Many overlook a crucial aspect of property cash flow—the actual cost of your deposit. Contrary to common belief, a 20% deposit in residential property does not guarantee positive cash flow, as it often fails to factor in the deposit’s true expense.

So, where can you find day-one positive cash flow? Is it in residential or commercial properties, and how can you invest wisely? These questions are common among potential investors, especially those embarking on their property journey without a clear understanding of the value of cash flow.

Whether you choose residential or commercial investments, recognizing the importance of cash flow is paramount. Disregard the misconceptions suggesting that a mere AUD 50 can secure your retirement. To retire comfortably in 3 to 5 years, you’ll need a weekly income of AUD 500, 1,000, or even 2,000 for one or two properties, with a strong inclination towards commercial property due to its higher cash flow potential.

The top 10% of Australian property investors own more than five properties, while the top 1% possess 10 to 12 properties. Achieving this requires obtaining five properties and mastering the intricacies of cash flow.

What is cash flow?

Let’s consider a property worth a million dollars. If you’re buying that as a residential property, you have to put in 20%, which is about $200,000. For now, let’s not worry about the cost. Instead, let’s focus on the million dollars. You put in $200,000 and you’re borrowing $800,000. Your $800,000 at the moment is about 7% in borrowings, so you might get a fantastic full 7% of $800,000, which is about $56,000—just over a grand a week.

If you’re adding costs like strata fees, insurance, land tax, management fees, maintenance, and council rates, you’ll probably add another $15,000 or $20,000 to it. Let’s consider the round-off number to be about $70,000—about $1,300 per week. That’ll cover the mortgage and the outgoing, but not your $200,000. That’s $70,000, or $1,300 a week.

However, only some will get that from their rental. If you do get $1,300, that’s a great investment, but your $200,000 is still not covered and you’re still negative. So the true cost that people don’t calculate when it comes to cash flow is the cost of their deposit—$200,000. The $200,000 is sometimes drawn down on your equity, so that’s when the value of your property increases. But that cost of $200,000 is another 7%, so that on its own is $14,000, and most people don’t calculate that.

When they get a residential property, they pay $1,300 a week and think that’s covering all their expenses, and they’re now neutral. If the rent increases by $100, they now have positive cash flow. But that’s not the case because you’re still negative. After all, you still have to find an extra $14,000, so the true cost of holding that property is around $84,000.

That is close to about $1,700 a week. With a $1 million purchase, even if you buy it in Sydney, Metro, Melbourne, or if you go somewhere like Townsville, Rockhampton, or some far-away place in WA, you aren’t going to find that payment. You might find it in a mining town when you spend a million. That’s a high risk and it will come down.

Most of the time, you buy residential for the growth, not for the cash flow, so you’re going to be negative anywhere. Most of the time, with a property like this, you’re probably going to be anywhere between $500 to about $800 negative a week. So that will be $25 to $40,000 negative a year.

If we switch that to a commercial property, when we calculate, we calculate everything. But the great thing is your tenant pays the outgoing, so there’s $20,000 you don’t have to find. All you have to do to support a 7% interest rate on a million dollars—that’s $200,000 coming from you as a deposit and the other $800,000 is the set (5x $56,000) coming from the repayment for that loan. So together it’s $76,000.

All you have to do is find a 7.5% or more yielding property. All you have to do is to find a property that’s 7.5% yielding or above, and you will be able to break even on that property the following year as the rental increases, the interest rate drops, and you start to make cash flow.

You may be wondering, with what’s happening in the market, if you’re going to find a property yielding 7.5% or more. The answer is yes! 2024 is where the opportunity is. We’ve seen 2023 where the returns and the yields haven’t moved, but in 2024 we’re going to see some movements in different regional areas, especially in large regional councils where the movement will come.

The key is to know where to find them and to position yourself so that you’re market-ready to buy. This is why being market-ready is important because people don’t think about that and instead they think that they’re ready to buy and they just want cash flow.

Becoming market-ready with a seasoned buyer’s agent

Fundamentally the most important thing to remember is that outgoings cost you money and expense is the enemy.

A lot of people aren’t market-ready because they haven’t gone through the right process and they don’t have the knowledge to make the right investment decisions. That’s where a specialist buyer’s agency can help in building out a property portfolio.