What is Cash Flow Positive Property?

Cash Flow Positive property is very high on any property investor's wish list. The reason is that the investor can buy the property and does not have to pump additional funds into the property every month after date of purchase (That excludes the cost of major maintenance). The return on investment is normally higher than cash flow negative properties.

So when is a property cash flow positive? A property is cash flow positive when you have rental income left every month after paying all your expenses. Monthly expenses will be items like the mortgage (must be 100% mortgage), levy and services charge and estate agent commission. Those are normally the common monthly expenses.

Rental Income R3000.00
Minus Estate Agent R342.00 (Normally 10% +VAT)
Minus Levy R500.00
Minus Mortgage R2000.00
Surplus every month R158.00
A surplus every month will classify this property as cash flow positive.

At the moment it is very difficult to find cash flow positive property. The reason is that property prices have increased over the last 8 years and rental income did not keep up or did not increase at the same pass. The resent interest rate escalations have not help either. The increase in rates caused repayments to increase every month and had a negative effect on cash flow.

Property prices have stabilised over the last 12 months, but rental income is still playing catch up. There are reports that rental income is increasing again. The hope is that we will have a dramatic interest rate reduction in the next 12 months. This will help to get many property cash flow positive again.

There are other ways to get your property cash flow positive. One of them is to manage your property without a rental agent. You will make large savings and your return on investment will increase. This might bring your property into cash flow positive status. Personally I don't believe in managing your own properties. The most important reason is that you need the time to do it and it will need active management. You will have tenants calling you at 7am or 9pm to tell you of a blocked drain. Or at the end of the month you will hear that someone was sick and now they are short on rent. And the list goes on. You get the point. I have better things to do.

Another way to make your property cash flow positive is to pay a deposit on your mortgage. This will bring down your outstanding balance and reduce your monthly bond payment. I will never do this. The reason is that if you pay a deposit of say R20 000.00 into your mortgage just to make your bond payment R200.00 less per month it will give you a bad return on investment. The R20 000.00 you could have used to help you buy your next property. That will give you a better return on your investment.

You can make your property cash flow positive by increasing the repayment period. You can change your repayment period from 20 years to 30 years or to an interest only mortgage. You will never repay your mortgage, but your cash flow will increase. I prefer interest only mortgages, but I will give my reasons in another post.

There are more ways to help you make your property cash flow positive, but I am going to stop there. I was only going to explain what a cash flow positive property is.

A cash flow negative property is a property where you have to pay the shortfall every month. We call it bleeding. Every month you have to find the shortfall somewhere else to fill the gap, or stop the bleeding. You are bleeding cash every month to subsidise the property. This is very dangerous, but unfortunately 90%+ of properties today are cash flow negative. When interest rate increase the bleeding increases and the strain on cash flow increases. This could lead to forced selling, to increase cash flow again.

On this blog we are looking for discount properties, but I will post cash flow positive properties from time to time. Watch this space. Register on this blog by entering your email address on the right under 'Get email updates' and don't miss out on great investment property for sale.