Capital Gains vs Cashflow Investors".

What do people think ,is there a difference between the mentality of Cashflow vs Capital Gains investors .
From the way I read recent and older posts ,it's very easy to walk into any financial planner's office lay your money or OPM on the table and buy into a diversified portfolio that may cost you money in the long run.. Depending on the skills and tremendous knowledge of the financial planners skill set and one only has to read within the RC finding most had very little and were no different from used car sale people ,not that I have anything against car sale people or any sales people..

The same as investors are now finding out ,it was very easy to buy a property over the past few years and lose money both capital gains and lower rent cashflows..

That's the hard part is finding investments that put money in your back pocket each month ,rather then taking the money out each month and if a change of government and change the rules again then acquiring an asset cash flow wise for your financial future may become harder unless you rely on Luck..

 

Absolutely....

IMO, the cashflow investor is primarily concerned with yield, ROI & ultimately net cashflow position with CG a secondary priority.

Whereas the CG Investor is primarily concerned with growth, leverage & maximizing tax effects such as negative gearing to accumulate equity/wealth.

It is more a difference in priorities rather than an either/or type of approach.

FWIW, asset rich & cash poor is not the right structure for retirement or throwing the job in...... but it let's you restructure to do so.... now enter the cashflow mindset..... see the difference?

 

I don't know about mentality but I only ever recommend that people prefer CG.

Many years ago, I compared a $500,000 capital growth investment (6% growth, 3% income) against a $500,000 cashflow investment (3% growth, 6% income).

My findings were:

1. For the asset to double in value to $1M, the GG investment took 12 years and the cashflow investment to 24 years. No surprise, the Rule of 72%.
2. After 25 years, both investments produce the same annual income, namely $61,000 per year.
3. From year 26 onwards (when one could be heading into retirement), the CG investment always produces more annual income (in $ terms) than the cashflow investment.
4. After 25 years, the total returns from a CG investment was $800,000+ ahead of the cashflow investment.
5. After 40 years, the total returns from a CG investment was $3.5M+ ahead of the cashflow investment.

The above conclusions are before tax (as everyone's tax rate is different) and the income is gross (before expenses, if any).

Hence, my preference for CG investments.

 

Wow, the knowledge on here is still being pumped out for those who choose to learn.
Such a great forum going way back to late 90's.
If I may add something, no matter what govt is in charge at any time, they all like CG, not only for the tax but for their own individual investments as well.

There was one slimy govt official in fairly recent past, NSW govt, who brought in a vendor tax but at the same time he was invested in NZ.
The 6 year rule I believe was brought in for those diplomats (ex pollies) who had those lovely overseas appointments etc etc.

CG was our strategy/vehicle and has served us well. Started using NG which obviously (and should) ended up positively geared.

And away you go.....swoooosh!

 

@kierank such a comparison is not necessarily a good indicator IMO for a few strategy reasons that would generally underpin the different investment approaches.

The Cashflow investor may have intermittent income, periods of no income or an inability to leverage. They may also choose a different asset vehicle to leverage tax advantages (ie. Super &/or fully franked shares) that actually boost the Net income position beyond those straight out calculations/comparisons.

I don't believe one approach is always better than the other as it depends on many factors peculiar to individual circumstances.

 

I don't believe they are exclusive strategies. I started off with mainly CF IPs as I wanted to test the waters and then realised that although the CF is nice these weren't going to give me any significant growth that I needed to achieve my goals (early retirement) In the medium term so moved into more CG focused IPs. The beauty of this is that the CF helped with the serviceability when the banks started tightening on lending and overall the CF across the portfolio is balanced. Longer term plan sell off the CG IPs and pay down debt then live off the income from the CF props......assuming the prophets of doom aren't correct and the whole market doesn't go up in smoke overnight...otherwise it's plan Z work forever to pay off the banks!!!

 

Don't forget the tax side of things. Income is taxed yearly whereas capital gains are only taxed when realised and then you only get taxed on half.

 

That is why I used the phases "prefer CG" and "my preference for CG investments" in my original post.

Having said that, the bigger the gap between the two percentages, the more dramatic the impact.

