Cashflow is always important for property investors, but never more so than in an environment like this.
Inflation has been soaring and the cost of living has been putting greater pressure on household budgets than any time in recent memory.
The effect is that we all need more cash in order to pay for our day to day life. And then on top of that of course, interest rates have been going up and up.
Anyone who has followed b Invested founder Nathan Birch’s core investment strategy will know cashflow is one of several key pillars, along with buying for below market value and with room for capital upside.
Free to build
If you are building an investment portfolio, the last thing you need is to suddenly have to find extra money to pay off mortgages because your rates have gone up.
A successful strategy requires you to be positively geared and therefore able to service or even build your portfolio while being unencumbered.
The importance of that freedom is why most investors begin by paying interest only in the initial years of their loans. Otherwise they are stuck needing to pay far more each week to service their property and are exposed to a lot more personal risk if things go wrong.
Landlords are being slammed in the media and even blamed for the rising cost of renting for tenants, but in order to make an investment viable, you need to raise your rent to pay those higher mortgage rates.
The alternative is negative
One misconception that people often have is that most Aussie investors opt for negative gearing in order to maximise their income tax benefits. The picture always painted by the media is that of a high net worth investor. But the majority of investors in Australia only have one investment property and they are paying it off so that it might provide some extra income in retirement. Often they are in low to middle income jobs and know they will need more than super to sustain them later in life.
These investors need cashflow to keep their head above water and to make sure they can stay in the market and benefit from long term growth and a property that pays itself off.
Asset tied to inflation
Anyone who stashes cash as an investment is getting a better return than they were for a long time because interest rates have begun to go up. But even the best savings accounts and term deposits are only paying 3 or 4%. Considering inflation is up above 7% at the moment, the money you have in the bank is actually losing value.
Every day your cash is worth less than what it was the day before.
The beauty of positively geared property is that you can use your cash to leverage into an asset that grows in value over time and returns you more cash than you pay. You benefit in the future, but you are also better off week by week than if you hadn’t bought it.
And rather than being slammed by inflation, your asset means you are benefiting from it. You are receiving the inflated money in rent rather than paying it to someone else.
Over time, your rental return keeps increasing while your debt falls or remains the same. One day, the debt you have left on the property will be irrelevant.