What is property cash flow and why does it matter?
Property cash flow is the difference between the rental income a property generates and all the costs of holding it — mortgage repayments (or interest), rates, insurance, property management, repairs, and body corporate fees. Positive cash flow means the property pays for itself and generates surplus income. Negative cash flow means you are contributing money each week to hold the property. Understanding your cash flow position is critical for assessing whether you can sustain the investment long-term, especially if interest rates rise or the property sits vacant.
What is the difference between cash flow and profit on an investment property?
Cash flow is a real-money concept — actual dollars in and out of your bank account each month. Profit (or net income) includes non-cash items like depreciation, which reduces your taxable income but does not require an actual cash payment. A property can show a tax loss (due to depreciation) while still generating positive cash flow, or it can be cash flow negative while the depreciation deduction reduces the real after-tax cost. Both perspectives matter: cash flow tells you whether you can afford to hold the property; the tax position tells you the true cost.
How do I calculate cash-on-cash return for an investment property?
Cash-on-cash return measures the annual pre-tax cash flow as a percentage of the total cash you invested (deposit + acquisition costs). Formula: Cash-on-cash return = Annual net cash flow ÷ Total cash invested × 100. For example, if you invested $180,000 in total and the property generates $6,000/year in net cash flow, your cash-on-cash return is 3.3%. This metric is particularly useful for comparing property investments against other cash-yielding assets.
How much should I budget for repairs and maintenance?
A widely used rule of thumb is 1% of the property's value per year for maintenance and repairs. On an $800,000 property, that is $8,000/year or about $154/week. In practice, costs vary significantly: newer properties and apartments typically require less; older freestanding houses and properties with large gardens or pools require more. Budget conservatively — unexpected repairs are the most common reason investors experience cash flow stress.
Does vacancy affect my cash flow calculation?
Yes, significantly. Most properties experience some vacancy between tenancies — typically 2–4 weeks per year, representing a 4–8% reduction in gross rental income. A prudent cash flow model applies a vacancy allowance of at least 4% (2 weeks per year). In some markets or property types (furnished apartments, student accommodation), vacancy rates can be higher. Always stress-test your cash flow assuming 6–8 weeks vacancy per year to ensure you can absorb a prolonged empty period.
What is a good cash flow figure for an Australian investment property?
This depends entirely on your strategy and financial position. Many inner-city investors accept cash flow deficits of $100–$300/week in exchange for strong long-term capital growth. Regional and outer-suburban investors often prioritise neutral or positive cash flow of $50–$150/week surplus. The key question is not whether cash flow is positive or negative in absolute terms, but whether the after-tax shortfall is sustainable given your income, risk tolerance, and capital growth expectations over the intended holding period.
