – however, this type of property will usually result in a net gain and tax will be payable.

Either way, cash in your pocket equals increased investing potential and a greater chance at a financially independent retirement.

Through a national branch network, Serendipity Property Group has been assisting people for many years to put together strategies which help them to find, finance and acquire the right kind of property. We help people to buy property by offering guidance and support.

Positive cash flow property can provide the means to accrue a secure retirement income, but it is by no means a magic formula, nor is it necessarily easy. An abundance of good research and being prepared to take time and put in effort, can result in a sound and safe financial future.

Disclaimer: Samantha Payne and Kris Teakle are registered Real Estate Agents in Western Australia but not for Serendipity Property Group.