Investing in a cash flow positive property can help you build a passive income. Here we explain how, with the right research and careful planning, you can take advantage of these property investment opportunities.
Passionate about property investment as a vehicle to build wealth, Lloyd enjoys sharing his deep industry knowledge to help people become financially independent.
With twenty two years knowledge and expertise, DPN has identified key factors towards finding positively geared or cash flow positive investment properties. Most importantly, a property investment decision needs to be based on independent research and a sound methodology, rather than emotion or personal preference. There are a number of factors that come into play, each impacting the return on your investment. Lloyd Thomas, our Director will now explain the key points.
The ideal deposit
Any property can be cash positive if the deposit is large enough. But in many cases access to funds for a large deposit is not possible. The best scenario is to achieve a cash flow positive investment with either no deposit (by using equity in your home and borrowing 100 per cent), or by placing a minimal deposit of, say, 10 per cent. With a 10 per cent cash deposit you may need to pay lenders mortgage insurance, however this is tax deductible. By utilising equity or other strategies available to minimise your deposit you can make more profit using less of your money and more of the bank’s money.
Minimising property expenses
Property expenses are made up of the bank’s interest charges and the costs associated with the property such as agent/management fees and body corporate/strata fees, rates, insurance, maintenance and so on. In order to be cash flow positive, your interest charges and property expenses need to be less than the rent you are collecting.
A new property gives you the advantage of being able to claim depreciation expenses for the entire time it is rented. This will further reduce your property expenses as a tax off-set. Additionally, a brand new property has much lower maintenance requirements because it comes with a builder’s warranty and also typically achieves up to 20% higher rent, according to Cassie Nancarrow, Property Management Leader. A cash positive property solution is achievable with the right planning and a more innovative property solution.
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Ensure a higher rental yield
The predicted rental yield of a property should be considered when making a property investment decision. Yields vary significantly depending upon the property, the market and the suburb. Your objective should be to find a property with a rental yield above 5.5%. Conducting thorough research on the location and investing in new properties, which are purposely built to suit the requirements of the prospective local tenants, will ensure your investment generates a healthy and sustainable rental yield. Our research team have access to SQM Research's suburb level data on vacancy rates, as well as independent rental appraisals for DPN properties.
Location is everything
The key lies in choosing suburbs in or close to major cities where continued and increasing demand will secure the future of your return.
Locating an investment property within a growth area will minimise your investment risk, but the growth needs to be sustainable.
Typically, growth areas are based on supply and demand and most experts would agree with the bank that it’s high risk investing in lower population areas such as rural and holiday towns. The key lies in choosing suburbs in or close to major cities where continued and increasing demand will secure the future of your return. Independent research such as Residex, can provide a valuable indication of predicted growth.
Using tax to your advantage
There are three areas that will ultimately affect whether your investment property will be cash flow positive from a tax perspective:
Interest rates and property expenses
Depreciation - building, fixtures and fittings
Your taxable income – if you are not earning a taxable income, the property may not be cash positive.
For example, with current tax laws, any old or second hand property purchased for investment is not eligible for the same level of depreciation claims. By choosing to invest in a new property, you can take advantage of some real tax benefits that may significantly improve your cash flow position. Let’s say you select a new property valued at $500,000. In this instance, the depreciation tax benefits may allow you to claim an additional $9,000 per annum. Depending upon your tax bracket, this equates to a refund of approximately $3,500 to $4,700 per annum. In comparison with an older property, you’d need to get an extra $65 to $90 per week in rent to achieve the same return, and in most instances, you would be receiving less rent for an older property.
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Finding a cash flow positive property
In addition to applying the above selection criteria to selecting a cash flow positive property, it is a good idea to look for innovative property investment solutions, such as purpose built dual income properties that will generate two incomes instead of one.
These properties have a land component, which appreciates, and unlike units, villas and townhouses, there are no escalating strata or body corporate fees.
A dual income property has the added advantage of only one lot of rates to pay as the two residences are on the same title of land.
With various combinations available such as a three bedroom dwelling plus a two bedroom dwelling is possible to generate a higher rental yield compared to the yield available from one three bedroom home.
Purpose built to perform as an investment, wasted space has been eliminated and features incorporated to increase rental yield.
As a new property, depreciation can be claimed for the life of the loan as a further tax off-set for a cash positive result.
Where to from here?
Investing in a cash flow positive property can help you build a passive income. Before you make any investment decisions, make sure you are fully informed, and not influenced by emotion or personal preferences. Be sure to work with a reputable company that can assist you to build a sustainable investment portfolio, by considering your current situation and goals, calculating your borrowing capacity, and providing you with a clear strategy to achieve your desired outcome.
The information contained in this article is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.
Residex, now owned by CoreLogic is Australia’s largest and most comprehensive provider of property data, analytics and insights to governments, the banking and finance industry, insurers and realtors.