What Is a High-Cashflow Property?

Purpose-built co-living is residential accommodation designed from the beginning for several people to live within the same property while maintaining a meaningful level of private space.

A typical professional co-living property may contain several private bedrooms, often with individual ensuites, alongside a shared kitchen, living area, laundry and other communal spaces.

Rather than one family or household leasing the entire property under a conventional residential tenancy, residents will generally rent individual rooms or have occupancy rights relating to their part of the property, depending on the applicable tenancy model and local regulations.

That creates a different rental model for the owner.

If there are five rentable rooms, for example, the property has the potential to receive income from five occupants rather than one household.

Exactly how the property is classified and how residents can be contracted depends on the state, local planning rules and the property’s configuration. Australia does not have one national legal definition covering every property marketed as co-living.

In Victoria, for example, a building where rooms are available for occupation by four or more people in return for rent can fall within the rooming-house regime. Queensland has its own definition of rooming accommodation. NSW also has a specific planning category called co-living housing, with its own requirements, including a minimum of six private rooms under that planning framework.

That is why planning, building, licensing, tenancy and management requirements need to be checked for the particular property rather than assumed from the term “co-living”.

These terms are often used interchangeably in property conversations.

They measure different things.

Understanding the difference makes it much easier to assess an investment properly.

Gross yield

Gross yield compares the annual rent with the value or cost of the property before operating expenses and finance.

A common calculation is:

Annual gross rent ÷ property purchase price × 100 = gross rental yield

For example, a property purchased for $1,000,000 and producing $80,000 per year in rent has an 8% gross yield.

That tells us something useful about the property’s income relative to its price.

It tells us very little about what the owner gets to keep.

Net yield

Net yield goes a step further.

It deducts relevant property operating expenses from the rental income before calculating the return.

Those costs may include management, council rates, insurance and maintenance, among other expenses.

Finance is generally excluded when looking at the underlying property’s net rental yield.

This makes net yield useful when comparing the operating performance of properties without allowing one investor’s loan position to distort the comparison.

The investor then has to service their loan.

For a basic cashflow assessment, interest can be deducted from the property’s operating cashflow.

If you are assessing the actual movement of money through the investor’s bank account, principal repayments may also need to be considered where the loan is principal and interest.

Principal repayments need to be treated carefully because they reduce the debt rather than generally representing a deductible rental expense.

That distinction becomes important when tax is calculated.

Positive gearing

The Australian Taxation Office describes a rental property as positively geared where the deductible expenses are less than the income earned from the property. The investor therefore makes a taxable rental profit.

Interest on an eligible investment loan may form part of those deductible expenses, subject to the usual tax rules.

Positive gearing is therefore partly a tax concept.

Positive cashflow

When we refer to positive cashflow in practical portfolio discussions, we are usually asking whether the property leaves the investor with money after the costs included in that particular calculation have been paid.

That calculation needs to be clearly defined.

Are we talking about:

• cashflow before finance?
• cashflow after interest?
• actual cashflow after principal and interest repayments?
• cashflow before tax?
• cashflow after tax?

Two people can both say a property is “cashflow-positive” while using different calculations.

That is why the assumptions need to sit beside the result.

Positive cashflow can be valuable for an investor because it can reduce the amount of personal income required to hold a property.

That becomes particularly relevant when interest rates, insurance, maintenance and other ownership costs rise.

ASIC’s Moneysmart notes that rental income may not always cover mortgage payments and property expenses, and highlights interest-rate rises, vacancy and ongoing ownership costs as risks property investors need to plan for.

Cashflow can give an investor more room to absorb those expenses.

It may also reduce the financial pressure created by holding several negatively geared properties at the same time.

That does not mean a positive-cashflow property is automatically a strong investment.

Location still influences tenant demand and potential future value.

The underlying property still needs to make sense.

The resale market needs consideration.

And unusually high yield sometimes exists because the market is pricing in additional risk.

A property in an area with poor employment diversity, declining demand or limited resale liquidity might offer an attractive yield because buyers require greater income to accept those risks.

That is why we do not search for the highest yield available.

We look at the quality and sustainability of the income alongside the broader investment case.

Start with the income you reasonably expect to receive.

Then reduce it by the costs you reasonably expect to pay.

The word “reasonably” is important.

Using the maximum possible rent, assuming permanent occupancy and allowing very little for maintenance may produce an attractive number. It may also produce a poor representation of what the property is likely to do.

