Why Positive Cash Flow Is The Best Investment Strategy For Most People
Positive cash flow properties generate more income than expenses, thus creating an excess of cash flow and passive income.
In Australia, positive cash flow properties are often talked about by so called “Gurus” as a sub-par way to invest, instead advising people to invest in negatively geared properties.
I believe this is poor advice for most Australians and in this article I will attempt to explain why I believe investing in positive cash flow properties is the best option instead.
1. We Are Emotional Creatures
Money makes us emotional, there is no denying it. Just ask your latest impulse buy and it will prove it to you.
We like to think that when it comes to investing we can take the necessary (logical) steps to achieve our goals as quickly as possible, but rarely is that the case.
Paying down your credit card debt is thwarted by that new outfit or gadget you had to buy. It’s depressing eating sandwiches at work so you buy yourself lunch and a coffee to make your day more enjoyable…and a chocolate bar on the way back to the office.
In theory negative gearing makes complete logical sense. Buy a property, lose money on it every week in order to generate a lump sum of money down the line…and it works too (sometimes). Some people can use this strategy successfully over and over, and some people strike gold and buy at just the right time once and that’s all they need.
But for most investors, that isn’t the case.
The problem is we aren’t investing in a vacuum. We still have to live our lives and our lives cost money.
When an investment property sucks away all your extra living expenses and you can’t even afford your $4 almond piccolo from your local bearded barista (the longer the beard the better the coffee) it makes investing (and life) pretty miserable.
When each investment costs $100/week to own, how inspired are you going to be to own 10 properties? Can you even afford $1,000/week to hold these properties? Most people couldn’t.
Positive cash flow properties use our emotions to our advantage. Like the snowball method for paying off debt investing in positive cash flow properties gives up quick rewards in the form of passive income.
When you buy a property and instantly it’s making you $50/week for doing nothing a funny thing happens. You want to buy more.
“If this property can make me $50/week then imagine if I had 10 properties….that’s $26,000/year”
Every property you buy provides you with instant gratification and inspires you to continue investing.
2. You Can Have Your Cake and Eat it Too
A lot of people ask me “Should I invest in cash flow properties or growth properties”.
The key part of this question is the word OR.
People assume you can only have one or the other, but the truth is you can have both.
Replace the OR with AND and the question becomes “How can I invest in properties with growth AND cash flow”.
Now I’m not saying these properties are a dime a dozen and you can simply jump in realestate.com.au to find them, but I am saying that with the right research you can definitely buy properties with cashflow, in growth areas with the potential to add value.
To find these properties you need to do the right suburb research (see my course Advanced Suburb Research for more details) and find a suburb primed for growth. You need to find specific properties where you can increase it’s value as well as properties with a higher than average rental yield.
These properties are definitely out there if you are willing to look for them.
3. Life Circumstances Change
Life rarely progresses in a straight line, rather it has twists and turns along the way.
A friend of mine used to work as an editor for a local newspaper. One day they lost their job and unfortunately there weren’t many editor positions available due to decline in the newspaper industry.
It took them over a year to find another job and in that time they had to sell their house and live off the proceeds in order to get by.
Investing in positive cash flow properties gives you the flexibility for life changes. Because the properties are self sustaining it doesn’t matter (as much) if you lose your job. In fact if that happens your properties will actually help you get by until you find another one.
On the other hand if you have multiple negatively geared properties and you lose your income then how are you going to pay for them? Chances are you won’t be able to and will have to sell some of them.
So if you expect life to go perfectly then negative gearing is fine, but if you’re someone who wants to prepare for life’s inevitable changes then positive cash flow properties are likely a better option.
4. Capital Growth is Never Guaranteed
Probably the biggest issue I have with negative gearing is that people talk as if capital growth is guaranteed no matter what you buy.
They assume that if a property is negatively geared then it is going to make them rich through capital growth.
But I have seen countless strories of people investing in so called “growth areas” only to have their property worth less and renting for less than when they bought it 5 years ago.
So if growth isn’t guaranteed it makes sense to invest in something that has positive cash flow as well as the chance for growth. If the property goes up in value great, and if it doesn’t you’re still making money.
5. New Lending Guidelines Makes Negative Gearing Harder
APRA recently brought in new lending guidelines that make it harder for people to get loans for investment properties. Servicability is down across the board and one thing that can really hurt your ability to get a loan is the rental yield of your property.
While excessively positive yields (anything over 7-8%) don’t help as much as I would like if your rental yield is below 7% then chances are it is hurting your ability to borrow money and invest in property.
By getting a better rental yield (like the yields of positive cash flow properties) there is the potential to increase your borrowing capacity and be able to invest in more properties.
Always see a mortgage broker about your specific situation and how different options affect your borrowing capacity. This is not mortgage advice. #disclaimer
Check out my article on how to increase your borrowing capacity for more information on improving your borrowing capacity. It’s slightly outdated but still useful.
6. Defence Against
The Dark Arts Market Downswings
Some economists believe that Australia is currently in a housing bubble that is primed for collapse. While this isn’t widely accepted it is definitely within the realm of possibility.
If the property market was to collapse, chances are rents for properties won’t drop as far as the prices of housing. This is due to the fact that rents are paid directly from income while properties are paid with mortgages of fluctuating interest rates.
This means if you own positive cash flow property and the market collapses, even though you would have lost a lot of money in regards to the value of your properties you could still potentially be generating a passive income in the midst of all the chaos.
This could buy you time for the market to recover or at least means you can continue to hold your properties and make some money.
I don’t know about you but I like the idea of being able to make money if the market goes good as well as if the market goes bad.
7. Financial Freedom is Obvious
When investing in positive cash flow property it’s likely you have a goal of financial freedom.
For example $50,000/year in passive income.
With positive cash flow property it is very obvious when you hit this milestone goal because it will be apparent on your end of year tax return. Financial freedom happens as a side effect of investing well.
However, when investing for capital growth it is common to become rich on paper but cash poor.
For example your properties may have grown in value and you now have $2 million in equity, but your properties are still negativel geared and costing you money.
You’de be rich yes, but you’de have to sell some of your properties to realise it and more often than not people don’t want to sell their properties. This means even though theoretically many investors have achieved financial freedom, they aren’t experiencing it because all their cash is tied up in equity.
What’s the point of achieving financial freedom if you don’t get to actually experience the benefit of it?
In summary I believe investing in positive cash flow properties is going to be the best investment strategy for a lot of investors.
It provides immediate emotional gratifiaction that inspires you to invest in even more properties. It can help you finance the purchase of more properties, be a hedge against a market downturn and could even help you experience financial freedom earlier than you otherwise might have.
If you’re interested in learning how to find positive cash flow properties, or want to get access to the archives of over 1,000 positive cash flow property listing, plus a new property everyday. Become an On Property member today.
Thanks for reading and until next time,