Let’s talk about the basics today. How does property investing work when it comes to the $$$? Simple… costs go up over time, but the income goes up far greater than the costs. That’s how you make the money!
But… how and when does this happen?
In the beginning, when you purchase a property, it will usually be sitting in the negative. This means that the costs are outweighing the amount of income coming in each week. So, you might be out of pocket, say, $50-$100 per week to hold the property.
The good news is that doesn’t last long, and the amount of negative gearing will reduce the longer you hold the property until eventually, your rent will increase enough to cover your costs.
Break even or neutral point is this time when your costs are equal to your expenses. You’re not generating any passive income yet, but you’re not out of pocket week to week.
Positive cashflow properties are those ones that are beyond the neutral point and costs are less than the income they bring in. These properties are generating a passive income.
Cashflow vs Gearing
It’s important to distinguish between cashflow and gearing when talking about property. Cashflow is your position week-to-week, whereas gearing is your position after tax time. So, a property that is negative cashflow could still end up positively geared once your tax return (and especially your depreciation) is taken into account.
Smart property investors are able to select properties that are break even (or even positive cashflow) from day one. They do exist if you know where to look.
The exciting thing about them is that you can own an unlimited number of these properties because they pay for themselves. On the other hand, you can own a very limited number of negative cashflow properties, so while they can form part of your strategy, they would, ideally, be breaking even in the near forseeable future so that you can keep growing your portfolio.
In addition, it’s worth taking your tax return into consideration when selecting properties – an investment that might initially cost money week-to-week might be positively geared and put you in front again at tax time.
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.