A more useful assessment includes:

• expected rental income
• realistic vacancy allowance
• property-management costs
• council and water rates where applicable
• insurance
• maintenance and repairs
• utilities where the owner pays them
• body corporate or strata expenses where applicable
• land tax where relevant to the investor
• specialist operating costs
• furnishing and replacement costs where relevant
• finance costs
• a reasonable contingency for expenses that do not arrive according to a neat annual schedule

Moneysmart identifies council and water rates, insurance, body corporate fees, land tax, management fees, repairs and maintenance among the ongoing costs property investors may face.

Tax should then be considered separately with an appropriately qualified tax adviser because deductible expenses, depreciation, ownership arrangements and the investor’s individual tax position can change the final outcome.

Cashflow and capital growth influence different parts of an investor’s journey.

Capital growth can increase equity and long-term wealth when property values rise.

Cashflow influences the investor’s ability to own and hold the property while that growth has time to occur.

There is no universal percentage that tells every investor how much of each they should pursue.

A professional with a high household income, strong serviceability and a long investment horizon may be comfortable carrying some negative cashflow in exchange for exposure to a particular growth market.

Someone already holding several negatively geared properties may place far more importance on adding income.

An investor approaching retirement may have another set of priorities again.

That is why we assess this at portfolio level.

Selected traditional residential properties

High cashflow does not always require a specialised property model.

Occasionally, the relationship between purchase price and sustainable market rent can make a conventional residential property attractive from an income perspective.

Those opportunities still need to be assessed for location quality, property condition, tenant demand, costs and resale potential.

Where planning rules permit, adding a secondary dwelling can create an additional rental income source from an existing or newly acquired site.

Feasibility depends on the cost of construction, achievable rent, local demand and the rules applying to secondary dwellings in that jurisdiction.

The underlying land and main dwelling still need to make financial sense.

Other multi-income properties

Some residential configurations allow income to come from several separately occupied areas.

Whenever an investor considers this type of property, the first question should be whether the layout, planning position and local rental market genuinely support the proposed use.

Theoretical rent from several areas means very little if the property cannot legally or practically operate that way.

Specialist Disability Accommodation, or SDA, is housing designed for eligible NDIS participants with extreme functional impairment or very high support needs.

Rental income works differently from conventional residential property because eligible participants may receive SDA funding connected with the accommodation.

The strategy is significantly more specialised.

Design category, participant demand, location, provider capability, compliance and occupancy all need careful assessment.

High potential income on a feasibility should never substitute for understanding whether the dwelling is genuinely needed and suitable for participants in that market.

Explore: What Is NDIS SDA Housing?

The reverse mistake is buying almost anything that advertises a high rental return.

A high yield cannot repair poor local economics.

It does not remove oversupply.

It cannot guarantee capital growth.

And it does not create a strong exit market.

We therefore want enough rental income to serve the investor’s objectives while maintaining a sound property and location case.

Look at the investor’s stage

The appropriate balance can change depending on:

the investor’s income and borrowing position, their existing portfolio, how long they intend to hold property, and what they are trying to achieve from the next purchase.

A first investment intended to build equity may be assessed differently from a fifth property intended to improve portfolio income.

This is why “cashflow or growth?” is rarely the most useful starting question.

We would rather understand what the investor needs the next property to do.

High yield becomes dangerous when the percentage becomes the reason for buying.

One mistake we see is selecting a location almost entirely because the rent looks strong relative to the purchase price.

Sometimes the yield is high because there is a genuine opportunity.

Sometimes the price is low because employment is weak, population demand is limited or buyers have concerns about the area.

Another mistake is confusing gross yield with actual return.

An advertised 10% gross yield can sound exceptional until operating costs and finance are included.

Vacancy can have the same effect.

A feasibility based on 52 fully occupied weeks every year gives the investment very little room for tenant turnover.

Rental guarantees deserve close examination too.

If an investment includes a guarantee, investors should understand exactly who provides it, how financially secure that party is, how long the guarantee lasts, what conditions apply and what happens when it ends.

Then there is resale.

An investment may produce strong income while operating successfully, but the investor still needs to understand the potential buyer market if they eventually need to exit.

Rental assumptions can also become optimistic.

A property does not produce the rent written in a marketing brochure simply because the feasibility says it should.

We want local evidence showing that tenants are actually willing to pay the required amount.

Financing cannot be ignored either.

A property with sound underlying operating performance can still become negatively cashflowed for an investor carrying a high level of debt at a high interest rate.

Specialised properties add another layer.

Co-living, SDA and other multi-income strategies can require experienced management. Buying the asset without understanding who will operate it can expose the investor to avoidable risk.

And finally, yesterday’s winner can become today’s expensive entry point.

A market that recently delivered strong growth or high yields deserves the same analysis as any other market.

Past performance tells us what already happened.

We still need to understand the rent, supply, demand, purchase price and risks facing the property today.