Asset Rich Cash Flow Poor

My way of thinking is capital is the part where you make your money, CF is what you live off and help service debt to achieve your capital.

At 30, I would rather 100k GC and 20k CF than 100k CF and 20k GC, reason being CF is taxed each year, where as capital is taxed when/if you sell. So technically assuming 30% tax and keeping it simple the numbers are 100k GC + ~13k CF = ~113k compared to 70k CF + 20k GC = 90k difference of 23k.... This is not including things such as NG benefits and selling costs.

The numbers are worse if you were at 50% tax as it is 110k vs 70k difference of 40k.

It is a lot easier to turn capital into CF than the other way around.

Once you build a significant asset base you have more options on transitioning into CF, if required.

My parents (mentor) targeted capital growth over CF and were able to retire in their early 50s.

 

I quite like this strategy and am a believer of targeting capital growth at a cost of cashflow, however am at a stage where the areas I like are out of reach for me and will need to balance the books in order to get deals across.

 

Each to their own goals and dreams. While I am a CG/equity hungry person, I can understand why others may want to just focus on higher yields from the start to suit their goals/lifestyle.

 

Yes each to their own, did you ever think about not paying any tax on income?

Everyone is entitled to 18.2k tax free p.a. or 36.4k per couple (not sure of your situation).

Lets keep it as a balanced (50/50 CF/CG) scenario of 100k p.a. total gain for an individual.

The 50k CG if you can get access through redraw is 50k + the CF of 50k less tax being ~41.5k total ~91.5k p.a.

80%CF 20%GC is 20k+60.8k total 80.8k

80%GC & 20%CF is 80k + 19.7k = 99.7k

So in order from lowest to highest is
CF - 80.8k
Balanced - 91.5k
GC - 99.7k

Yes it requires you to get equity out but if you extrapolate this to a total income of 300k p.a., i don't think this is being over the top here if looking at retirement.

Numbers are;
CF - 152 + 60 = 212k
Balanced - 103.5 + 150 = 253.5k
GC - 240k (already more than total CF) + 48k = 288k

You could technically get the GC or balanced one to return higher with NG by reducing your taxable income which you cannot do with a CF+ property

 

Capital first, but you still need to create income streams, makes sense but it won't be a hold forever strategy. I think most have worked this out, next step
.....do it, requires more effort, damn it, more work. Once you nail this then you are in navara

 

whatever post we start with, always to end up capital_growth versus cash_flow discussion

why can't Mr cash_flow fall in love with Ms capital_growth, get married and live happily ever after.

 

Because Mr cash flow won't happen unless with have me capital first it's a catch 22

I am in love with both

 

Because Mr cash flow won't happen unless with have me capital first it's a catch 22

I am in love with both

 

Because Mr cash flow won't happen unless with have me capital first it's a catch 22

I am in love with both

 

I guess if you use passive & active "cashflow" interchangeably....

There are merits to both strategies and having a high asset base with poor cashflow is a good problem to have.

To be fair, I think another level of defintion is needed to do justice to the discussion.
For cashflow - active & passive.
For capital - encumbered & unencumbered. (ie. Finance, capital release costs, CGT etc.)

My rationale is based on this:
100k active cashflow (ie. J.O.B.) = time poor & not enduring
20k encumbered capital = either CGT liability or cost to release equity.

Versus

100k passive income = time rich & enduring
20k unencumbered capital = no liabilities.

These are the 2 ends of the spectrum (with many permutations in between) but it highlights a few other very real considerations such as liabilities, passive versus active cashflow & valuing time.... if you ever intend to achieve financial independence, these considerations are very necessary & add a value layer to the discussion IMHO.

Enjoy the journey

Indi

 

Would love to read your post fully but I'm not sure if it's the warm sun making me sleepy during another day not needing to work a job to pump money into multiple negative properties but I did nod off for a while there

Have you reached financial freedom with your strategy? So many variables and ways to do.it.

