Positive Cash Flow Property: How to Calculate It Before You Buy

Positive cash flow means cash left over

A positive cash flow property produces more income than it costs to hold.

That sounds simple, but many investors calculate it too generously. They include rent and loan repayments, then forget vacancy, repairs, insurance, strata, land tax and management fees.

The basic formula

Positive cash flow calculation:

Annual rent minus annual cash expenses minus loan interest and repayments, depending on how you measure cash flow.

For a practical investor view, include all cash costs:

• Mortgage repayments.
• Council rates.
• Water rates.
• Strata or body corporate fees.
• Insurance.
• Property management.
• Repairs and maintenance.
• Land tax.
• Letting fees.
• Vacancy allowance.

Example

Assume:

• Rent: $650 per week, or $33,800 per year.
• Mortgage repayments: $30,000 per year.
• Rates and water: $2,800.
• Insurance: $1,000.
• Management: $2,000.
• Maintenance: $1,500.
• Vacancy allowance: $1,300.

Total cash costs are $38,600.

Cash flow before tax is negative $4,800.

The property may still work if capital growth is strong or tax deductions help, but it is not positive cash flow before tax.

Do not confuse yield with cash flow

A high-yield property can still be negative cash flow if the loan is large or the interest rate is high.

A lower-yield property can be positive cash flow if the deposit is large and costs are low.

That is why yield and cash flow should be modelled together.

Include land tax early

Land tax is one of the most commonly missed investor costs.

In Victoria, the threshold is low enough that many investors need to check it. In NSW, the combined land value of taxable holdings matters. In Queensland, owner type changes the threshold.

Run the Land Tax Calculator before calling a property positive cash flow.

Bottom line

A property is not positive cash flow because the rent is high. It is positive cash flow only after all real costs are counted.

Use the Investment Property Yield Calculator, Negative Gearing Calculator and Land Tax Calculator before making an offer.

Sources: ATO rental property expenses guidance and state revenue office land tax guidance. This article is general information, not financial or tax advice.