How Cash Flow is Important When You Plan to Buy an Investment Property

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Before we start with the effective management of cash flow, you need to understand what is cash flow? Cash flow is the main aspect of any business administration. It refers to the measurement of the net amount of cash that comes in and out of your business or investment in a period of time. At the fundamental level, we can say that Cash flow is measured by contrasting how much money flows into a particular business to how much money flows out of that business.

How to Calculate Cash Flow?

The simple way is to calculate cash flow is subtracting all the expenses and cash reserves from the gross rental income. That is, if your cash flow is positive, then it means that your business is doing profit. And, if your cash flow is negative, then that it means that your business is running at a loss.

For example, if the money put in every year for holding a property is higher than the money earned from it, then the cash flow of that particular property is negative. You must go through the investment property depreciation schedule ATO to obey all the rules of investment ad tax.

Factors You Should Look for Before Investing in a Property

  • Rate of interest: It is an amount of interest due per period as a proportion of the amount borrowed. The rate of interest is prone to fluctuations according to the demands of the market.
  • Depreciation estimates: Depreciation estimate is the future dip or decrease in the selling value of a particular property. It is counted on the basis of the maintenance and value of the land and the age of the property. You can plan out a depreciation schedule for better management of the estimated depreciation on your property.
  • Body corporate fees: In case the property in question is an apartment then maintenance charges for the utilities such as parks, swimming pool, gymnasium, etc. are to be taken into account.
  • Insurance: It provides property protection coverage for the owners. Insurance of a property is a must as it provides a lot of benefits and gives liability coverage.
  • Tax breaks: It is a concession that includes exemption, deduction, or credit which is often allowed by the government in order to boost investments. Apply for the PAYG withholding variation.
  • Rental estimates: It should be an amount that is to be set after taking all the factors into account for a profitable income. It is very important to get your accountant to do all the numbers and chalk out a proper plan.

Factors for a Negative Cash Flow after Investing in a Property

  • Repairs and maintenance: If the maintenance is too high than the income and if you need to dip into your own pocket for that extra money then it is a negative flow of cash.
  • Property taxes and insurance: Taxes and insurance costs can go up anytime and if you do not prepare for such a situation then you have to look for a better deal and invest smartly. But you can also apply for the tax depreciation to compensate for the loss.
  • Tenant turnover: If a tenant moves out suddenly, you have to take care of beyond what their security deposit covers. Again, many property management companies charge a “lease fee” from you, which is similar to a month’s rent.

Bottom Line

Investing in property or real estate is all about counting proper numbers. It deals with an understanding of the business, where cash flow is a major factor in a buy and holds an investment program. Keep in mind all the factors discussed above for positive cash flow. It is better if you have proper knowledge about depreciation for residential rental property before you plan to buy an investment property.