How Positive Cash Flow Properties Can Make You Financially Free (Ep6)
Positive cash flow properties can make you financially free because they generate passive income over and above the expenses you are required to pay.
In this post I wanted to explain the 5 ways positive cash flow properties can deliver financial freedom into your life.
What Is Passive Income
Wikipedia defines passive income as an income received on a regular basis with little effort required to maintain it.
This means the income comes in and continues to pay you whether you work or not.
See if you are an employee (which most of us are) you are likely paid a salary or an hourly rate. Neither or these are passive. If you stop working you stop getting paid. The income is directly dependent on the the hours and work you put in.
Passive income is different because it comes in whether you work or not.
How Do Positive Cash Flow Properties Generate Passive Income
Positive cash flow properties by definition generate more income than you are required to pay in expenses. This extra income is considered passive because little work is required to maintain it.
Let’s say you buy a house as an investment and your monthly expenses (mortgage, council rates, insurance, management fees, maintenance etc) are $1,500/month.
You then rent out that property and the tenant pays you $2,000/month.
As your expenses are only $1,500 you would be generating $500/month in passive income ($2,000 – $1,500 = $500)
As a property manager (usually a local real estate agent) is managing the property for you there is little work required from you to continue to generate that income. Thus, the income is passive.
5 Strategies For Obtaining Financial Freedom
It would be very hard for anyone to achieve financial freedom in Australia on just $500/month. But what if you had 20 properties all earning that same amount.
$10,000/month or $120,000/year is a great income by anyone’s standards and is leagues ahead of what the government pension pays retirees.
There is an old (and slightly gruesome) saying that says “There are many ways to skin a cat” and the saying holds true for property. “There are many ways to achieve financial freedom through property”.
I have listed 5 common strategies for achieving financial freedom through positive cash flow property. For more indepth training on finding and investing in positive cash flow property join the Positive CashFlow Academy.
1. Purchase Enough Positive Cash Flow Properties (don’t pay down debt)
In his book 0-130 Properties in 3.5 Years (affiliate link) investor Steve McKnight and his business partner purchased an obscene amount of properties in a very short period of time.
Although they were slowly paying down debt on many of their properties they achieved financial freedom by owning positive cash flow properties en mass.
If your goal is $10,000/month and each property earns you $100/month in passive income the owning 100 properties would deliver your income goals.
If each property generated $500/month then you would only need 20 properties.
The idea is to continually buy properties that spin off passive income. Paying down debt is more of an afterthought and natural occurrence than it is the ultimate strategy for financial freedom.
2. Buy, Hold and Slowly Pay Down Debt
In this strategy your goal is to buy and hold positive cash flow properties. However, rather than using the extra cash flow to aggressively invest in as many properties as possible you use it to pay down debt.
The goal is that over time the passive income from the properties completely pays off the debt that you owe. Then your largest expense (your mortgage) disappears and you live off the original passive income plus the money you used to pay towards your mortgage each month.
3. Buy, Hold and Sell To Pay Down Debt
In this retirement strategy you buy and hold properties in your portfolio. When it comes time to retire you sell a couple of properties (which have hopefully gone up in value) and use the profits to pay down the debts.
An example would be if you purchased 5 properties each for $500,000. Assuming an 80% loan for each your total debt would be $2,000,000. Your income (let’s say $700/week per property) is used to pay expenses and not much else.
You hold the properties and when it comes time to retire they have now all doubled in price and are worth $1,000,000 each. You sell of two properties collected $2,000,000 and use it to pay off your debt.
You keep 3 properties, and as you don’t have a mortgage to pay the majority of the rental income is profit to live off.
4. Buy, Hold and Use Equity To Live Off
In this strategy you buy and hold properties with the goal of having them go up in value.
Let’s say you buy a property every year for 10 years at $500,000. Assuming property doubles every 10 years in 10 years time property #1 will be worth $1,000,000.
So in year 11 you get an equity loan for $100,000 against property #1 to live off for the year.
In year 12 you get an equity loan for $100,000 against property #2 to live and so on.
Until you get to year 21 and you are back to property #1 again (which is now worth $2,000,000 as it has doubled again).
You now borrow against property #1 again and the cycle starts a fresh.
In order for this to work you either need an income to support the new loans or the rent needs to be great enough to support the repayments on the new loans.
5. Buy, Hold and Sell Everything – Then Put Your Money In The Bank
The final strategy is one where you buy properties and let them accumulate in value over time.
When retirement comes you then sell the properties to realise the profit and you retire. You either spend the money or you put it in the bank and live off the interest.
This can be done selling your properties as you need cash, or it can be done all at once so you have a lump sum of money (but you usually pay more tax).
Positive Cash Flow Properties Can Make You Financially Free
There you have 5 ways positive cash flow properties can make you financially free. There are many people who live off the income their investment properties generate for them.
The most important thing is to get started as soon as possible. Start finding and investing in positive cash flow property whenever you can.
If you want training on finding positive cash flow properties check out the Positive CashFlow Academy for advanced training modules on finding these properties all over Australia. Or let us do it for you with our free positive cash flow property listings.