5 Questions you need to ask for a positive cash flow property

August 30 2016
Positive cash flow property

There was a time when someone with little investment knowledge could easily buy a positive cash flow property, sit back and watch the money roll in. Times change, and nowadays investors need to be smarter, more innovative and more proactive in order to reap the benefits of a positive cash flow property.

We’ve seen some huge property growth over the last few centuries which allowed for the novice investor to secure a growing positive cash flow property will little difficulty. As the property market relaxes to a more comfortable pace, this rapid growth can no longer be expected as a given for all properties. Instead, Investors need to become more educated, more saavy and know the questions to ask in order to secure a property with the best potential of positive cash flow.

5 Questions to ask to find your positive cash flow property

We’ve put together our big 5 questions to help you get on your way to finding a positive cash flow property.

1. Is the property already cash-flow positive and will it stay that way?

Serious investors are familiar with number crunching, or know when to call in the experts to assist them in putting together the figures for their potential investment properties. It is important to calculate the exact costs and all income before you purchase the property.

Buying based on rough estimates can put you in serious risk of making a loss. If you are not confident in crunching the numbers yourself, enlist the assistance of your accountant.

2. What is the rental potential of the area?

There are a few items to consider that will effect the rental potential of the area in which you invest. These should all be taken into account in regards to their effect on the future positive cash flow opportunities of the property.

Vacancy rate

As a rule, the higher the vacancy rate, the lower the rent will be in that area. The vacancy rate refers to the amount of rental properties that are vacant at one time. So the more vacancies, the more choice for potential renters. You can find out what the vacancy rate of the area you are looking at is by visiting the REIWA website.

Competition

Along with the vacancy rate, you also need to take a look at the types of properties your rental will be up against. Take a look at how many similar properties are currently available in that area. If you are looking to purchase a 3 x 1 and all the properties in the area are 3 x 1 then having a 4 x 2 may be more beneficial to you.

You also need to consider the age of the property, particularly in areas that have new developments. If you are thinking of purchasing a 30 year old 4 x 2 property and brand new 4 x 2 properties are readily available in the same area for the same rental price, then you will already be behind the competition.

3.  What are the developments in the area?

Knowing the future developments in an area are key to understanding the demographics that will be attracted to the area and in turn the type of property they would be looking to rent. Does the area have future schools, shopping centers and parks that would entice families to live there? Is the area going to be serviced by a train station or become an entertainment hub that might attract professional couples or students?

By profiling the future demographics of the area, will help you determine the demand there will be in that area for the type of property you are going to buy. If the area is going to be a hub for families, will your 1 bedroom apartment with street parking really provide you with the return you are hoping for?

4. What is the population growth of the area?

Steady population growth means there is likely to be a greater demand for rental properties. This not only increases the chance of your property being occupied by tenants, but also that the rent will be able to be charged at a higher rates.

On the flip side, if the population of that area is not growing or is falling, then purchasing a property in that area might not be a great idea.

5. Does the property have subdivision potential?

If the house you buy is on land that is currently re-zoned for development, or may be rezoned in the future then the possible return on the property can be amplified. Before considering this option, you need to understand if there is the rental market for subdivided units in that area. This is more suited to suburbs that are completely built out and the possibility of new housing in the area is limited to redevelopment.

 

Further reading –

Not sure about development zoning? Take a look at our R-Codes guide for first time developers.

Looking for more information on the future developments in your chosen location. Check out our article on the future Perth Transport plan.

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