9 Things That Affect Cash Flow When Investing In Property
Want to maximise the cashflow for your property portfolio? That’s not a bad idea, considering if you are in the positive, you can keep on growing your portfolio pretty indefinitely… whereas if your cashflow is sitting in negative, you’re only going to be able to own a few properties before you hit your limit.
Many investors are aware that rent is going to affect cashflow… but there are actually eight other factors that can make your properties bring in more or less money. Some factors you want to go up… and other factors you want to go down. It all depends on whether money is coming in or going out.
The best way you can maximise your rental income is to ensure your property has a good yield and minimal vacancy periods.
Yield is a percentage of the property’s value which we get back every year in rent. If you were to only look at yield, you might be tempted to invest in commercial property. A lot of people go and buy commercial properties looking for high yield, and it might be great for the initial three-year lease period, but then they could be looking at a long vacancy period while they wait for a new tenant. Vacancy will really eat into the amount of rent you are able to receive.
If you want to avoid extended vacancies, look for houses in capital cities. They’re always in demand. If you’re being realistic about the rent amount, you will always have a tenant. When one tenant moves out, another will move in pretty quickly if your price is right.
Although rent is very important, it’s only one part of the picture. You can’t buy a property with a great rental yield and expect it to have great cashflow based on that alone. The other eight factors are an essential part to ensuring you end up in front.
Tax Return (More!)
Another form of income is your tax return at the end of the year. Many investors forget about this element and miss out. The best way to maximise your tax return is through depreciation, and we’ll talk more about that in a bit.
Loan Repayments (Less!)
In order to maximise our week-to-week cashflow, we want to minimise our loan repayments. One way to do this is by choosing an interest-only loan. Because it is an investment property, we don’t need to pay it off, we only need to be able to service the debt with our rental income.
Body Corporate Fees (Less!)
We want to pay less body corporate fees, or ideally, avoid them entirely, as they can really ruin your cashflow. As a general rule, avoid townhouses and units to avoid body corporate. Houses are much better for growing your portfolio anyway, because capital growth is made on the land component.
Rental Management Fees (Less… sort of)
Yes, rental management fees do affect your cashflow, but it’s important to take a balanced approach here. Don’t compromise, because you do get what you pay for – don’t be cheap, but make sure you are getting the right value for your money.
Make sure your rental manager is the best and that you pay them appropriately because they need to work hard for you and keep your property in good order. If you try to screw your rental manager down in price, don’t be surprised if you experience issues with your tenants and vacancies.
Council Rates (Less!)
Council rates can eat into your profits each week, so you do want to reduce them if possible. The best way to do this is by avoiding the high end of the market, where rates are considerably higher.
Insurances (Less… sort of)
Of course, insurances influence cashflow, but you should be cautious about cutting corners here. First thing’s first: make sure you’re getting covered for everything you need, because if you ever need it, you really need it. Once you’re sure on that, you can shop around to ensure you are getting a competitive price. And this is something that you can review regularly.
Maintenance can be the silent killer of your cashflow. One of the top mistakes I hear from clients who have gone and bought property before doing my coaching or education is that they’ve bought older properties that are costing them up to $10,000 a year in maintenance. It’s the repainting, replacing, termite eradication, and so much more that can really eat into your cashflow. If you buy new, you won’t have to deal with major maintenance costs for a long time (and by then, cashflow should be ticking along nicely!).
And finally, depreciation. Even though depreciation is technically a decrease in value, because it is a non-cash deduction, it means that we get a bigger tax return without any cash leaving our bank account from week to week. So, how do we maximise that? We buy brand new properties, because they are going to see the best depreciation in those first few years.
So, if you want your property to be positive cashflow, you need to take all of these factors into account. Make the rent (high yield, low vacancy) and the tax return (and therefore depreciation) as large as possible, and the expenses to be as small as possible.
Daimien Patterson is the CEO of Integrity Investment Properties, a property investment company based in Australia. He regularly produces books, blogs, and videos on the topic of property investing. Head to [integrityinvestmentproperties.com.au] for your free copy of Daimien’s book, Safe as Houses.