Many people will ask whether or not investing in positive cash flow property is risky. This question is mainly asked because investing in positive cash flow property is a lot less common than investing in negative cash flow property.
Positive Cash Flow property is an investment property where your income (from rent and other sources) is greater than your total expenses (mortgage, maintenance, insurance etc). This means that at the end of each year a positive cash flow property will put money in your pocket. A property that is negatively geared on the other hand takes money out of your pocket every year.
The Benefits Of Positive Cash Flow Property
You Make Money Right Away - This is the major benefit of positive cash flow property. You make money right away, right from the word go.With negative gearing you have to hope for the price of your property to go up in value to make money, with positive cash flow you don’t need the price of your home to go up in order to make money.
If you are earning more in rental income than you are paying in expenses then you don’t have to rely on a market increase in order to make money. To me, that sounds fairly risk adverse.
Your Income Is Likely To Go Up - In the past rents have gone up dramatically. Yes they have their up and down periods, but over time they have trended upwards. Buying a positive cash flow property gives you a good chance of increase your cash flow. Because as rental income goes up your major expense, your mortgage stays the same. Meaning you have more disposable cash with each rental increase.
Note: This is not the case for all areas and it does depend on the property and area in question.
You Still Get Capital Gains - Many people fight against positive cash flow property by saying that you don’t get capital gains and that is where the real money is made. This is because many positive cash flow properties are found in regional areas where prices may fluctuate a lot more. Again it depends on the property in question and the area, but you are certainly still able to receive healthy capital gains on your property as well as a positive cash flow.
Less Strain On The Budget - Where negatively geared property drains your cash, positive cash flow property gives you more cash. This could allow you to afford more properties as the loan repayments are covered by the rental income.
The Risks Of Positive Cash Flow Property
Could Become Negatively Geared - If you have a vacancy in the property and can’t get it rented for any reason then your positive cash flow could turn into a negative cash flow very quickly. This issue can usually be fixed by lowering the rent, completing renovations or using better marketing tactics to get tenants.
Less Capital Gains - Many people state that because a property is positively cash flowed then it must achieve less capital gains than properties that are negatively cash flowed. I do not believe this to be the case. I have seen people invest in properties that are heavily negatively geared and their property hasn’t gone up, I have also seen people invest in positive cash flow properties who achieved substantial capital growth. It all depends on the property, the area it is in, the market and your skills as an investor.
As with all real estate there are risks with investing, but just because a property has a positive cash flow does not make it riskier than a property that is negatively geared. In fact in many cases it can actually reduce the risk of losing money substantially.