Why Is Cash Flow Important When Investing In Property? (Ep139)
Cash flow is important for a number of reasons and today I have listed seven reasons why I think cash flow is extremely important.
1. So Your Investments Don’t Trap Your Life
You may be wondering how an investment could keep you trapped. The fact is that a lot of people invest in properties that are negatively geared. This means that every week or every month they are paying out-of-pocket for the property to keep it going.
Now this situation is fine while you have a high-paying job, but let’s say you want to be crazy like me and move all the way to the Gold Coast to start a new life with your family. If you are going to have to leave that high-paying job then you probably won’t be able to afford the mortgage on that property.
In this way the property is keeping you trapped because you don’t have as many options since you are under a financial strain by making payments to the property.
Also, even if you are stable now and you’ve got a great job, what’s going to happen if in the future the economy changes or you decide that you no longer want to be an accountant or a lawyer? Circumstances change and you have to be aware of that.
So investments can trap you. But if you have investments that are generating cash flow then generally you’re not going to feel as trapped because an investment that pays for itself actually gives you extra money and the freedom to decide what you want to do with your time. That way, if the property is taking care of and paying for itself it will actually help to fund anything that you want to do.
2. So You Can Afford To Invest
Not all of us earn a great deal of money. We’re all paying for our life expenses like food and rent. Some of us may even have to pay for our children’s schooling. All of these costs are necessities but they can certainly add up and become expensive.
Therefore, investing in a positively geared property that generates cash flow means that you can actually afford to invest when you may not have been able to in another situation.
3. You Need Cash Flow To Grow Your Portfolio
Expanding your portfolio means that you are highly likely to take on more debt and responsibility. If you have cash flow behind you or if you have properties that generate cash flow then that can fund future investments and help with the expansion of your portfolio.
But again if you’re investing in negatively geared properties and putting in every dollar you earn just to keep that property afloat, then it’s going to be pretty hard to go out and expand your portfolio and get exponential returns on your investments.
4. Cash Flow Is Important For Contingency Purposes
If you have cash flow coming in on a regular basis you can put some aside and save a fund that can be used in contingency situations. For instance, my mum bought two properties within the space of one year. In both of those properties the hot water heater needed to be replaced which cost hundreds, if not just over $1000, in both circumstances.
By having cash flow coming in and a contingency fund saved you’re more likely to be able to pay for those expenses that you didn’t expect.
5. You Can Start Seeing The Benefits Sooner
Not all of us want to invest using our super and only see the benefits when we turn 65 or whenever it is that you can claim the money. We want to start seeing the benefits very soon and so one of the benefits of cash flow is that you can decide to access those benefits sooner rather than later.
As for a negatively geared property, like I’ve mentioned you’re not seeing the benefits because you are paying money to keep that property afloat. In order to see the benefits you have to sell your property which may not be the best long-term strategy for you.
But if you have a passive income from cash flow then you can siphon the passive income out after you’ve paid expenses and use it for your lifestyle straightaway if you want to.
6. So Someone Else Can Pay Off Your Mortgage For You
Rather than paying off your mortgage yourself, positive cash flow means that someone else is effectively paying off your mortgage for you.
The rental income is covering all of your expenses including your interest repayments and then generating passive income on top of that. You can siphon that passive income back into your mortgage or you can even wait until the rental income goes up over time and switch from an interest only loan to a principal and interest loan and therefore pay off your property over time.
So having someone else pay off your mortgage for you is a pretty exciting idea and while it doesn’t happen right away, it is still exciting that someone else pays off your massive loan for you over time.
7. Cash Flow Helps You Achieve Financial Freedom
One of the things that I get really frustrated about is when people decide that they want to invest in property but they don’t actually set any financial goals. They don’t have any reason why they want to invest in property apart from the fact that they hate their job or that they just don’t want to work any more. The problem is they don’t actually set a goal of what they want to achieve.
Personally I think financial freedom is a great goal to strive for and it happens when you’ve got more passive income coming in then you are spending in your everyday life. That means that you’re not reliant on a job or a wage in order to live your life and you have the freedom to do what you want with your time while the cash flow property produces passive income that could help you achieve financial freedom.
A lot of investors invest in a mix of properties having some that are negatively geared and some that are positively geared. They may even have all negatively geared properties. Then they accumulate a mass of properties and allow them to go up in value over time.
Eventually they sell off a couple of properties and use the equity they’ve gained to pay down the debt on the properties they kept and therefore turn them into a positive cash flow situation by the paying off the mortgage. This means that those properties then start to fund those people’s lifestyle and help them achieve financial freedom.
This concludes my seven reasons why cash flow is important when investing in property. Hopefully I have convinced you that cash flow can be pretty cool and and turned you into a lover of cash flow just like I am.
A disclaimer: I am not a financial adviser and I can’t give this as financial advice. This is for educational purposes only and states my opinions on cash flow properties.
Because cash flow is so important it is important to do your cash flow analysis before you buy. Doing this analysing by hand is extremely time consuming. Luckily there is a better way. Check out The Advanced Property Calculator