What is a Positive Cash Flow Property Investment?

Positive Geared Property seems to mean different things to different people, sometimes with very complex approaches (whole books!). At Plum Property we have developed two relatively simple definitions:

• “No Funds Required” – This is an investment where you never outlay any money, and for property investment this means that the income (rent) covers the repayments on a loan which is large enough to cover all the costs (including the full purchase price, mortgage transaction costs, inspections, conveyancing, stamp duty and agent fees). A loan like this could be as high as 110% of the value of the property, and that would be very hard to get. Also, there would need to be an extremely high rent return, and the old adage applies - where the investment returns are highest the risk is greatest. For example, a property which meets this definition of positive cash flow might produce a good rent return but have a low purchase price because it is a shack that is ready to fall down. Again it would be hard to persuade a bank to give you a large loan with security like that.
• “Positive Geared Property after the Initial Investment” - The second way to look at positive gearing is to use a more business-like definition. If you bought a business it would be cash flow positive if the monthly income was greater than the monthly expenses – after the initial purchase there is no ongoing drain on your funds. In the property world that means you make your initial investment, including a deposit, and from then on the rental return should cover the monthly outgoings. The rough rule of thumb for this approach is that the Yield (Weekly Rent x 52 / Loan Amount x 100) should be greater than the mortgage interest rate. For example:
  
  
  • If the rent is $400 per week, multiply by 52 = then Income is $20,8000 per year;
  • If the property price is $280,000 and you have a $30,000 deposit and sufficient funds to cover the other upfront transaction costs;
  • Then the simple Yield is $20,800 divided by $250,000 multiplied by 100 = 8.3%
  • If you can get a mortgage with an interest rate less than 8.3% then this property would be close to CF+, depending on the other monthly costs.