Cash Flow Cycle
When you buy a property you begin the first step of your property investment cycle. This diagram shows the different stages of cash flow.
The costs for holding a property over time remain relatively stable despite occasional maintenance hiccups. The rent for a property in theory should be increasing year on year.
Stage 1 –The Hurt Locker
Most properties to begin with cost you more then the rent they return, leaving you to cover the short fall, this is what we call the Hurt Locker stage at Profolio. This is the hardest time to get through as an investor. The investors goals when purchasing the property (cash flow or growth) dictate the time the property sits in the Hurt Locker stage, some investors might actually prefer this stage for tax reasons, but a property won’t remain in this stage forever, other investors purchase a property and aim to have it out of this stage and into the cash cow stage as soon as possible.
In this stage the property is negatively geared.
Stage 2 – The Sweet Spot
This is the time most investors are looking for; they are chasing the sweet spot. The sweet spot is when an investment changes from costing you money, to paying for itself. This could happen instantly or 5 years down the track. For cash flow investors this is the hallelujah moment. This means this investment property is now paying for itself.
In this stage the property is neutrally geared.
Stage 3 – The Cash Cow
You might of heard investors refer to their properties as cash cows, what this means is that these properties are now providing their owners with residual income, or put simply, money they earn by doing absolutely nothing- the best sort of income. After you’ve hit the sweet spot with your property it only gets better, as the rent continues to increase all of this extra money goes into your pocket, from here you can use this to help fund another property purchase, pay down the debt (always ensuring you pay the loan off the house you live in first before even considering to reduce your tax deductible debt) or just enjoy a little extra cash flow.
In this stage the property is positively geared.