Q. I have some friends who are on high incomes but are purchasing cash flow positive property. What is the benefit of doing this if they can easily afford a shortfall?
A. What’s the end goal of investing? To create a passive income that can substitute our income so that we don’t have to work, or we have the choice to work full time.
Your friends are simply taking advantage of the fantastic current cash flow positive times. By investing this way, if the interest rates go back up to eight per cent again, they should have significantly increased the rents on their properties so that they would still be cash flow positive.
If they stay low, the increased rents over time will only make the property even more positive. Being cash flow positive from purchase, along with low rates, allows them to buy multiple properties whilst still gaining some tax advantages through depreciation and negative gearing.
That said, their properties still have a shortfall each week, unless they submit a Tax Variation Form each financial year.
Even on high incomes, their portfolio is limited by their ability to repay the shortfall.
From a practical outlook, the current world economic climate does not warrant risky investing without knowing you could lose the lot.
You only live once, so take a leaf from their book and invest in the same way.
Todd Hunter, director, wHeregroup