What is cash flow?

Cash flow is essentially your income minus your expenses over a period of time. You can measure your cash flow on a monthly basis by looking at how much you’ve earned (whether through salary, dividends, side hustles, or rental income from an investment property) and how much you’ve spent. While this is a simple way to manage your cash flow, it’s important not to forget to budget for bigger, annual expenses, such as insurance and holidays. 

Getting your cash flow under control is important, especially if you’re wanting to invest in property. Understanding cash flow can be the difference between a solid long-term investment and a costly mistake, so do your research – and get advice before you buy.

What is negative cash flow?

Investment properties can sometimes generate negative cash flow, which means you’re required to put money in each year to cover the difference between the total cost of the property (including interest repayments, rates, insurance, maintenance, etc.) and the total income (rent and tax concessions) needed.

If you don’t know what the cash flow of your property is before you buy, you might run into trouble if your cash flow dries up. Always seek advice from a good accountant before you buy.

How to work out your cash flow

To understand the cash flow on a potential investment property, it’s best to get your accountant to do the numbers for you.

Make sure your accountant has access to all the costs of holding the property, including rates, body corporate fees, insurance, land tax and property management fees. They can work out the interest, estimate depreciation and give you an idea of the cash flow for the property. Have the property inspected and if possible see if you can check body corporate records. This can help you find out if there are any big maintenance or structural repairs planned.

If buying a property will put strain on your finances, then find a property with better cash flow. Also, when doing your figures, factor in possible interest rate rises and potential vacancies.

A final word about tax

If you think you’ll have a net rental loss (i.e. your deductions, including interest, depreciation and capital allowances exceed your rental income), you can improve your cash flow by applying to the Australian Tax Office (ATO), opens in new window for a PAYG withholding variation. If the variation is approved, you may be able to reduce the tax taken out from each wage packet, rather than waiting until the end of the year to get a tax refund.

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Important information

The information in this article has been written by Michael Sloan from The Successful Investor. While Mr Sloan has been careful to ensure the information is correct and accurate, Mr Sloan’s views are his own and do not necessarily represent those of National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence 230686 (NAB). This information should not be relied upon as financial product advice as none of the information provided takes into account your personal objectives, financial situation or needs. NAB recommends seek the counsel of an independent financial advisor before making any investment decision.