In the first instalment of this three-part series, Damien and Jeremy dig into positive cash flow property, examining exactly how rare it is to find in today's market, and what investors give up when they prioritise yield over growth.
What Is a Positive Cash Flow Property?
Jeremy defines a positive cash flow property simply as one where after-tax rental income exceeds all holding costs. Damien clarifies that on an existing property, this needs to be assessed using the interest-only component of a loan (not full principal and interest repayments), since principal repayments are simply paying down debt rather than a genuine holding cost.
The "Bog Standard" Property Example
Using a $500,000 property with a 20% deposit (roughly $125,000 total, including stamp duty and purchase costs) and a national average gross yield of around 4.3%, Jeremy models total annual expenses of around $8,400 (council rates, insurance, maintenance buffer, and management fees) plus loan repayments of around $26,000, against roughly $20,000 in rental income. This produces a pre-tax cash flow shortfall of around $15,000 a year, reduced to roughly $10,000 (around $200 a week) after accounting for a tax credit at a 30% marginal rate plus Medicare levy.
Jeremy stresses that despite this ongoing shortfall, the property remains a worthwhile investment because of capital growth, using a 6% long-term average growth assumption, the estimated annual profit (growth minus cash flow cost) comes to around $20,000, translating to a return on investment of around 16% on the $125,000 originally invested. He frames this explicitly as a "bog standard" outcome using only long-term average assumptions across every input, not a best-case scenario, deliberately contrasting it with typical superannuation fund returns (often advertised around 8–12%) to illustrate how strong an ordinary, unremarkable property investment can be by comparison.
Reducing Debt to Achieve Cash Flow Positive
Jeremy shows one way to engineer a cash flow positive outcome on the same $500,000 property: injecting a much larger deposit ($355,000 instead of $125,000), leaving only a small $170,000 loan. This produces a modest $3-a-week cash flow surplus, but the ROI actually drops sharply, to around 8.5%, since a much larger amount of the investor's own capital is now required to achieve a similar dollar return. Jeremy's practical recommendation: rather than paying down a larger deposit purely to eliminate negative cash flow, it's generally better to borrow at a standard loan-to-value ratio and park surplus funds in an offset account instead, preserving both the leverage benefit and the flexibility to access that cash later if needed (for a future deposit or in case of job loss), rather than locking it irretrievably into the property itself.
Chasing High Yield Instead
Returning to an 80% LVR structure, Jeremy shows that a near-neutral cash flow outcome (also around $3 a week positive) can alternatively be achieved by targeting a much higher-yielding market, in this example, 7.9%, well above the national average. This raises the estimated ROI to around 24%, prompting the obvious question: why not simply target these higher-yielding markets instead of accepting a bog-standard 16% return?
The Impact of Interest Rates
Jeremy illustrates how dramatically interest rates alone can shift these numbers, referencing the period before the first rate rise in May 2022 (following 12 years without one, dating back to November 2010), when rates sat around 3.3%, compared to around 6.5–6.7% at the time of recording. Using the same 7.9%-yield example, that lower interest rate alone would have added roughly $175 a week in cash flow, lifting the estimated ROI from 24% to around 31%. Both hosts caution this illustrates why relying on any single interest rate environment as a long-term assumption is risky, sharing a personal example of Jeremy previously being limited to a single lender under unusual borrowing circumstances, which left him unable to refinance away when that lender later raised rates steeply, a position that ultimately contributed to him needing to sell down some of his 16-property portfolio at the time.
Why Growth Usually Matters More Than a Few Extra Percentage Points of Yield
Jeremy compares two scenarios directly: a market offering 6% growth and a 7.9% yield (a combined "return" of 13.9%) versus one offering 10% growth but only a 3.9% yield. Despite the second scenario's much lower yield, its overall ROI is around 6.8 percentage points higher, since the dollar impact of 4% additional growth on a $500,000 property (roughly $20,000) outweighs the cash flow difference. His conclusion: an investor who can tolerate a larger annual cash flow shortfall is generally better off prioritising growth over yield, provided that shortfall is genuinely manageable, and that this calculus should shift toward yield only once cash flow genuinely becomes a limiting constraint.
Just How Rare Is a Truly High-Yielding Market?
Using a "context ruler" tool showing the distribution of gross yields across 3,457 sufficiently data-reliable Australian house markets (filtered to a statistical reliability score of 60 or higher, out of roughly 16,000 suburbs nationally), Jeremy shows the average yield sits around 3.9–4%, with the bulk of markets falling within roughly 2.7–5% (one standard deviation either side of the average). A market yielding 4 percentage points above average (around 7.9%, the figure used earlier) occurs in only about 1 in 100 markets nationally, genuinely rare. By contrast, a market showing 4 percentage points above average growth is far more common, around 1 in 25, reinforcing Jeremy's view that targeting growth offers meaningfully better odds of outperformance than targeting yield.
How Long Do Very High Yields Actually Last?
Testing the durability of high-yield markets, Jeremy identified 23 markets three years prior with a 7.9%+ yield and reasonable statistical reliability; three years later, only 10 still maintained that yield level. Of those 10, half had growth below 6%, though the group's average growth was still a respectable 8%. Jeremy's overall takeaway: achieving both an above-average yield and above-average growth together (around 2% above average on both, roughly an 8% growth rate) narrows the available opportunity set to around 1 in 400 markets nationally, an extremely narrow target, and one where results (including a small number of markets with flat or negative growth) still varied considerably.
Finding the Right Balance
Testing a more moderate combination, 2% above average yield (5.9%) alongside 2% above average growth (8%), only 14 matching markets were found nationally, actually a smaller set than expected. Adjusting further toward a more modest yield premium (around 1% above average, roughly 4.9–5%) alongside a stronger growth target (around 9%, 3% above the long-term average), Jeremy found this combination opened up meaningfully more opportunities, representing what he considers the healthiest overall balance between yield and growth for most investors.
Why High Yield and High Growth Rarely Coexist at Scale
Jeremy presents a final chart plotting yield against typical property price across SA3-level (Statistical Area Level 3) regions nationally, showing a clear pattern: yield declines steadily as price increases. This illustrates why truly high-yield markets inherently limit an investor's opportunity set for growth, not because of some inverse causal relationship between yield and growth specifically, but simply because there are fewer markets available to choose from once yield requirements are set very high, mechanically reducing the pool of markets available to also deliver strong growth. Jeremy connects this to the "rentvesting" strategy (renting in an otherwise unaffordable high-growth, low-yield area while investing in a market with more balanced fundamentals), noting this will be explored further in a future episode.
Closing Thoughts
Jeremy's overall conclusion for Part 1: balancing cash flow and capital growth matters, but for most investors capable of tolerating a manageable cash flow shortfall, prioritising markets with strong underlying demand relative to supply (and therefore stronger growth potential) tends to produce a better long-term outcome than narrowly chasing high yield. Damien and Jeremy close by previewing Part 2, which will look at specific real-world suburb and property examples, and invite listener questions and feedback via email.