 

Sorry you are 15 years ahead of me in age so we cannot compare. If we were to compare you would most likely be in a better financial position however then we would need to compare my parents as they are 15 years older than you and they are in a much better financial position than you. Guess what my parents are in a far greater financial position than me but there is 30 years difference in age.

Keep it simple lets say we all started working 20, I have had 10 years you have had 25 years and my parents have had 40 years. Lets say we all spent 5 years saving up to buy a house (keeping it simple) the numbers are 5 years for me, 20 years for you and 35 years for parents.

Hardly a fair comparison as you have had 4x more 'investing' years compared to me... A fairer comparison would be my parents as they are not even 2x yours but this still wouldn't be fair and I don't think you want to compare.

Good try though...Don't forget about melanoma with all this sun you are being exposed to.

 

Why so bitter? No need for all this 'I'm better than you' stuff. People can find success with different strategies, no need to be angry about that. I'm happy that you're happy

 

@Big Will great examples above, and if you have found a method that works stick to it. But growth doesn't always occur, and life sometimes gets in the way of servicing negative cashflow year after year, especially if markets turn. Over the years the biggest thing I've learnt is plans on paper look great, living through those plans don't usually pan out the same.

 

I would like to see where you are getting 100k passive income from 20k unencumbered capital, please tell me.

Even at 10% CF you would need an asset base of 1M unencumbered just to get 100k passive with property on a 1M asset base.

Lets pretend it is 10x $100k properties (Broken Hill median is 100k), that yield 10% p.a. in yield this is extremely high but doable at Broken Hill and keeps numbers easy along with it makes the 100k 'passive income'.

However you would likely be losing 10-20k p.a. with PM fees (1-2k per property - you asked for passive income) + 10-20k in rates (1-2k per property) + 10k maintenance (1k per property), vacancy rate of 4k for 2 weeks per year (400 per property) + 10k for insurance (1k per property).

Total cost 44-64k

Leaving you with an income of 56-36k or after tax income of 32-45k.

Typically regional properties will have a higher vacancy rate but with the more property you can sort of average this out to a lower rate per property. I also haven't included reletting fees, advertising fees or owners corp fees (assumed all properties were houses).

Versus

The job of 100k before any deductions is 73k after tax and 20k debt would likely be consumer debt e.g. a car.

 

Its a mindset thing which so called gurus keep regurgitating.

No surprises, its easier, less work to buy and hold because eventually property will go up if you hold long enough... no questions asked.

Nothing wrong with this, no point trying to explain the fact that you can increase your odds by buying in rising/booming markets, reduce risk and retire in shorter time frame. Geez, sounds good......
Not interested in justifying the reasons, some will work it out and that is great otherwise most probably doing better than 95% of the population. Its not a competition, you do what you can do with what you know and you are comfortable with.

MTR

 

Good to see you are happy with me being happy.

Not bitter but your question of have I reached financial freedom implies to me you would like to compare but clearly I wouldn't of made financial freedom being 10 years into my working life or 5 years of investing.

Very few people make financial freedom (you are a rarity) however even fewer do it in 10 years or less. Unless you invent something like Facebook or get an inheritance most people will need 20 -30 years or working life.

I know people can find success with different strategies and property as a whole isn't the only way. However was just demonstrating that the CG comes up trumps over CF if you can hold. As a CF property just becomes more CF+ meaning more dollars goes to tax but the CG (typically CF-) will eventually become CF+ (tax) and in time will become even more CF+ (more tax) but you are gaining more CG (non-tax, unless sold) each year than the property which was CF+ to begin with.

 

Atlanta - around $150K dependent on Aussie dollar with $500K capital. You wont do this in Australia, I think most will be lucky to make 6% net yield on property and moving forward we may not necessarily see the growth.

 

I agree buy in rising markets is a great way to shorten the time however no one has a crystal ball to tell you this, though there are ways to forecast some sort.

However better to do something than to do nothing at all. No one got rich by keeping their money under their mattress... I actually think this is risker than investing as you get no gains and someone can come steal it.