{"id":2615,"date":"2022-05-21T00:45:26","date_gmt":"2022-05-21T00:45:26","guid":{"rendered":"https:\/\/royabhishek.in\/urbanbuyer\/why-chasing-high-cash-flow-properties-may-be-detrimental-to-your-wealth\/"},"modified":"2022-05-21T00:45:26","modified_gmt":"2022-05-21T00:45:26","slug":"why-chasing-high-cash-flow-properties-may-be-detrimental-to-your-wealth","status":"publish","type":"post","link":"https:\/\/royabhishek.in\/urbanbuyer\/why-chasing-high-cash-flow-properties-may-be-detrimental-to-your-wealth\/","title":{"rendered":"Why chasing high cash flow properties may be detrimental to your wealth"},"content":{"rendered":"

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Everyone likes cash, don\u2019t they?<\/strong><\/p>\n

While most of us don\u2019t have much of it in our wallets anymore because it\u2019s been replaced by a bank card, that doesn\u2019t mean that we don\u2019t spend much of our lives wanting more of the stuff.<\/p>\n

Whether it\u2019s through a salary or starting a business, most Australians would like to have more cash at their disposal.<\/p>\n

The problem with such a mindset, though, is that the desire for cash drives some investors to buy the wrong type of property.<\/p>\n

They see the phrase \u201ccash flow property\u201d and they start daydreaming about filling a bathtub full of $50 notes \u2013 just because they can.<\/p>\n

The thing is, while you need cash flow via rent to make the mortgage repayments every month, it will not make you rich.<\/p>\n

Indeed, chasing high cash flow properties may actually be detrimental to your wealth.<\/p>\n

Here are three reasons why.<\/p>\n

1. I\u2019ll have some of that<\/span><\/h2>\n

If you buy a property that is a positive cash flow, then that extra money is classed as your income.<\/p>\n

What that means, in reality, is that bathtub full of $50 notes turns into $20 notes instead because you will have to pay a proportion of it to the tax department.<\/p>\n

It might feel nice to have extra funds coming your way from rent, but no one got wealthy on an extra few hundred dollars a month, did they?<\/p>\n

2. Slow capital growth<\/span><\/h2>\n

Now, while the cash might be flowing in your eyes, the property that you have bought probably isn\u2019t growing in the capital very much.<\/p>\n

That\u2019s because so-called cash flow properties are usually located in the outer rings of cities or in regional areas, which are generally quite sensitive to economic cycles.<\/p>\n

Also, because there is usually less demand from buyers, properties in those locations don\u2019t tend to increase in value as much as they do in our major cities over the long term.<\/p>\n

3. Finance wobbles<\/span><\/h2>\n

At the end of the day, banks are in the business of lending money, but that doesn\u2019t mean they don\u2019t have certain types of borrowers that are their ideal customers.<\/p>\n

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Usually, they\u2019re the ones that are buying investment-grade properties in locations that have a proven history of capital growth, such as major cities.\n<\/p>\n

Lenders often get nervous when a loan application for a property \u201cout the back of beyond\u201d lands on their desk.<\/p>\n

Now that doesn\u2019t mean they\u2019ll knock it back, but it might mean they will only lend a smaller proportion of the purchase price.<\/p>\n

Say, in the city, you may be able to secure a loan with a loan to value ratio of 90 per cent, using a 10 per cent deposit of your own funds.<\/p>\n

However, in a regional area, you may have to cough up a 20 per cent deposit, which lowers your leverage and ultimately your potential returns.<\/p>\n

It\u2019s important to realise that almost all investment properties become positive cash flow at some stage because rents rise but your repayments stay the same.<\/p>\n

The thing is that it usually takes a number of years, by which stage your investment-grade property has already grown in value significantly.<\/p>\n

Let\u2019s say over a five-year timeframe, rent on your $500,000 investment property increased from $500 per week to $600 per week and your mortgage repayments have remained the same at $450.<\/p>\n

So, that means you have an extra $400 or so a month in your bank account \u2013 before costs of course.<\/p>\n

Now, if that property was in an inferior location, its value may not have improved much over the period.<\/p>\n

However, if it was a blue-chip location, for example, its value may have increased by 50 per cent, which is $250,000.<\/p>\n

Simply, that equates to tens of thousands of extra dollars per month if you were to sell the property!<\/p>\n

I sure know which one I\u2019d rather be investing in.<\/p>\n