What Does Cashflow Positive Mean? by Graeme Fowler (2015)
Updated: Oct 7, 2019
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
I will often ask at seminars or meeting up with other investors – what are some of your rules for investing?
Most will say that one of their rules is to ‘only buy cashflow positive properties’.
I will say – ‘well, what does that mean’?
They will often look at me as if to think I’ve never heard of the saying ‘cashflow positive’ before. So, they say ‘well it has to make money’!
I say – ‘ok so let’s say I buy a house for $200,000 with no mortgage and it rents for $50 a week, is that cashflow positive?’
They say ‘no it’s not’.
And I say ‘well it actually is’!
It is according to some people - it just depends on what your definition of cashflow positive is.
Here are the things that are taken into consideration in order to work out if a property is cashflow positive or not.
First of all, you have the rent which is a fixed amount per year. Some people though when working out if something is cashflow positive or not, will use 52 weeks rent for the year, others will use 50 weeks of the year and some will use 48 weeks. Using 48 weeks or 50 weeks takes into account any vacancies or loss of rent.
Then comes the interesting part as there are so many variables that people use to work it out.
Here is a list of factors/expenses which are used to work out if something is cashflow positive or not:-
And after that you also have the interest rate per annum of the loan, the term of the loan (how many years the loan is to be paid off over), the amount of deposit used when purchasing the property and finally if you are using a P & I loan, or an interest only loan.
Simply saying something is cashflow positive or not really is meaningless without knowing how they are calculating it.
With the example above, some would call that positive cashflow, which of course it is if you are using a certain method of determining it.
From the above you can see that there are so many different ways of working out of a property is cashflow positive or not, so here are some of the main ones people use.
None of them are right or wrong and with no mortgage on a property as mentioned above, you can pretty much make any property cashflow positive.
Rent (anywhere from 48 to 52 weeks) per annum - must be more than expenses (to be considered cashflow positive).
Method 1: - Loan on interest only (I/O). No deposit when purchasing the property, and using all of the expenses above (some investors don’t include maintenance into their calculations, and this can vary significantly from one year to the next. Also, some investors prefer to do maintenance themselves on their properties and this will save costs as well).
Some investors will manage their properties themselves, and therefore don’t have the expense of property management.
Method 2: - As above, but loan on Principal and Interest (P & I). What has a huge effect on this is how long the term of the loan is over. If the loan was over only 10 years for example, it would be very difficult if not impossible to have the property be cashflow positive, as the repayments on the loan would be so much higher than they would be on a 20 or 25 year loan.
Method 3: - Loan on interest only. Use a 20% deposit when purchasing each property and using the expenses above as required..
Method 4:- As above using a 20% deposit and using P & I over a specific term, usually 20 or 25 years, and some people even use 30 years.
I’ve used two different methods to work out if the properties I was buying were cashflow positive, or at least neutral (rent is approx equal to calculated expenses).
The first method was when I was buying rentals about 12 – 14 years ago and building up a good solid foundation. What I wanted then was to have the rent cover my expenses on either a 20 year loan or a 25 year loan, using a 20% deposit for each purchase.
The deposit was created/made or saved each time by either trading properties or renovating and selling properties on again. Other investors may save the deposit from their wages or from owning a business which hopefully creates a good cashflow for them.
In the early 2000’s interest rates were a lot higher than they are now, around 8 – 10% per annum compared to around 4.5% p.a. now, so it was a lot more difficult to get a property to be cashflow positive or even neutral back then. That is, unless you used interest only or put in a reasonable deposit when buying any rental properties.
The other method I used was early last year when I set up a new trust to purchase 20 rental properties. These properties were to be purchased with no deposit and they had to be at least cashflow neutral or slightly positive, using a 6.5% p.a. interest rate as a guide.
The expenses that the rent had to cover - was the mortgage, rates, regional rates, insurance and also property management on a 20 year P & I loan.
I didn’t factor in an amount for maintenance, however over the last 2 years this has worked out at approximately $1,000 - $1,200 a month over the entire 20 properties ($50 - $60 for each property).
With these 20 properties that I bought last year, the income after expenses (rates, insurance & property management) is approx $18,500 a month and the mortgage amount is approx $17,000 a month.
Most of these loans are still fixed at 5.75% - 6% p.a. and if they come down to around 4.5% p.a. (current interest rates) when the fixed terms expire during next year, the mortgage payments will drop down to about $15,500 a month.
That would make them $3,000 a month cashflow positive ($150 per property) which is more than enough to cover any maintenance.
So, there’s many, many ways of determining if something is cashflow positive or not: -
Various methods of using some or all of the expenses, some investors may even calculate using no expenses.Whether you are using I/O or P & I loans.
If using P & I loans, what term is the loan over? Is it over 10 years, 15 years, 20 years, 25 years or even 30 years?And how much deposit is paid when purchasing each property? Is it on no deposit (100% financed) or is it with a 5%, 10%, 20%, 30% or even more deposit?
You may see now why it can get confusing for people at times, or hearing other investors talk about their investing rules, and wanting only to buy cashflow positive properties.