For example, if we compare a $500,000 capital growth investment with 15% growth and 4%income (say, a share like Cochlear which I started buying in May 2008 and has returned 15.67% growth and 4.10% income) against a $500,000 cashflow investment (4% growth, 15% income), the number are:

1. For the asset to double in value to $1M, the GG investment takes 5 years (vs 12 years above) and the cashflow investment takes 18 years (vs 24 years above).
2. After 14 years (vs 25 years above), both investments produce the same annual income, namely $123,000 per year.
3. From year 15 onwards (vs year 26 above), the CG investment always produces more annual income (in $ terms) than the cashflow investment.
4. After 10 years (vs 25 years above), the total returns from a CG investment was $800,000+ ahead of the cashflow investment.
5. After 16 years (vs 40 years above), the total returns from a CG investment was $3.5M+ ahead of the cashflow investment.

The above conclusions are before tax (as everyone's tax rate is different) and the income is gross (before expenses, if any).

I don't think a lot of cashflow investors are aware of this.

 

When it comes to residential property investment, I will always believe it's best and most efficient use for me is to use it to grow my capital whilst I create CF from a business which happens to mainly involve property too.

I would never want to buy IPs with the main goal of them to produce small amounts of CF each prop. I feel its a waste of equity for such a miniscule return.

 

and the potential opportunity cost could be HUGE .

 

There are just much better returns elsewhere for say 1 mil of equity than the peanut yields of residential RE. Some may be happy to settle for those yields for their equity ( which is fine) but im not.

 

I am purely CG all the way. You can always manufacture CF if your creative- renting rooms by setting up rooming houses/business/Airbnb/granny flats/sub division etc. CF won’t get you far and won’t allow you to grow your portfolio as you won’t have the equity to make the deposits. I think once you have you CG portfolio set up you should then look at increasing CF or turning the properties into CF properties to sweeten it and keep it comfortable

 

You may well find that the properties you brought for cashflows have changed into CG (due to the high returns and/or land content) overtaking the properties you initially thought would give you the CG.
Many CF+ properties have had good CG

 

You seem to miss the point of property investing it is a place to store and secure your wealth and provide LIQUIDITY. The yield is a bonus. The equity can and should be used to secure high growth assets. The yield of the security is different to the returns you get from investing the equity. It is the high and relatively safe leverage that a high yielding property allows that is the point and the opportunities it allows you to take advantage off

 

My portfolio and net worth says otherwise .

For me, Yield is never a bonus but makes up part of the "total returns" on the asset. Technically i understand it may not be correct to view it that way but in reality yeild is important to be able to hold assets. I am not for super high yielding RE anyway, but certainly wouldnt buy a place with a 1% yield unless I had business plans for it.

I have always been more interested in RE as a place to grow and expand my wealth as I've said in an earlier post quite clearly anyway.

 

I think primarily focusing either cash flow or capital gains is a flawed approach.

Focus on growth.
* Growth of rental income so negatively geared property quickly becomes positively geared.
* Growth of value so you make a healthy profit when you do sell.

It's almost impossible to find a fully leveraged cash flow positive property these days. Those that are, tend to come with significant risks.

There are properties that have good growth but stagnated rental demand for various reasons. If nothing else, sooner or later land tax is going to bite you with this sort of property.

IMO the best type of property is one which is in constant demand from both potential purchasers and tenants. This type of property is going to be more useful for building a larger portfolio in the long run and more resilient to the various risks in the marketplace.

Also I'm not really a fan of accessing equity to built portfolios. You're far better off to save the next deposit, debt recycle it if you can, to buy the next property. By accessing equity you're forever chasing ever increasing debt which is a limiting strategy in the restricted lending environment we now face.

 

I am with you.

Yield contributes to cashflow along with a stack of other things (salary, other property rental, dividends, pension payments, ...).

Total Returns over the medium to long term is the name of the game for me. As I have shown twice in this thread, a capital growth investment ****** all over a cashflow investment in that regard.

 

After the 1987 crash land values fell substantially and there was little demand for the rental or purchase.
For the next decade or so to the early 2000's land was considered a cashflow investment by market forces (with no CG prospects)
But the 21st century changed this cf+ investment into CG.
What I am trying to say is things can change (cashflow investment can become CG)
Ps land that was renting in the 90''s for $1 per m2 is now fetching $25 m2
Commercial ..not residential

 

Yes agree

If you can have both then happy days, been enjoying this scenario since 2011

Cashflow is massively important how do you soley LOE, I dont know anyone who has done this successfully. Current lending environment will be impossible

 

I think both is the best answer, especially with P&I loans now and tougher access to equity, those with cash flow are able to weather this period much easier.