What is positive cash flow? It is an excess of income when compared to expenses generating a recurring profit which is known as cash flow.
Alright. Now, we’re into the good stuff. This is one of my favorite topics, “What is positive cash flow?” I absolutely love positive cash flow because of the flexibility it delivers to investors because it can help you become financially free. And so, let’s help you out to begin to understand what exactly is positive cash flow.
In its essence, positive cash flow is an excess of income when compared to expenses. So when you purchase a property and rent that property out, you’re now generating income in the form of rent. However, owning a property also comes with a whole bunch of different expenses. So, you probably have interest rates on the mortgage that you use to mortgage the property. You’ve got things like council rates. You’ve got insurances.
You’ve got to pay for water and electricity sometimes. You’ve got rental manager fees if you get someone to help you rent out the property. There’s a whole bunch of different expenses that come with owning a property.
Positive cash flow happens when the rent that you’re receiving is greater than all of your expenses combined. A really simple example is if you purchase a property and it’s earning $700 per week in rent and your expenses, when you add them all up, is $600 per week. That’s $100 difference between what you’re earning and what you need to pay on that property and that $100, you can do what you want with it.
You can take it to the pub and spend it on the pokeys, which I don’t advise. But, hey, you could do it or spend it on alcohol, which is probably a better investment, but still not very good. Or, you could re-invest that money into the property – use it to pay down debt. Use it to purchase new properties or just use it to fund your lifestyle. So you can what you want with that money, which is really exciting.
In most general terms, that’s what positive cash flow is. If the rent is higher than all of the expenses, whatever you have left over, that is positive cash flow.
There’s another term called “positive gearing”, which is slightly different and does require some tax savings in order to achieve a positive cash flow situation. But, we’ll cover that in the introduction to positive cash flow course, which we’ll go more detail into the specifics of positive cash flow. Check out that course if you’re interested.
A really exciting thing about positive cash flow is that over time, as rents go up, and if you buy in a good area, then the rents should go up. Over time, as rents go up, your cash flow just continues to improve and you may get to a point where you’re using that cash flow to pay off the debt. Once you remove the mortgage that you had to pay for the property, then cash flow increases even more.
So, generally speaking, the longer you hold that property, assuming it’s in a good are and that area is increasing in value, then, your positive cash flow and the cash flow that you have to spend is going up as well. Do that across multiple different properties, and then you can achieve financial freedom.
But, I think my favorite thing about positive cash flow is the fact that it just gives you flexibility. So let’s say you purchase a positive cash flow property and then you lose your job. Well, that property is paying all of its expenses and it’s giving you some money left over.
So you’ve got the flexibility to keep that property and it’s actually helping put food on the table while you don’t have a job. But, if you’re negatively geared and had to pay for that property, if you lost your job, you could be in a very bad position.
I love that positive cash flow can lead to financial freedom, but I also really love that positive cash flow can give you the flexibility as your life changes throughout your investment journey, that you can keep those properties, hold on to them and you can choose what to do rather than being forced to sell a property because you can’t afford it anymore.
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