What is a good cash flow for a rental property?
What are we looking at, what do we want to achieve in terms of cash flow when we're investing
in a rental property?
Hi, I'm Ryan from On Property - Your daily dose of property education and inspiration
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Today, we're talking about what is a good cash flow for a rental property.
So, if you're going out and you're investing and you're doing your analysis, maybe using
the Investment Property Calculator inside on Property Plus or maybe you're doing it
by hand, what's going to be a good cash flow for you and what do you want to achieve.
In the last episode which is you can see it onproperty.com.au/195, we talked about investing
for cash flow and different ways to you can do it, different investments - there's property
but there's also dividends with shares, investing cash, businesses, all that sort of stuff.
But a good cash flow and what is a good cash flow, it depends on the investment and it
also depends on the investor and what you want actually to get back from your investment.
A more experienced investor with more money is probably going to want to get a higher
return on investment, whereas a newer investor probably just wants to get their feet wet,
get their hands dirty and learn a bit about investment properties so we're not going backwards,
that's probably awesome, we want to obviously move forward and make a profit.
So, when you're asking what's a good cash flow for rental property, we're not actually
in this instance talking about rental yield which is how much rent are we getting in compared
to the purchase price of the property.
We're actually talking about how much money is left over after we pay all of our expenses.
There are different types of properties that you might want to invest in, in Australia.
There's negatively grid properties which is one of the most common investment strategies.
Now negatively grid property is one where you lose money in every single month or quarter
or year or whatever it is that you're measuring.
But basically you are paying more in expenses than you're getting in rental income, so you've
got a negative cash flow and you hope to make up that loss through capital growth.
So what is a good cash flow for negatively grid properties, well's one that you can afford,
if you can't afford to pay your outgoings or the difference between your expenses and
your rental income, if you can't afford it, well you aren't going to afford to pay your
mortgage, so eventually that property is going to be taken away from you, and you'll never
see any of the capital growth that you invested in before, in the first place.
So, definitely something that you can afford, you want a cash flow where the loss is going
to even more than offset the by capital growth, so if you've got a massive loss on that property
and capital growth isn't going up, as quickly as you'd like, was probably not ideal because
you're losing more money than you're making.
And also if you're investing in a negatively grid manner, you probably want to have some
breathing room there, so that you can go ahead and purchase a second property down the track
as well.
So, what's a good cash flow for a rental property that's negatively grid, something that you
can afford, it's something where the capital growth is going to more than offset the loss
that you have and it's something where you're probably got a bit of breathing room so you
could invest if the opportunity arose.
You then got neutral grid property.
Neutral grid property is the ones that don't really make you money but they don't lose
you money in terms of cash flow and again in a neutral property, you either want to
make money through getting growth in that property or maybe you want to make money by
the rents going up over time and it becomes positive in cash flow.
If you're investing in neutral grid property well a good cash flow is one where you don't
lose any money but you don't make any money, make zero dollars and zero cents and so that's
what makes it a negative grid property, so we can't really say anything else about it.
And then there is positive cash flow property and this is where you get more money coming
in than you have going out in expenses and what happens is that at the end of each month
or quarter or yearly, you have a surplus of cash because you paid all your expenses and
that's your positive cash flow.
So what cash flow is going to be good for a positive cash flow rental property - well
many investors can say that everything above the going cash rate to be good.
So, if the banks are offering four percent and anything above four percent is going to
be good because it's better than putting your money in the bank plus you have the benefits
of rents going up overtime or your property maybe increasing in value, so if your cash
on cash return is better than what you'd get at the bank, many investors consider that
to be good and that would be something to aim for.
What you need to look at rather than saying, what's good percentage, is what do you want
to achieve from an investment and what sort of return on investment do you want to get.
If it's one of your first ones and you just want to make sure that you don't lose any
money, well maybe a smaller return on investment you're going to be happier with it, maybe
you want to get a ten percent or twenty percent return on investment because you're a more
seasoned investor.
You need to look at that return on investment in terms of what cash you put into the property
and how much you're getting back.
And like we talked about in episode one hundred and ninety five, a lot of the times they also
want to look at the return of investment.
How quickly are you going to get your investment back so you can then take that and invest
it again and you're still holding this asset that you now have almost free?
So, there's the sort of things you want to look at when you're talking about what is
a good cash flow on a positive cash flow property.
You want to look at the return of the investment, is it better than the cash right, are you
happy with what it's delivering you, do you want a higher investment, are there things
that you can do to increase your cash and cash return.
You also want to look at your return of investment - how quickly are you going to get your investment
back, so that you can then take that and invest elsewhere.
Let's just quickly have a look at some of the yields because I think people are asking
this question, won't just be talking about cash flow or talking about rental yields as
well.
So when you're looking at rental yields of a property - I'm going to talk about rental
yields at the moment, now bear in mind I don't know when you're going to watch this, or listen
to this, or read this, but interest rates at the moment on mortgages are around five
percent so if interest rates go up to six or seven then this is going to be different.
But basically, anything under five percent or anything under the current interest rate
is going to be negatively grid.
If you're getting a five percent yield on your property well chances are with all the
expenses you have and all the interest that you're going to need to pay, that's going
to be a negatively yield property.
Anything from around seven to eight percent often going to be in that neutral positive
zone - depending on how expensive the property is, on the lower side of things when the properties
are around a hundred thousand dollars the less might be a little more, seven or eight
percent might not make it positive cash flow but as you get higher up to five hundred thousand
to a million dollars, etc., being at seven or eight percent is probably going to generate
a positive cash flow for you.
Anything over nine percent is most often going to be positive cash flow as long as you have
a tenant in there, your property is occupied, you're getting that rental income, you don't
have massive over heads from strata or body corporate, if you own a unit, or maintenance
if you own a house that needs a lot of work to it.
So, you need to be aware of what your expenses are, what your expenses are going to be but
that's a very rough guide that you can use to say, okay, well the property is yielding
this much, is it going to be positive cash flow, is it going to be negatively grid, and
I do you have a free gross rental yield calculator - just go into goggle and just search gross
rental use calculator and you can find out what the rental yield is.
Or if you want a more advanced calculator where you can put in purchase price, rental
income, interest rate, and it's going to say, this is going to generate nineteen dollars
a week, positive cash flow and give you a cash on cash return of five point six seven
percent, if you want a calculator that does all that for you and yes its super simple
and it does all that for you, then you're probably going to want to access the advanced
property calculator which is available to On Property Plus members.
Membership starts from nine ninety-five a month and you can check them out by going
to OnProperty.com.au/plus.
So, hope that answered your question as to what is a good cash flow for a rental property,
obviously its very depending on your circumstances on your investment strategy and what you want
to achieve from a property.
I hope that this has given you more clarity on the situation.
I'm Ryan McLean from OnProperty.com.aw and until tomorrow remember that your long term
success is only achieved one day at a time.