I have had a lot of readers asking the question “Do new houses offer positive cashflow?“. New houses do in fact have a variety of benefits that can help you to generate a positive cash flow on your property. I want to show you a couple of ways you can take full advantage of a new house so that you can get the highest rental yield possible.
Firstly, let’s define positive cashflow
Before you can know whether or not new house offer positive cash flow for you as an investor you need to know exactly what a positive cashflow property is.
A property is considered to be positively cash flowed when it generates more in income than you pay in expenses after you take tax breaks and advantages into account.
There are two ways you can achieve positive cash flow:
- Have more income than all your expenses before tax and generate a profit that you pay tax on
- Have more expenses than income thus generating a loss before tax. But then using depreciation and other tax advantages you get money back from the government and thus end up earning more in income than you pay in expenses.
7 Ways Your New House Can Generate A Positive Cash Flow
There are multiple ways you can use a new house to generate a positive cash flow. If I was going to go through and list them all this post would get too long and you would get bored. So I wanted to focus on the 7 things that you could apply to help your property generate a positive cash flow quicker.
NOTE: Owning a new home does NOT guarantee a positive cash flow. There are some advantages that can help you achieve a positive cash flow, but positive cash flow is never guaranteed. Do your sums before investing. Use our property calculators if you need help calculating the cash flow of a deal.
1. Tax Deductions
This is where new houses can really offer you a lot towards your cash flow. The government will often let you depreciate the value of your assets over time. This is because certain things (like lighting, fixures etc) become less valuable over time. This is often called “Phantom Loss” because you are not actually losing cash out of your pocket any year, just value, but you can claim on this ‘phantom loss’.
These losses can (in most cases) be used as a tax deduction against the income you earn from the property and against your own income. If you earn a lot of money and fall into a high tax bracket then for every $1 you lose in depreciation you can get up for 30-50 cents back from the government.
New houses can offer more depreciation than older houses because there are more new items (lights, fixures etc) that you can depreciate. In older home, these items have already been depreciated to their full extent and thus you cannot claim anything.
NOTE: You cannot just decide how much you want to depreciate. I would always get a professional depreciation schedule done on your property and I would consult an accountant when it comes times to claim these losses.
2. Dual Occupancy
If you are building the new house yourself (instead of just buying a new house that has already been built) the you have the opportunity to design your property for multiple incomes. You could make it possible to seal off a portion of the house to make another livable property. So instead of having one 4 bedroom house you can have 2 x 2 bedroom flats.
Or you could have a house and a fully contained granny flat that you rent out separately. You could also rent out the garage car spots separate to a house if your area is one with demand for car spaces.
There are multiple ways you can create dual occupancy if you get creative and do it well. More often than not 2 x 2 bedroom flats will rent out for more combined income than simply renting out one 4 bedroom house. Always do your due diligence and make sure you follow your state/council laws in regards to dual occupancy.
NOTE: If you are building a house and are deciding the do dual occupancy to increase your rental yield then you may want to make it so that you can return the house to one property. Having a single house can allow you to appeal to a larger market when you go to sell your home.
3. Subdivision/Adding a House
You may buy a block of land or a large block with a property already on it. You could make this property positive cash flow by subdividing the land and then building another property of that land thus generating you a second income.
You could sell off one of the blocks to lower your mortgage expenses or you could rent out both of the properties separately. If you build two houses or a duplex then you will have 2 new houses that you can claim depreciation on.
It is also likely that the final value of your properties will be worth more than you paid to subdivide and build, thus you will have a better Loan to Value Ratio (LVR) with your lender. This can allow you to borrow more money to reinvest, or to even offset your losses while you are waiting for your rents to increase and become more than your expenses.
4. Maximum Rent
A new house can offer you maximum market rent when it is in great condition. People are willing to pay more money for a house that has new interiors that are in excellent condition than they are willing to pay for a property that is run down with a grotty kitchen and bathroom and a large cockroach population.
In order to get maximum rent you need to make sure that your property has exactly what the market wants. If they want air conditioners then you should have one, if they want a certain type of layout (eg. Open plan) then it can help to have that layout etc.
5. Low Costs of Maintenance
Having a high rental yield compared to the purchase price of a property is important for generating a positive return each year. However, another thing that many people don’t take into consideration is that if you lower your expenses you don’t require as much income in order to generate a positive return.
One of these expenses that people often forget is the expense of ongoing maintenance. When you buy an old house you are usually buying a package deal, the house comes with a lot of ongoing maintenance to keep it up to standard. New houses need less ongoing maintenance because everything is fairly new, thus will have a few years in it before it requires much work.
6. Extra First Home Buyers Grant
If you are building your own home or purchasing a new construction then you may be eligible for a larger first home owners grant than if you were to purchase an older home. This is because the government wants to encourage first home buyers to purchase new builds and thus stimulate developers to create more properties. There is a housing crisis in Australia so the more houses we can build the better.
To be eligible for the grant you need to live in this property as your primary residence for at least 6 months usually in the first year. Speak to a professional about the boxes you have to tick to be eligible for the grant.
7. Potential Capital Gains
Potential capital gains don’t directly generate you a positive cash flow but, when used effectively, can increase your income or give you more leverage with the bank to reinvest in other properties or other investments. By building your own home or buying a new home in a good growing area you could increase your capital gains quite quickly.
Some investors have been using their capital gains to borrow more money from the bank to offset their losses until their rents go up enough to cover their expenses, this way they don’t have to find money from their own pocket to pay their expenses. They might borrow an extra $20,000 and put it in their offset account and then slowly use the money to pay the difference between the rental income and their expenses.
Over time as rents increase the difference goes in the opposite direction where the property becomes positively cash flowed and then begins to pay off the larger mortgage by itself. You need to be careful with this method as you can quickly get into a lot of debt that you may be unable to service.
Always Do The Ground Work Before You Buy
Just because you buy a new house, or build your own house doesn’t guarantee that you will generate a positive cash flow. Always do your research and speak to a professional before you purchase. Our investment property calculators can help you do calculations quickly and easily on the cash flow of a property.
Factor in all your expenses and make sure that your property is structurally sound. A building and pest inspection should uncover most of the hidden problems that could cause you grief.
How To Learn More About Investing In Positive Cash Flow Property
The more you can learn about positive cash flow property the easier it will be to generate a positive cash flow from your property. If you know how to be manipulate the different factors of income, expenses and taxes effectively (and legally) then you can turn what might be a negative geared property for another investor into a positive geared property for yourself.
Books are always a great place to start your learning. Books are cheap and contain a great deal of information that can be extremely useful to you. I attribute my original interest in positive cash flow property to an investment book I read when I was just a teenager. To take life easier for my readers I have created a list of the Top 10 Positive Cash Flow Investment Books so check that out if you want to find a book to read.