What do you really mean when you say cashflow positive?

[OneStepCloser]

Hi all,

What do people really mean when they say cash flow positive property?
- Is it AFTER you have put in the deposit or BEFORE you put in deposit?
- Does it INCLUDE paying off the principle or just covering mortgage interest + all outgoings?
-
I am quite confuse with how people use the term here.

Thanks.

[Damap]

Income less all expenses including the mortgage. Whether you include principal or not is up to you. People do it both ways depending on your investment strategy.

[orion]

Hi all,

What do people really mean when they say cash flow positive property?
- Is it AFTER you have put in the deposit or BEFORE you put in deposit?
- Does it INCLUDE paying off the principle or just covering mortgage interest + all outgoings?
-
I am quite confuse with how people use the term here.

Thanks.

This came up at the Wellington seminar I spoke at last month so I've started to write another article on it, haven't got far yet, this is how it goes so far (although may change!)


What does Cashflow Positive Mean?

I will often ask at seminars and meeting with investors – what are some of your rules for investing?
Most will say that one of them is to only buy cashflow positive properties.
I will say – well what does that mean?
They will often look at me as if to think I’ve never heard of the saying ‘cashflow positive’ before. So, they say well it has to make money!
I say – ‘ok so let’s say I buy a house for $200,000 with no mortgage and it rents for $50 a week, is that cashflow positive?’
They say no it’s not.
And I say well it actually is!

[Damap]

let’s say I buy a house for $200,000 with no mortgage and it rents for $50 a week, is that cashflow positive?’

If the rates, insurance, management fees, maintenance and vacancy exceed $50 a week, then actually it isn't.

[orion]

Wait until its finished Dean

[Damap]

And I say well it actually is!

That was the end of the post Graham.

[OneStepCloser]

Looking forward to your new article Graeme. Thanks.

[webhostienz]

This came up at the Wellington seminar I spoke at last month so I've started to write another article on it, haven't got far yet, this is how it goes so far (although may change!)


What does Cashflow Positive Mean?

I will often ask at seminars and meeting with investors – what are some of your rules for investing?
Most will say that one of them is to only buy cashflow positive properties.
I will say – well what does that mean?
They will often look at me as if to think I’ve never heard of the saying ‘cashflow positive’ before. So, they say well it has to make money!
I say – ‘ok so let’s say I buy a house for $200,000 with no mortgage and it rents for $50 a week, is that cashflow positive?’
They say no it’s not.
And I say well it actually is!

stop being so cryptic mate...what are you trying to say? 50 bucks per week on a 200k mortgage is not cash flow positive at an avg interest rate of 6%

[orion]

stop being so cryptic mate...what are you trying to say? 50 bucks per week on a 200k mortgage is not cash flow positive at an avg interest rate of 6%

Not trying to say anything, I just said it.
You just didn't read it correctly.

[Damap]

Yeah Web Graham said that a property earning $50 a week is cash-flow positive no matter what expenses it has. That's not true but that's what he said.

[BigDreamer]

stop being so cryptic mate...what are you trying to say? 50 bucks per week on a 200k mortgage is not cash flow positive at an avg interest rate of 6%

If you read Graham's post you would notice he said a house for $200,000 with *no* mortgage and, therefore, it does not matter what the interest rate is.

However, I do agree with Sean/Damap that we still need to accommodate all expenses such as rates, insurance, and any maintenance costs for that period before confirming whether or not the property is cashflow positive or not.

[OneStepCloser]

I am interested in to understand what other people's strategies are. For those who emphasis on cashflow postive, do you chase for cashflow +ve with no deposit? Will you relax your rules if you have cash for deposit? Would you purchase something with less yield because you can still get +ve cashflow with deposit? Or do you stick to your strategy and only buy cashflow property at 100% mortgage?

[Damap]

It's sort of an impossible question to answer Onestep as it depends on you.
For example one investor who let's say has just sold a property so has 500K in the bank might buy a 1 million dollar property in a blue chip location and use the 500K as deposit to make the property cash flow neutral on interest only because they believe the location will increase in value significantly etc. etc.
Another investor with that 500K would rather buy 5 or 10 properties so will go to the provinces and buy properties that are cash positive on 90% loans on P and I.

The thing is to have rules and stick to them. My "minimum" rules when I was full time were cash neutral on interest only with 20% deposit, brick or weatherboard only and never refinance.

Yours may be completely different. The only significance of the cash positive phrase is to decide what that means for YOU and set rules accordingly.

[sazu]

@Damap. 'interest only' and 'never refinance' does not add up ('cos I thought P&I plus never refinance can get you free hold after x number of years). Could you please expand on why 'never refinance'? thank you

[Damap]

Never refinance means never top up the mortgage to more than original amount. The banks eventually force you on to P and I so in those days I went IO initially then as rents increased switch over to P and I.

In high growth markets like Auckland it is very common for people to refi as fast as they can and keep using the equity for more deposits. Staying high leveraged like that can eventually bite you.