[THE VAULT] WHEN NEGATIVE CASH FLOW IS GOOD. WAIT…WHAT!?
At Binvested, we don’t believe in negative gearing as a strategy however when purchasing an investment property with negative cash flow , it is important to understand how it will play a part in your overall portfolio. This example from the Vault shows how, under the right circumstances, a slightly negative cash flow can play a positive role in your investment strategy.
PURCHASED $75,000 UNDER MARKET VALUE
This fibro cottage in the Hills District of Sydney was purchased in mid-2013 for $425,000 – around $75,000 below market value, meaning that the buyers were already in the clear from day one. At the time of purchase, the rent was $450 per week, which created a borderline cash flow which was slightly negative. However, the buyers made sure not to bight off more than they could chew, and could sustain the slight deficit in order to benefit from the gain in net worth.
Their strategy paid off, just two years later, in mid-2015, this property sold for $796,000, turning a very tidy profit for these buyers.
EMPLOY THE RIGHT STRATEGY – THERE’S NO ‘ONE SIZE FITS ALL’ APPROACH
If growth is strong and you can buy well below market value, a slightly negative cash flow is not necessarily a bad thing. If you purchase with the right strategy, and include the right number of positive cash flow properties in your portfolio, it is still possible to have an overall cash flow that is neutral or positive. The important thing to remember is that all of your properties have strong growth potential and will enable you to increase your net worth position from the time of purchase.
This property experienced excellent growth and was purchased well below market value. Its cash flow was not great, however, it was purchased to generate good equity in line with this buyer’s personal strategy. It made over $370,000 for the PIA client who bought it and sold it just two years later – an impressive gain which has helped this client on their path to financial freedom.
Have you purchased a negative cash flow property as part of an overall strategy towards a self-sustaining portfolio? Please share your experiences in the comments section below.