Are there downsides to positive cash flow properties?
Positive cash flow investment properties are considered by some investors as gold in today's hot housing market.
Having a positive cash flow property provides you with another stream of income, while giving you the capital you need to pay off your loans faster than if your investment was negatively geared.
Investment properties that provide positive cash flow are often located in regional areas where housing prices and stamp duty are lower than inner city areas These factors make properties in these areas perfect for first-term landlords and investors with a strict budget.
The potential for the housing market to turn resulting in falling property prices means investment properties can fail to deliver strong capital growth. With cash flow positive properties, this risk can be counteracted with a regular return on investment. Like all investment models, however, there are downsides to positive cash flow investing. Below, we've detailed some of the key things you need to take into consideration with positive cash flow property investing.
Affordability and upfront costs:
With the whole focus of a cash flow positive property being regular income after all expenses are covered, weighing this up against property prices and deposit requirements today can mean there are large upfront costs and affordability limitations with the strategy. While cash flow positive properties may have been easier to find a few decades ago, the capital required for deposits and costs like stamp duty today can quickly render a cash flow positive property investment unviable.
Location and market volatility:
The regions where cash flow positive properties are most commonly available in today's market are located in regional areas. Price movements in these areas can be volatile due to the seasonal cycle of economic activity in these areas. This means the capital growth of these properties can be inconsistent too. It's important to consider here whether your capital would be better invested in regions with properties that experience a more consistent rate of capital growth.
Obviously, due diligence is part of any astute property investor's purchase process, however, with positive cash flow properties in regional areas, you need to take into account the long-term cash flow potential of the property. Property investor services company Real Estate Investar suggests investors search for properties with an 8% to 16% yield while being located near a hub such as a university.
Positive cash flow properties can be a fantastic addition to an investor's portfolio. You do, however, need to do your due diligence to make sure the cash flow positive properties that you find fit into your long-term investing goals.