Cashflow, Cashback and Capital Growth

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When people are looking for the perfect investment property, they always start to think well, “Which one am I going to compromise on? Maybe I should go for Capital Growth or maybe I should go for Cash Flow”.

When considering it all you actually don’t have to compromise on either, you can have moments where you can get “The Sweet Spot” of Cash Flow, Cash Back and Capital Growth. Now by cash back that’s interesting terminology and I’ll go through that in a moment. But let’s talk about cash flow first. Now cash flow what I mean by that is, enough rent for you to cover interest, rates, water, landlord Insurance, property management,
for example, so pretty much your outgoings and the interest there soon as you hit that mark whenever you have a dollar or cent above it, you’re positive cash flow and that positive cash flow could be a interest-only loan
or it could be a principal and interest if it’s interest only its money in your account building up if it’s principal the extra cash flow is just using it towards paying yourself because you’re reducing the principal on your mortgage whereas all the rent covers everything else anyway.

So when you think of that cash flow in today’s world, it doesn’t take properties to have much of a yield you could very much have that done in say a 4.75% rental yield for 90% loans or even lower for 80% loan. So you can see it doesn’t take huge amounts of yields to start to be cash flow neutral or slightly positive.

Now when you talk about Cash Back, that’s a scenario where you have a property that’s aged in a particular sweet spot where it’s not
so new where you’re getting a brand-new build but not so old where you miss out in depreciation. So when you have a property that might be sort of cash flow positive slightly or neutral but it’s got an element of depreciation in it, not only could you make that cash flow positive tax-free potentially,
but you could actually make that slightly negative on paper due to the
depreciation which allows that little bit of a cash back.

And then the last component – Capital Growth. If you bought a market where drivers are showing and risers are occurring you could have the sweet spot where you’re getting percentages of capital growth above the norm of what’s happening say maybe where you live or where the market that your most used to then you’ve got cash flow, which is that yield component that’s slightly higher and it’s allowing you to get a bit more rent than some of you had goings and then cash back when you’ve had the property that’s not too old but not to new has all those other factors around it too and gives you that depreciation component to be able to get a little bit back in tax, which is your cashback component.

So when you think of them, these are almost to say your unicorn properties,
but I want to bring up a case study now where that property and that actually achieved all of that. So the case study was where we purchased a property in a fantastic and growing Market in Regional Victoria.
It was for $310,000 renting for $340 per week. The build was around 2008.
Build around that year allowed us to get the sweet spot where it’s
not so new we were paying for such a large amount of the building component. We still have some land and the land size was adequate was over 550 square meters or quite decent but then at the same time,
it’s not so old we’re not going to miss out on the depreciation component.
So kind of that sweet spot. So with this cash flow, we were cash flow positive enough to go, it’s covering everything and giving us money back at an 80% lend but at the same time it was depreciable enough to give us that cash flow as tax-free as well as a little bit of tax back.

So when you think of that we’ve got the two components of $310k purchase price with a $340 per week rent, but then you’ve also got your depreciation component making such a positive property slightly negative giving you that tax back. Now from a Capital Growth perspective that market is already started to rise since we purchased it and we’re seeing comparable sales come up 10, 20K above more even 30K about more in some places which very very similar land sizes 3 by ones and similar structures as well.

So when you think about that that’s an example where you don’t have to go compromise on things. You can have Cash flow, Cash Back and Capital Growth. Although these properties might not fit everyone for their investment strategy they did fit this particular investor in what they’re looking to do which was at a low risk investment and an affordable price that doesn’t compromise their lifestyle in a market showing great Capital Growth signals.

So that’s it from us here at InvestorKit, The Experts in Wealth Creation helping you take action.