Negative cash flow as an investment strategy
While I’m firmly in the school of property investors who invest for long-term cash flow and not appreciation, many professional investors purposely invest in properties with negative cash flow. They see this as no more than a cost of investing in an asset that is going to produce a significant capital gain.
In this series of posts discussing positive and negative cash flow, I’ve examined:
- Investing in buy-to-let property for positive cash flow and not capital gain
- Three fundamental tactics to prepare for negative cash flow on buy-to-let properties
- Strategies to use when your property accidentally goes cash flow negative
In this post, I’m going to show you why some investors are happy to buy an investment property with negative cash flow, and the maths that corroborate their property investment strategy. You’ll also learn some strategies that negative cash flow property investors use to make their profits.
How negative cash flow can be a valid property investment strategy
Let’s say that you invest in an apartment valued at £300,000. You put down a deposit of 40% (£120,000). You have a positive cash flow of £200 per month.
Meanwhile, your friend invests in an identical apartment. He only puts down a 20% deposit, and because of his larger mortgage costs has a negative cash flow of £40 per month.
On the face of it, the equation is a no-brainer: you’re way better off than your friend. However, there is another way to look at it:
- Each year, your friend puts in an extra £480 per year.
- Meanwhile, you recoup £2,400 per year.
- Even with your much larger positive cash flow, a difference of £2,880 per year – it will take almost 21 years to equalise your cash positions (£60,000 ÷ £2,880).
Plus:
- You risked more at the outset.
- Your friend had more cash remaining to invest in other opportunities.
While positive cash flow is your friend, for those investing for capital growth negative cash flow doesn’t have to be an enemy. The trick is to be in control of negative cash flow, and not let it control you.
Staying in control of negative cash flow
Most negative cash flow properties are older homes that need renovating. It’s this refurbishment that turns the property around and creates what the investor wants: a capital gain. There are risks with this strategy. Renovation costs can overrun, the market can change while repairs are made, and it could take longer than anticipated to renovate and sell. Here are a few rules when buying negative cash flow property:
- Have an exit strategy planned
Work out how long you can absorb the negative cash flow, and work towards a planned exit strategy. Most commonly this is to sell for a profit before your money runs out.
- Have a back-up plan
Before buying, consider other potential options, including:
- Modifying to a house of multiple occupancies
- Increasing rent and/or decreasing costs of holding
- Using a rent-to-own agreement
- Buying ahead of future infrastructure and regeneration
- Use conservative cash flow projections
If you’re buying a negative cash flow property, you will most likely be buying for future value growth. You’ll need to estimate the future upside. Overestimate your costs and underestimate income. If you’re renovating an existing property, overestimate the time for repairs.
- Keep plenty of cash in reserve
Never do a deal that doesn’t have plenty of wiggle room. You give yourself this flexibility by maintaining a sizeable cash reserve. This way, if the unexpected happens (which it will), you’ll be expecting it.
Whatever your investment objectives, investment in property can meet them. Contact the team at Gladfish on +44 (0)207 923 6100 to discuss your goald and hear of the property investment opportunities we have available right now.
Live with passion,
Brett Alegre-Wood
