In Australia, the property market is already showing signs of more growth with the interest rates starting to steady. For investors in property, make sure you know your cash flow before buying.
Why is my cash flow important?
Knowing your cash flow can be the difference between making a good and bad decision on an investment property purchase. Solid research and professional advice are essential before buying.
What if there is negative cash flow?
Investment properties often give rise to negative cash flow and this is where property-related expenses exceed rental income, less the offsetting effect of tax deductions. When property prices are expected to increase, investors can be happy to have negative cash flow if they can afford to top-up the shortfall from elsewhere. Rental increases over time should also mean this ‘top-up’ is no longer needed.
Some investors don’t know the cash flow of their property before they buy and only find out something is wrong when it is too late.
What happens if I get it wrong?
It is easy to be optimistic about an investment purchase. For instance, you overestimate rental income assuming full occupancy (52 weeks a year), or you might underestimate maintenance or insurance costs.
Sadly, it is a common mistake for investors to get the calculations wrong. They quickly run into problems and need to find extra cash each month to fund the shortfall or sell. Investors seldom get the optimal price when selling under pressure.
How do I get my cash flow right?
To understand the cash flow on a potential investment, ask your accountant or financial adviser to assist you with the numbers and provide them with all the costs of holding the property, including rates, body corporate fees, insurance and property management fees.
Your accountant or financial adviser can help you work out the interest and repayments and estimate any depreciation. The rules around depreciation are complex. Depreciation can reduce your tax bill and therefore increase your cash flow.
Before buying the property, inspect it and always check body corporate records to help you avoid unforeseen maintenance or planned structural repairs. Also always allow for interest rate rises when preparing your numbers, and make sure you know how long you can fund the property costs if it is vacant.
Don’t stretch yourself if the property has poor cash flow, rather find one with better cash flow. Be cautious too with companies selling properties that provide a cash flow report. The figures can often be overly optimistic or miscalculated, so get your accountant to work through them.
Speak to your BYRONS accountant or financial adviser if you need assistance with this important decision.
Disclaimer: The information above is intended as general information only and should not be taken as advice. No action should be taken prior to taking financial advice tailored to your personal circumstances.