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What is a positive cash flow property?

My husband and I have paid off our house, our kids have got jobs and have moved out and we are thinking about getting into property investing. We both have good super funds being teachers and we prefer to buy investment properties to use the tax deductions to make it more effective. I have heard about positive cash flow techniques to make investing in property but I don’t fully understand it. Why is it different from a positively geared investment property? Could you explain?

The dream investment property is one that’s positively geared and rises in value. These are not very common but they do happen.

I once interviewed a guy who bought 10 properties for around $1 million near Beenleigh in Queensland, all of which were rented out for an amount which meant they were positively geared. He didn’t care about the capital gain, as he just wanted properties where the income was bigger than the expenses including the interest rate repayments. Those properties, within 10 years became $300,000 houses, which meant he made $2 million in capital gain and it did not cost him anything!

Positive cash flow properties are ones where by using the potential tax deductions you can make the money going out from the property less than the money coming in. That is, the rent plus the tax deductions turn your cash flow from the rental property from negative to positive. Most negatively geared properties have a negative cash flow but we live with this because the tax deductions soften the negative cash blow and eventually the capital gain, from the rise in the price of the house, really makes it worthwhile.

Now what some experts have noticed is that a lot of people don’t make the most out of their potential tax deductions, even if they use an accountant. By using a quantity surveyor, which could cost you a tax deductible $500, you could really ramp up your deductions. This, in some cases, will turn a negative cash flow property into a positive one but even if it doesn’t completely achieve the positive outcome, it will definitely soften the blow.

I recommend you do some serious homework on property investing, as there’s a wealth of info out there that can make you into a very savvy real estate investor.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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Published on: Monday, December 06, 2010

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