Investment properties can be a rewarding method of growing your wealth – only if you make the right choices. If you’re scouting around for your first investment property, these questions would probably pop into your mind: What can I afford? What kind of property is best suited for me? How can I ensure that my investment is safe?
One of the most important things to consider when you are shopping for a rental property to invest in is its ability to generate positive cash flow.
What is a positive cash flow property?
Cash flow is the amount of money that flows in and out of your rental property. When an investment rental property generates positive cash flow, it means that the total amount of money you receive from the property (i.e., the rental income) exceeds the expenses required to operate the property. Here, expenses can include utilities, mortgage payments and interest, maintenance costs, MCST management fees, insurance and property taxes.
In short, a positive cash flow investment property is one that pays you to own it! That is why it is highly attractive to own such a property.
Here are five good reasons why you should invest in positive cash flow property
- The property pays for itself
The appeal of a positive cash flow property is that it is self-sustaining. This is because the property already pays for itself by covering all the expenses required to operate it PLUS you have income leftover that goes right into your pocket. The extra cash generated is your monthly profit. This is a prime example of an income-producing asset where it pays you to own the asset.
- Reduces cash flow risk
Negative cash flow is a situation where you would need to top up cash from your own pocket to operate the rental property. This happens when your rental income is not sufficient to cover the costs of operating the property. In other words, you are actually losing money from your investment as it costs you to hold that property. Should you find yourself short of money to top up the shortfall, this would put you in a precarious financial position. By investing in positive cash flow properties, you don’t have to worry about such a negative cash flow scenario.
- Enhances your borrowing power
If you are planning to finance the purchase of your property by taking out a loan, a positive cash flow rental will make you more attractive to lenders. Banks will usually consider several factors before deciding whether to approve your loan, as well as the amount of money they are willing to lend to you. A positive cash flow property increases the likelihood of getting approval for the loan because the positive cash flow generated from rental income enhances your serviceability i.e., your ability to service the debt.
- Lowers overall investing risk
Investing in a positive cash flow property is one of the safest ways to invest. This is because regardless of the conditions of the property market – whether the market is in an upturn or downturn – your property will still be able to continue to pay for itself. In another scenario, say you’ve been receiving positive cash flow from a former tenant but are now facing a situation where you are in between tenants. While you are looking for your next tenant, you still have bills to pay such as the mortgage payment and other maintenance costs. The positive cash flow generated from the income received your previous tenant will help you to ride out the interim situation until you find your next tenant.
The extra cash flow generated from a positive cash flow property enables you to save towards paying the down payment for another positive cash flow investment property. This increases your ability to buy into another property for investment sooner, rather than later. Over time, you will be able to build a portfolio of positive cash flow investment properties that will enable you to receive both extra income and provide you with exposure to capital growth in the longer-term.