The cash flow of the property indicates how much money is going into the property and how much is coming out of it at any given time, hence the name. You want to know if more cash is coming out than going in, making the property cash flow positive. Cash going in usually takes the form of maintenance expenses, mortgage payments and insurance fees. Cash out is generally the rent you receive. If there is more money going in than coming out, the property is cash flow negative and you as the investor will have to cover the deficiency. But just because a property is temporarily or even permanently cash flow negative does not mean that it is a flawed investment. One of the other three ways to make money in property might cover the deficiency, which is often the case in Macau.
cash in – cash out = cash flow
If the property has little or no positive cash flow as is usually the case in Macau, the next important way of making money from real estate is appreciation. Appreciation is defined as the growth in value of a property over time. The questions most pertinent to property appreciation are “How much growth?” and “How much time?”. As you probably know, a lot of investors in Macau made a lot of money in the past because there was a lot of growth in a very short amount of time. Many of the factors in the taking ‘A RIDE’ model we discussed last week affect the appreciation of a property, but external factors are not the only determinants. You can renovate or improve the property to maximize appreciation as well.
future resale price – original purchase price = appreciation
An amortizing loan is a loan where the principal of the loan is paid down over the life of the loan according to an amortization schedule, typically through equal payments. In the case of property investments, the principal is usually amortized mostly through rental payments made by the tenant. In short, the rent helps you pay for the interest and then some, essentially helping you buy the property.
Debt service (total mortgage payment) – interest paid = Amortization
Although Macau has very low tax rates, in other parts of the world owning private property protects your money by entitling you to various tax-deductions and depreciation deductions.
Next week we will take a look at some basic key financial measures needed to analyse property investments.
Juliet Risdon is a Director of JML Property and a property investor.
Having been established in 1994, JML Property offers investment property & homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.