Positive cash-flow investing. How does it work?

Written by Mark Thomas

25 September, 2019

Want an investment that pays you income from day one?

Positive cash-flow properties are investment properties that provide you with an income stream.  The income from these properties exceeds the expenses. It’s that simple. Most property investments get there in the long term provided you are patient enough, inflation pushes up rents, and you pay down debt systematically.

The typical situation – on purchase it is quite normal that expenses exceed income because the interest expenses are typically high due to high debt levels.  The government provides a subsidy to investors that are in expense deficit called negative gearing whereby the loss (deficit between expenses and income) is tax deductible.  But as the years pass by and the debt is paid down these negative income properties slowly turn into break even and then positive income positions.

But what if you could avoid the wait and buy an investment that pays you income from day one?  Well this is reality for some investments i.e. they start off with income higher than expenses.  The one reason behind these attractive investments is their higher rental income.

The two models that can produce positive cash-flow investing include 1) commercial property investments; and 2) dual occupancy property investments.

 

Commercial property

Commercial property refers to real estate property that is used for business activities. Commercial property usually refers to buildings that house businesses, but it can also refer to land that is intended to generate a profit, as well as larger residential rental properties.

Commercial property generally provides a higher return on investment (ROI) compared to residential properties. According to CoreLogic, the average rental yield for commercial properties, such as a warehouse, is between 8-10%, whereas the rental return for residential properties is 3-5% on average.

Commercial properties may refer to:

  • retail buildings
  • office buildings
  • warehouses
  • industrial buildings
  • apartment buildings
  • “mixed use” buildings, where the property may have a mix, such as retail, office and apartments.

Pros for commercial property

Cons for commercial property

  • Higher income (5-10%)
  • Professional relationships – your tenants are businesses
  • Limited hours of operation
  • More objective valuation (less emotion)
  • More flexible lease terms
  • Longer lease terms and certainty
  • Management of multiple tenants
  • Potentially require professional management
  • Bigger initial investment 
  • More risks you need to insure
  • Shorter loan terms (15 vs 30 years)
  • Higher deposit required

 

Dual Occupancy

Dual occupancy means a dual occupancy (attached) or a dual occupancy (detached). Dual occupancy (attached) means 2 dwellings on one lot of land that are attached to each other, but does not include a secondary dwelling.

Dual occupancy homes provide a unique investment opportunity where it is possible to rent one side of the house out while living in the other. A dual occupancy development consists of two dwellings built on one block of land. Dual key designs often share some common areas, such as the entrance foyer.

A dual occupancy home is similar in some ways to a duplex as they are still two homes on the one block. The main difference between a dual occupancy and a duplex is that, in most cases, you cannot subdivide and have separate titles with a dual occupancy.

Also known as a dual occupancy, each side is a completely separate home, with its own entrance, amenities and yard. Duplexes are sometimes on one title, meaning both halves must be sold together. If a duplex is subdivided into two separate titles, each home can be sold separately

Dual occupancy developments allow two dwellings to be built on one block. Also known as a duplex, dual occupancies are common developments in areas with large blocks and older housing stock that isn’t protected by heritage constraints.

Pros for dual occupancy property

Cons for dual occupancy property

  • Higher income (5-10%)
  • Reduced maintenance
  • A property with two sources of income
  • Income returns for both the short and long term are superior
  • Positively geared from day one
  • Because the dual occupancy delivers a superior cash flow you actually need less of these properties in retirement
  • Potentially harder to sell as both properties are on the one title
  • A risk that lenders would introduce stronger lending requirements either in the form of greater deposits (lower LVR) and/or greater serviceability
  • Purchase prices are typically higher 
  • Renters may have preference for a standalone house with a big backyard

 

If you are interested in positive cash-flow investing we will be holding a session on Saturday October 26th at the Property Buyer & Investor Expo featuring Graeme Hough of Commercial Warehouse and Graeme Shiels of Property Queensland. Get your tickets here!