A cash flow positive property provides good rental yields that can be a great asset to balance your portfolio. This avoids the financial brick-wall that you may encounter and give you access to greater borrowing power in the future by putting money back into your pocket.
Rental yield strategy helps with serviceability
This strategy will help in your serviceability and it is a balancing act to ensure that investors can continue to move forward in building their real estate portfolio.
Cash flow positive properties may include properties that attract less competition from purchases such as rural properties, properties located in the outer suburbs, serviced apartments and student accommodation. Because there is less competition, these properties usually grow at a slower rate (e.g. lower capital growth) despite its good rental yields, but rental yields will still increase due to inflation and tenant demand in the area.
Located in regional areas of lower capital growth
Typically, these properties are located in regional areas and they tend to have lower entry prices (as well as lower stamp duty and land tax). Regional areas tend to be sensitive to economic cycles and have slower capital growth over periods of time unless there is an economic change to the area. Jobs growth may be slower, unemployment may be higher, wages growth can be generally lower and there is no shortage of land.
In addition, these properties tend to be located:
- In an area that has low growth drivers and the only way the vendor can market the property is to drop the price so that the rental return looks attractive to positive cash-flow purchasers.
- In less desirable areas, which can affect the vacancy rates and may mean that your property may attract fewer good tenants.
There may potentially be higher costs associated with maintenance and incur more tenancy problems due to socio-economic factors and tenant profile.
Since you are generating an income from the positive cash flow properties, you pay tax along the way.
Types of positive cash flow properties
There are three types of positive cash-flow properties you can invest in.
There are properties that generate almost no growth. The value of the property only goes up by only a small amount each year.
There are properties that have good growth. They are also high risk.
There are properties that have good growth, possess minimal risk and can be structured as positive cash-flow investments.