Sponsor A Child

Wednesday, March 24, 2010

Negative Cashflow

Today my colleague shared with me very happily that he just signed the sales & purchase agreement (SPA) for a condominium in Riana Green. He bought it with tenancy. I congratulated him for his progress in property investments, that is, until he shared with me his mortgage repayment and monthly rental. As he is cash rich, he took a shorter loan period, only 15 years, with the monthly repayment of RM1700. The maintenance fees are at RM160. The unit is rented at RM1700.
This means that he is losing at least RM160 every month, not counting yearly recurrent expenses such as assessment, quit rent, insurance etc. And if there are any repair works (airconditioners, plumbing, drainage, cracks, painting etc), there will be further loss. Not to mention income tax on the rental collected.
I told him that he should not make a loss on the rental property, citing an important phrase that I learned from Robert Kiyosaki's book "Cashflow Quadrant". "Why are you subsidizing your tenants to live in your condominium?" He replied, "I am not. My tenants are subsidizing my mortgage." This is a common misconception that many property owners have.
As long as you have positive cashflow every month, you can own as many properties as you want for as long as you like. But if you have negative cashflow, you will soon deplete your cash reserves and will be limited to only a few properties. If the costs of living in a property is more than what your tenants are paying you to live there, then you are subsidizing your tenants. Always look for positive cashflow before investing in rental properties.

No comments:

Post a Comment