Cash flow property: what it is and how it works

I

What cash flow property means

Positive Real Estate's guide describes a positive cash flow property as one that can cover its own expenses without the owner chipping in more, and adds that this only applies after tax. The guide draws a line between a positively geared property, which puts extra income in the owner's hand each week from rent before tax, and a positive cash flow property, which may run at a loss on paper yet leave more money in hand once a tax return is lodged.

The second guide puts it more plainly: property of this kind pays its owner every week just by being owned. The same guide notes that an owner could well make a capital gain if the property gains value while they hold it.

II

How the figures work

Rental yield, as the second guide defines it, is the cash an investment property earns in a year shown as a percentage of what the property is worth. The guide gives two versions: a gross figure, worked out from weekly rent and purchase cost, and a net figure, which brings the property's costs into the sum. A property can carry a high gross yield and still leave little once heavy costs are counted.

Positive Real Estate's guide includes On Property's explanation that new or newly renovated properties, which offer larger depreciation claims, are the most likely to reach positive cash flow, since a paper loss can increase the tax refund. The guide adds that older and cheaper properties can still give a strong rental return, making them more likely to be positively geared.

The second guide urges checking where the positive cash flow is derived. It suggests looking at whether the positive cash flow comes before tax, after cash costs, or only once non-cash deductions such as depreciation are counted, and it warns about rental guarantees that hold a property in positive cash flow for as long as the guarantee runs. The same guide notes that when interest rates climb quickly, a positive cash flow property can turn negatively geared or neutrally geared.

III

Where positive cash flow properties tend to be found

The second guide says positive cashflow properties can be hard to find, and that the conventional ones tend to share one or two traits: they sit far from capital cities (in regional or rural areas), offer a higher rental yield, a lower purchase cost and lower capital growth. The guide puts holiday units and property in mining towns among the types it calls high risk.

The same guide notes that the market has moved in ways that suit people who know where to look, and that positive cash flow properties are now appearing in key population centres and capital cities where demand outruns supply. Positive Real Estate's guide likewise mentions major population areas, and says finding positive cash flow properties in major population areas can come down to spotting locations poised for growth.

IV

Ways a property can carry more than one income

Positive Real Estate's guide sets out several property types that bring in more than one stream of rent. A duplex is described as two adjoining properties, often sitting under the same title. A granny flat, as the guide describes it, is a secondary dwelling that is self-contained and typically about the size of a studio flat, built behind an existing home. Shop-top housing puts a home on the same lot as a retail space, and room-by-room rentals divide one larger property into smaller self-contained quarters, a format the guide says is popular for renting to university students.

The second guide lists methods it links to finding this kind of property: searching suburbs with high yields, buying at about 20 to 40 per cent below the median for the suburb, choosing a property with an extra income such as a granny flat, buying in regional areas and giving priority to student accommodation, renovating to raise the rent, and managing interest rates. The same guide says a rental return of around 5 per cent or more is a positive signal, and a vacancy rate of 3 per cent or less is a good sign of steady rental demand.