6 tips to better understanding the cash flow from your property investments

While many Australians get into real estate investment to gain cash flow, in reality that’s not how property works.

You see…residential real estate is a high growth, but relatively low yield investment, so if you’re hoping to pay your child’s school fees or your vacation airfares from your rental returns, you’ll be sorely disappointed. 

Of course once you build up a big enough asset base of investment properties you can then lower your loan to value ratios so you’ll be able to live off the cash flow of your properties, but things must be done in the right order…

Asset growth first, then cash flow.

Having said that…

Cash Flow is important

Along your investment journey, it’s cash flow that will keep you in the game, until you have a big enough asset base to get out of the rat race.

This means as a property investor, it’s vitally important to understand and maximise your net cash flow position, and while most people just think of the rent coming in, here are six other areas to con­sider when assess­ing your investment cash flow.

1. Tax deductions for rental properties

As a property investor, you can claim a variety of expenses relat­ing to your rental prop­erty as tax deductions, improving our after tax cash flow.

Your accountant should be able to outline these for you, or you can check out the list at the ATO website.

2. Depre­ci­ation 

As a build­ing gets older, the items within it wear out and therefore depre­ci­ate in value.

The ATO allows prop­erty investors to claim deduc­tions (at varying rates) relating to the build­ing as well as the plant and equip­ment within it in one of two ways:

• Cap­ital works deduc­tions are avail­able on the struc­ture, includ­ing items that are not eas­ily removed, but remember this isn’t based on the pur­chase price of your p but on the construction cost of the building.
• Depre­ci­ation of plant and equip­ment, that are deemed to have an
  effect­ive life set by the ATO.

To claim depre­ci­ation against your property income, it’s advis­able to obtain a tax depre­ci­ation sched­ule from a licensed quant­ity surveyor.

But the good news is that even the cost of obtaining this report is tax deductible.

3. Interest rates on borrowings

One of your biggest cash flow expenses as a property investor will be the interest you pay on your mortgage.

While rates are currently at his­tor­ic lows, it’s pretty clear that some­time in the future interest rates will rise.

Strategic investors will prepare for this by locking in some or all of their loans to fixed interest rates, while others will set aside a financial buffer in an offset account, or similar, to handle unexpected expenses or the extra cost of rising rates.

4. Acquis­i­tion or pur­chase costs 

When budgeting for your property purchase you will need to allow for all the settlement costs of purchasing your property – not just the price of your property.

These should include things like stamp duty, legal costs, loan costs, valuation fees, repairs or improvements, insurance and the initial vacancy period and agent’s letting fees.

If you’ve underestimated your needs these extra bor­row­ings will impact your planned cash flow and could require further input from your personal finances.

5. Vacancies

Investors must understand that their property will not be occupied hundred percent of the time.

Currently vacancy rates are falling and rentals are rising, but when estimating your cash flow it’s important to assume that your property will be vacant for a week or two each year.

And when your property does become vacant, apart from the period when you don’t receive rent you will also have to pay your property manager for reletting the property.

6. Prop­erty manager 

Another slight dent in your cash flow will be expense of professional property management.

In my mind this is a small price to pay for peace of mind of protecting your asset.

While the fees will vary from man­ager to man­ager, don’t choose your property manager based on the cheapest rate, because in general you get what you pay for.

Instead, do some research, check on testi­mo­ni­als and don’t skimp on quality service in exchange for saving a few dollars.

The skinny on cash flow

As you can see there are a number of areas that can improve or reduce your cash flow from one year to the next.

The key is to calculate for each of them so you’re not left in an unsavoury cash flow position that could have long-term impacts on your wealth creation journey.

from Property UpdateProperty Update http://propertyupdate.com.au/6-tips-to-better-understanding-the-cash-flow-from-your-property-investments/