PROPERTIES YOU SHOULDN’T BUY - Unikorn Commercial Property

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What is Positive Cash Flow? Understanding the
Key to Financial Freedom
In the world of real estate, the notion of
positive cash flow and passive income often
sparks enthusiasm among commercial property
investors and seasoned professionals. However,
for those entering the residential property
market, the concept of generating passive income
can be confusing. Many people misunderstand the
true meaning of positive cash flow, assuming it
is simply the result of putting money into a
property and receiving a small return. In
reality, positive cash flow represents a
significant milestone in achieving financial
freedom through real estate investments. In this
article, we will explore the distinction between
residential and commercial properties in terms
of generating positive cash flow, debunk
misconceptions, and emphasize the importance of
sustainable income. By the end, you will gain a
clear understanding of the true essence of
positive cash flow and its significance in your
investment decisions. Understanding Passive
Income To comprehend the concept of positive cash
flow, it is crucial to first grasp the essence of
passive income. However, this understanding
falls short of the reality. Passive income should
not require additional financial support from
the investor to sustain the property. Instead, it
should serve as a sustainable and tangible
income source, capable of contributing towards
financial goals or replacing ones regular
income. The Misconception of Passive Income in
Residential Properties Lets consider a scenario
where you purchase a residential property worth a
million dollars, with an initial investment of
200,000. Assuming an 80 loan, you acquire an
800,000 loan, subject to an interest rate. In
the current market, interest rates typically
range from 5 to 7.5. For the sake of
simplicity, lets assume a 5 interest rate,
resulting in an annual interest payment of
40,000 or 48,000 at a 6 rate. To cover the
mortgage, your property needs to generate 1,000
per week in rental income. However, most
residential properties fall short of this figure,
even if you manage to achieve 700 or 750 per
week, which equates to 35,000 or 40,000
annually. In addition to the rental shortfall,
you must account for council rates, insurance,
management fees, and other expenses, which could
amount to approximately 15,000 annually.
Therefore, supporting this property demands
65,000 per year, while your rental income only
covers 35,000 to 40,000, leaving a deficit of
around 25,000 or 500 per week that comes
directly from your pocket. The Reality of
Positive Cash Flow In the above scenario, the
negative cash flow clearly demonstrates the
absence of positive cash flow. Switching gears,
lets explore what positive cash flow truly
means. Contrary to popular misconception,
positive cash flow is not limited to an extra 50
or 100 per week. To qualify as positive cash
flow, your investment property should generate
substantial monthly incomeranging from 200 to
1000depending on your financial goals. True
positive cash flow provides sustainable and
tangible returns that can be utilized towards
your desired objectives or as a means to replace
your regular income. This stark contrast between
commercial and residential real estate is where
the notion of passive income diverges.
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Commercial Properties vs. Residential
Properties The disparity in understanding passive
income arises from the fundamental differences
between commercial and residential properties.
In the commercial real estate sector, positive
cash flow is a common objective for investors.
The income generated from commercial properties
is typically higher, allowing it to cover
mortgage payments, deposits, and all associated
expenses, while still leaving surplus funds.
This surplus cash flow serves as true passive
income, as it can be reinvested, used to finance
additional deals, or contribute to personal
financial growth. On the other hand, residential
properties often fail to meet the requirements
for positive cash flow. While some investors
hold the belief that continuous investments and
incremental rental increases over time will
eventually result in positive cash flow, this
approach is flawed. The reality is that such
investments tie up a significant portion of your
capital with minimal returns, effectively
trapping your money in the property and
providing little in terms of cash flow. True
Positive Cash Flow The Key to Financial
Freedom To achieve financial freedom through real
estate investments, it is imperative to
understand the significance of true positive
cash flow. It goes beyond mere breakeven or a
small weekly return. True positive cash flow
empowers you to cover all financial obligations
associated with the property, including mortgage
payments, deposits, expenses, and still have
surplus income left over. This surplus income not
only provides financial stability but also opens
doors to future opportunities. Banks and lenders
recognize positive cash flow as a valuable asset,
as it strengthens your overall financial
position and enhances your capacity to secure
financing for future investments. Positive cash
flow acts as a catalyst, enabling you to pursue
additional deals, refinance existing properties,
or leverage equity to expand your real estate
portfolio. The Importance of Sustainable
Income When considering investment options, it is
crucial to prioritize sustainable income streams.
Positive cash flow offers stability and
resilience by ensuring that your investments are
self-sustaining, regardless of market
fluctuations or economic uncertainties.
Sustainable income eliminates the need for
continuous injections of personal funds into the
property, reducing financial strain and
mitigating risks. By focusing on properties that
generate substantial positive cash flow, you
create a solid foundation for long-term
financial success. This income stream can be
utilized to fund future investments, cover
personal expenses, or serve as a reliable source
of passive income. Sustainable income allows you
to achieve a level of financial freedom where
your investments work for you, rather than the
other way around. Leveraging Financial
Opportunities One of the significant advantages
of positive cash flow is its ability to provide
financial leverage. With a proven track record
of generating surplus income, you gain access to
increased borrowing capacity. Banks and lenders
view positive cash flow as a reliable income
stream, which bolsters your financial profile
and enhances your ability to secure financing for
future ventures. The surplus income from positive
cash flow properties can be used to satisfy
lending criteria, allowing you to expand your
real estate portfolio and pursue more significant
investment opportunities. Leveraging financial
opportunities becomes easier when you have a
reliable income
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stream that satisfies not only your
property-related expenses but also demonstrates
your financial capability to lenders.
Making Informed Investment Decisions Understanding
the concept of positive cash flow is crucial
when making investment decisions in the real
estate industry. By recognizing the true essence
of positive cash flow and its significance in
achieving financial freedom, you can make
informed choices that align with your long-term
goals. Evaluate potential properties based on
their cash flow potential rather than relying
solely on speculative appreciation. Look for
properties that have the capacity to generate
sustainable income that exceeds expenses,
including mortgage payments, deposits, and other
outgoings. A careful analysis of rental market
trends, vacancy rates, and potential rental
income can help you identify properties with the
potential for positive cash flow. Additionally,
its essential to consider the impact of loan
interest rates on cash flow. Fluctuations in
interest rates can significantly affect the
financial viability of an investment property.
Higher interest rates increase mortgage
expenses, potentially eroding cash flow. Keeping
a close eye on market interest rates and
exploring financing options with lower rates can
help optimize cash flow and enhance overall
investment returns. While achieving positive cash
flow may present challenges in the residential
property market, its important not to overlook
the opportunities available in the commercial
real estate sector. Positive cash flow goes
beyond a small weekly return or breakeven point.
It represents sustainable and tangible income
that surpasses all property-related expenses,
providing financial stability and the potential
for true passive income. By understanding the
distinction between commercial and residential
properties, leveraging sustainable income
streams, and making informed investment
decisions, you can unlock the benefits of
positive cash flow and pave the way towards
financial freedom through real estate. Watch
Helen Tarrants YouTube Video on this topic
https//www.youtube.com/watch?vsw9opNJ2jgA With
more than 20 Commercial properties of her own,
educating hundreds of students and working with
many clients all over Australia, she happily
shares her insights, strategies, and valuable
experience with you on buying the best commercial
investment property for your needs. Subscribe
now for more informative videos on commercial
property investment, market trends, and strategic
planning to stay ahead in the real estate
game! Join one of our upcoming events. Book a
strategy session. Buy Helens book and watch her
YouTube videos. Let us help you learn and grow
in commercial real estate investing.
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