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Cashflow Calculations

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Transcript

Cash flow calculations. When investing in property, cash flow is absolutely crucial to your portfolio and to the health of a portfolio long term, but it’s interesting to ask actually what are the breakdowns of the cash flow numbers? What are the calculations actually mean? How do you calculate the cash flow on a property?

Let’s look at step one and then step two. Step one is the incomings, what you earn from the property. Number one being the yield. Step two is what’s the cost? Examples of some costs are: rates, water, landlord insurance, the mortgage, simply put, rounding it together as outgoings plus mortgage. In some scenarios, there’s tax as well in terms of land tax, depending on your situation, but let’s just simplify it to two things. Step one being income, the rent coming in. And step two, being the outgoings and mortgage.

You may have seen social media posts or different things where people are promoting how much cash flows coming from their property portfolio. Now what it’s actually important to understand is that when people calculate cash flow, majority even including myself, look at it from an interest-only perspective. Now, why is that an important thing to consider? Because two things. Number one, is at the end of the interest-only term, the cash flow may not be the same. So that’s something to consider in terms of buffers to keep, or if interest-only is re-going, or if you decide to just start paying down the mortgage. 

Number two is when you’re looking at the interest-only component. If you have a property that’s positive cash flow, what will occur is your income should be enough to pay outgoings, plus the interest on a mortgage. Anything left over is how much positive cash flow you are. Now you can do two things with the positive cash flow. One, either use it to earn in terms of an income that’s coming from your property, or two, use that to pay the principal on your loan. Now, I actually did a recent survey and asked if you had a property where the income was higher than outgoings and higher than interest, if you were paying the principal back, would you consider that paying yourself or paying the bank?

Now, I was unsure if people would see this as a trick scenario or maybe, “Hey, what does that mean? You’re always paying the bank.” And I was interested to see the responses 80/20 was the actual split. 80% of the people said that, “Well, Arjun, I considered that as paying you because when you’re paying the principle, you’re reducing your debt.” And 20% of the people said paying the bank because you’re actually physically paying the bank.

That’s an important thing to consider when you’re looking at positive cash flow and calculating cash flow. Income, outgoings and mortgage, basing it off the interest portion, and anything left over is the positive cash flow that you can do one or two things, pay down the principal or earn it as an income. That’s it from us here at InvestorKit, the experts and wealth creation, helping you take action.