At the height of the real estate boom, some people purchased rental homes without looking at whether the rental income was enough to cover all the expenses — including the mortgage — and provide positive cash flows to the investor.
Going forward, investors should first be concerned about making sure that the properties they buy pay for themselves. For example, if one invests $35,000 in cash equity to buy a $125,000 property, they should buy what gives them positive cash flows and more importantly a positive cash-on-cash return on their money.
Beware, because many properties, even with today’s lower prices, do not pay for themselves. In these cases the owners end up taking money out of their bank accounts on a monthly basis to cover the negative cash flow properties they have purchased.
Covering negative cash flow from your other savings is not a good investment strategy. Here’s why – look at these two townhomes. One in a moderately priced area of San Diego and one is a fancy luxury townhome:
The first property “moderately priced” property pencils out a nice positive 7.03 percent cash-on-cash return on my money.
Although the rent is higher on the second “fancier” townhome property, it has significantly negative cash flows on operations of $8,400 per year. That person is investing $137,500 of cash equity to still be negative on operations, or an investment return of negative 6.11 percent.
And going forward, the chart below estimates that this property will be negative on cash flows for over 10 years. Not only are you investing an $137,500 down payment, but continue to add to negative cash flows for over a decade. You will have over $192,995 into this property before the property begins to make money.
The question you should ask yourself is, “Why didn’t I just buy a cash flow positive property?” like the moderately priced townhome?
This is just one example and you need to put the property specifics into your analysis, do some research on realistic rents, area vacancies and expenses to make your own decision.
Just realize, that in general, prize properties are no prize. It’s the moderately priced properties with decent rents compared to the purchase prices that have positive cash flows and are the real prize.
Elite Wealth Creators have been involved in the property and finance industry for over 20 years. Our Investment Property Strategists deliver investment grade properties to the investment market and mediate between the developer and the investor. We also assist first home buyers in purchasing their first home in QLD through our house and land packages – this includes receiving $20,000 cash back towards their mortgage by buying one of our full turn-key packages.
Our service will take you through the complete process of buying positive cash flow property, including:
• educating you on positive cash flow and the ability to pay your mortgage off years in advance
• saving you thousands of dollars in interest
• supporting you in the decision on which property to buy
• assisting in the organizing of your finances, if required
• preparing you for settlement of contracts
• liaising with other professional advisers on your behalf if required.
Our Strategists specialise in delivering quality positive cash flow property and also helping investors pay off their mortgage years in advance
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sales@elitewealthcreators.com
1800 GO ELITE
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