Is it cash flow positive or cash flow negative? Seems like a simple question to ask of an investment property but its one that comes down to an awful lot of variables – most of them having as much to do with you as it does the property itself.
Looking back 2 years to those dearly missed 2% interest rates, it was pretty easy for a house earning a 6% gross return (not uncommon here in Cairns) to be bringing in more in rent than was going out for the mortgage (particularly interest only), rates, insurance and general maintenance. At that point it was hard to NOT be cash flow positive, almost regardless of how the purchase was structured.
Bring it back to 2023, and that 2% is now 6%, putting that property in the red straight off the bat where the full amount had been borrowed. But that is where YOU come into the picture and the maths gets a little more complicated.
For the more conservative investor that likes a big deposit and an aggressive paydown, you might only owe 60% - dropping the interest bill accordingly, and potentially putting you back into a break-even or positive position. A healthy increase in rent following a minor renovation or a transition to a lucrative holiday letting can also change the equation. I’ve seen (some) units in key locations go from earning $300 per week to $600 per week (albeit with great effort) – that’s a whole new dynamic.
Beyond the day-to-day cashflow management there are of course also things like depreciation to consider (if this fits your investment strategy) – returning cash at tax time (though with potential repercussions at the time of sale).
In making a decision on your prospective investment property, you’ll need to take this into consideration as well as your end goals. For some buyers, cash is king and unless the property is providing an immediate income boost, then it won’t be considered. For others, its all about capital gains and the income is just there so the property can wash its own face (pay for itself) or at least minimise the holding costs until the time comes to sell.
The latter tends to be more commonly followed in capital city markets like Sydney or Melbourne, though good luck finding a house at the median house price (circa $1.3M) that pays its own way in the current interest rate environment.
As our market continues to perform both on the rental and sale front, hopefully we continue to see opportunities for both.