Property has long been one of the most popular forms of investment, and a lot of people get into it to improve their cash flow. However, it is important to recognise that this will not happen immediately. Once you have built up a large portfolio of investment properties, you may be able to live off the cash flow you accumulate. However, asset growth needs to occur first.
Patience is key, but you also need to understand your cash flow along your investment journey. This is what is going to keep you in the game, enabling you to grow and grow your portfolio until your asset base is large enough to get out of the rat race. With that in mind, let’s take a look at some of the important factors to consider when understanding and maximising your investment cash flow.
Tax deductions – Make sure you find out what tax deductions you are eligible for. This is one of the best ways to improve your after-tax cash flow. A lot of investors are paying more tax than is necessary without realising.
Vacancies – One thing you need to understand is that your property is not going to be occupied 100 per cent of the time. You need to account for this, as it will impact your cash flow considering there are going to be months when nothing is coming in. It’s wise to assume that your property will be vacant a month each year while you potentially look for new tenants. Of course, the landscape changes if you have purchased a holiday home to rent out on a short-term basis to holidaymakers.
Purchase or acquisition costs – When budgeting for the purchase of your property, you do not only need to account for the price of the property, but you also need to allow for all of the settlement costs associated with purchasing it. This includes things like the agent’s letting fees, the initial vacancy period, insurance, improvements or repairs, valuation fees, loan costs, legal costs, and stamp duty. Your planned cash flow will be impacted by any underestimations in regards to these expenses, which could demand further input from your personal finances.
Interest rates on borrowings – A lot of people require a mortgage in order to begin their property investment journey. Many investors also use bridging loans to assist them during periods whereby cash flow is tight and they do not have the immediate credit due to cover any debts. Loans are a normal part of the investment process, but make sure you incorporate the interest rates in your cash flow plan. The best way to control this is to lock most of your loans into a fixed interest rate agreement.
Depreciation – Finally, depreciation is a vital factor that must be accounted for, however, a lot of property investors tend to overlook this. Items within your property are going to depreciate in value as the building gets older. You may be able to claim depreciation against your property income, depending on where your property is based.