{"id":10118,"date":"2016-12-15T10:00:17","date_gmt":"2016-12-14T23:00:17","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=10118"},"modified":"2016-12-15T10:00:17","modified_gmt":"2016-12-14T23:00:17","slug":"why-cash-flow-positive-property-is-not-a-strategy-margaret-lomas","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/why-cash-flow-positive-property-is-not-a-strategy-margaret-lomas\/","title":{"rendered":"Why cash flow positive property is NOT a strategy – Margaret Lomas"},"content":{"rendered":"

 
\nMargaret Lomas<\/strong> explains why positive cash flow property investment is not a strategy and how the same property, if owned by two different investors, could deliver a totally different outcome.
\n <\/p>\n

Transcript:<\/strong><\/h4>\n

Kevin<\/b>:\u00a0 I remember talking to Margaret Lomas from Destiny Financial Solutions about this time last year. I said, \u201cMargaret, how is cash flow? How do you see cash flow as a strategy?\u201d and you rightly pointed this out to me.
\nHi Margaret, how are you going?
\nMargaret<\/b>:\u00a0 I\u2019m going really well.
\nKevin<\/b>:\u00a0 Cash flow is not a strategy; it\u2019s more an outcome.
\nMargaret<\/b>:\u00a0 Exactly. I know when we did talk about this last year, you asked me whether or not it was possible for people to use positive cash flow as strategy for buying property, and I said to you then that the thing about positive cash flow is that it isn\u2019t a strategy; it is simply a tax outcome. And because all property is different, then it\u2019s a tax outcome that will also be different for each individual investor.
\nLet me give you an example. Let\u2019s say you and are were going buy a property and we found a property next door to each other. We\u2019re going to buy them to the same price, they would rent for the same amount, and fairly similar properties.
\nBut Kevin, you\u2019re very wealthy, and we all know how much money you earn, so you\u2019re in that top tax bracket. And I\u2019m a poor, struggling writer, so I don\u2019t pay very much tax at all. I\u2019m right in that bottom bracket.
\nAlso, you happen to get one that has an upgraded kitchen, it\u2019s had a brand new bathroom, so you\u2019ve got a bunch of on\u2011paper deductions that I can\u2019t get out of my property because I don\u2019t have those kinds of deductions available.
\nThe bottom line for both of us will be very, very different. Even though we\u2019re getting the same purchase price and the same rent return, you may well get a positive cash flow because you\u2019re going to get back more of your tax dollars because you pay more tax in the first place, plus, you have all that on\u2011paper, which you don\u2019t pay anything out for but you get some of your tax dollars back for.
\nOn the other hand, I haven\u2019t paid much tax, so there\u2019s not much to get back. I\u2019ve got nothing on paper, so my property is likely to be negative cash flow because I didn\u2019t have those tax dollars to plug up the gap between income and outgoings.
\nKevin<\/b>:\u00a0 It\u2019s a very good example, Margaret.
\nLet me ask you this question. People who look for positive cash-flow properties, would you say they\u2019re more risk adverse \u2013 they just don\u2019t want to take that risk?
\nMargaret<\/b>:\u00a0 Maybe. Let\u2019s just sort of talk about how people go through that process, because people call me all the time and say, \u201cLook, I want to buy a positive cash flow, and I only want to buy a positive cash flow.\u201d
\nWhat that mean is they\u2019re seeking a property that\u2019s going to be able to give them enough money that they\u2019re not really dipping into their own pocket. That\u2019s really what their strategy is and that\u2019s what they\u2019re aiming to achieve.
\nNow, we need to understand, as I just said, all properties are different. There is a basis that you can start on, though. Some properties, no matter how much tax you get back, will probably still be negative if it\u2019s got really low yield.
\nAnd if we\u2019re in a really low interest rate environment, then that makes it hard to get positive cash flow too, because the more money you pay in interest, then the less money you\u2019re going to have left over to meet all of your other costs.
\nIf we\u2019re in a low enough interest rate environment, and if we also can find areas where the rent returns aren\u2019t too bad \u2013 say 5 to 6% in the minimum \u2013 then we could also find properties that have a decent amount of on\u2011paper depreciation \u2013 so they\u2019re properties that are a little bit newer \u2013 then you have a better chance of getting a positive cash flow.
\nNow, the other thing that people have to understand is that first of all, it\u2019s unusual and unlikely for you to find a positive cash flow property that\u2019s positive cash flow from day one. When you first buy a property, remember that at that point in time your expenses are going to be as high as they\u2019re ever going to be, and your rent is going to be as low as it\u2019s ever going to be.
\nOver time, rent goes up and expenses go down because you start to repay debt. So a property that\u2019s negative cash flow can become positive cash flow within a couple of years of buying it. That\u2019s the first thing.
\nAn investor should probably seek out a property that\u2019s likely to become positive cash flow as soon as possible, because it\u2019s already got good rental yield. But the trap that investors fall into is in looking for this positive cash flow, they often buy areas that don\u2019t have anything else going for it.
\nKevin<\/b>:\u00a0 Yes.
\nMargaret<\/b>:\u00a0 The important thing to understand about cash flow is cash flow might keep you in the market because it means that you are not financially burdened by a property, but unless there are other things about that area, such as the growth drivers that I always talk about, then if the property never grows, then you\u2019re not going to achieve anything because it\u2019s the growth in the asset that get you out of the market when you retire. You have the build up a net worth in order to be able to afford to leave the paid workforce.
\nKevin<\/b>:\u00a0 Now, you talked about growth drivers there. You and I have chatted on previous occasions, and if you only go back and search through some of the interviews that I\u2019ve done with Margaret, we actually do touch on those key drivers.
\nMargaret<\/b>:\u00a0 There\u2019s so much information out there at the moment, yet still, we have too many of the property experts hawking the same message. They talk about things that really are relevant in terms of whether or not a property is going to perform well for you.
\nPeople still buy property emotively, as well, so they still want to buy property according to one they can get for a good price, or one that they think they can get a rental return for without having to look at what really drives growth and the importance of those growth drivers.
\nKevin<\/b>:\u00a0 Margaret, once again, thank you for your time. It\u2019s always great talking to you.
\nMargaret<\/b>:\u00a0 Thank you.<\/p>\n","protected":false},"excerpt":{"rendered":"

  Margaret Lomas explains why positive cash flow property investment is not a strategy and how the same property, if owned by two different investors, could deliver a totally different outcome.   Transcript: Kevin:\u00a0 I remember talking to Margaret Lomas from Destiny Financial Solutions about…<\/p>\n","protected":false},"author":176692471,"featured_media":10120,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[34,10,11,13,36,17,25],"tags":[101],"class_list":["post-10118","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-topic","category-kevin-turner-sponsored-channels","category-kevin-update","category-latest-story","category-property-investment-topic","category-property-investment","category-sponsored-channels","tag-podcast"],"yoast_head":"\nWhy cash flow positive property is NOT a strategy - Margaret Lomas - 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