What Is A Good Cash Flow For Rental Property (Ep196)

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 and if you want to get access to our free report showing you ten real positive
cash flow properties in Australia, go to onproperty.com.au/free and sign up today. 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.

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