The Active Home Loan Manager

Investment Property Cash flow

If you’re considering an investment property, it pays to spend time figuring out the cash flow implications of the property you’re purchasing – and the loan you’ll be servicing.


Working Out How Much You Earn From Your Investment Properties

Do you know if your property is negatively or positively geared? If not, you can use an investment property cashflow calculator to figure out how much your property earns each week. This creates your investment property cash flow.

What is Investment Property Cash flow?

Every property you own is a business unto itself. Each comes with separate income and expenditures, resulting in a profit or loss.

Your investment property cashflow relates to whether you make money from the property. If the weekly fees exceed the amount earned in rent, you have negative cash flow. This means you have to invest more money into the property to maintain it.

Many investors find their properties have negative cash flows at first. As the balance of the loan is paid down over time, and as rent received increases, the cash flow trends towards the positive. While many investors aim for this, there are some who can benefit from negative cash flows. In particular, investors in the higher tax brackets can use negative cash flow to their advantage. This allows them to benefit from negative gearing and the tax benefits that come with it.

It depends on your situation. Talk to an expert to find out if aiming for a positive or negative cash flow is right for you.

More about Negative Gearing

Negative gearing is a complex concept. It involves making losses on cash flow. Investors can claim these losses as deductions on their tax returns. They can then put these deductions back into the investments.

A simple example works as follows:

You have an income of $200,000. Your investment property has a negative cash flow, leading to a loss of $20,000 per year.

You can deduct $20,000 from $200,000 to create a taxable income of $180,000. That’s the first benefit.

Now, let’s say your tax rate is 49% (which is what it would be on a $200,000 income, including the Medicare Levy and the Temporary Budget Repair Levy). By deducting the $20,000 loss from your income, you will reduce your tax payable by $9,800.

Of course, it can be more complicated than that in practice. A tax advisor can help you if you feel that you can use negative gearing to your advantage.

You can use uno’s calculator to work out whether an interest-only home loan is more costly than a principal and interest loan.

Remember that this is a guide. You should talk to an adviser for a more comprehensive look at your cashflow.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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