Buying Cash Flow Positive Properties

A cash flow positive property is one that makes more money than it costs to own.

To buy a cash flow positive property, you only need to know how much money it will return and how much it will cost to own. You don't need to consider location. You just need to do the numbers.

The money it will return is the weekly rent multiplied by the number of weeks it is rented each year. In some cases, your place will be rented for all 52 weeks of the year. However, many places have different tenants in them from year to year. This usually means that a property will be vacant for a few weeks each year whilst it is between tenants. An easy figure to use is: rented for 50 weeks per year. This makes the maths easy because the annual return is the weekly rent divided by two with two zeros on the end e.g. $180 per week is $90-00 or $9000 per annum. If it costs you less than $9,000 a year to own this property, then it is cash flow positive.

You always look at the rent first. You can ring property managers in an area, and ask them what places are renting for. You can look at ads in the newspaper or on the net to see what rents are being asked.

The cost of owning a property is mainly determined by the interest rate the bank charges for your loan. Whilst this may not be true if interest rates are extremely low e.g. 1%, it is [was, at the time this was orginally written] valid for the current economic climate. At the moment, interest rates are 7%.

In addition to the cost of the loan, you will need to pay management fees, rates and insurance. You should also allow an amount for maintenance of the property. These other costs come to about 3% of the cost of the property. Actual figures vary. Property managers charge between 5 and 10 percent of your rent, rates can be about $1,000 per annum, and insurance is currently about $300 per annum. A standard figure for maintenance is 5% of the rent.

If the interest rate is 7%, and the additional costs come to about 3%, and if you put nothing down on buying the house, then you are up for 10% of your purchase price each year in order to own the house.

For this to be cash flow positive, your rent needs to be at least 10% of the purchase price. This means you can quickly determine the maximum price you can pay for a house by looking at the rent. For example, if rent is $180 per week, this is $9,000 per annum, so you cannot pay more than $90,000 for the property if it is to be cash flow positive.

Of course, if you are buying in an area where houses are typically $150,000, you will have a difficult job to buy one for $90,000. That doesn't mean that you won't find someone that needs to sell his house, and is willing to do so for $90,000. It also doesn't mean that you can't find an area where you can buy a house for $90,000.

Figures used in this post are of a historic nature and don't reflect prices at the time of posting.

Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.