Capital Gains vs Cashflow

The old chestnut... do you invest for capital gains/growth or cashflow??

IMHO cash flow investing is not superior to capital gains investing or vice versa, there is a place for both and It all depends on what you want to achieve in the end.

There will always be pros and cons, here are details of a property I purchased in Coburg, Melbourne which I no longer own, damn it.

2008 - $500,000 (purchased)
2010 - $700,000 (sold)
2016 - $1,000,000 + (expected value from recent actual sales).....ouch

The beauty with this property was that it is a sort after double fronted Californian bungalow and I could have built at the rear of the property and today would have made some serious $.

Why did I sell ?- it has highly negatively geared, and at the time, interest rates I think got as high as 10%.... we needed the cash as our financial situation changed. In hindsight this was a keeper at all costs.

Moving forward, I have learnt to mix it a little, the keepers perhaps are the ones that will provide a twist where you can add value, however its not a bad idea to sell from time to time to reduce debt and increase cashflow and improve serviceability.


MTR

 

Each to their own but I look for the CG as the rent will becoming positive (so you get the best of both).

Where as my feelings with a CF property will just become more CF and slight changes in CG.

If you take CF you have to pay tax on this, however with CG you only pay if you sell. However if you don't sell e.g. draw out equity to buy another property you have in theory not paid tax on it.

Getting an extra $20 a week (before tax) means you got an extra $1,000 (less tax ~500-700). I would rather pay $20 a week at a loss (queue NG abolishment comments) and earn $10,000 extra in CG as this will help me far greater in my growth of my portfolio.

 

... however, you will hit the wall with servicing debt if you don't manage cash flow, CF and CG helps investors continue to move forward. APRA is a big one we did not have, this is a game changer.

When markets turn/down trend valuations will not necessarily be possible because they will come in too low, however you are still servicing debt.

I require both CG/CF as a part of my investment strategy to improve outcome

MTR

 

I agree you need to consider both and if you are about min/max your portfolio then yes.

However a lot can happen between purchases and for me (30) when I retire (hopefully 50-60) the playing field will be very different from today.

Any BB can go back 30 years and look at all the changes that happened in their time.

For me it is slow and steady, I know I wont get rich quick and I am okay with it but I will get there at the end. I may not earn as much as some people in a wage at my work place but I know my total net worth increased more than what most if not all in the last year.

 

For the next 10 years capital gain will be my focus. Once I retire cashflow will be my focus.

 

I've focussed on cash flow with the investing that I've been doing over the last few years because I'm in my mid 40s and want to be able to choose whether or not I work. Being cash flow positive I was able to buy 12 all up and because of ripple effect from the Auckland boom all of my cf+ properties have increased in value. So I'm not sure that I'm that far behind someone who went for 'growth' in the same period. I'm finishing work again this year, for as long as I like, to travel and do stuff that I enjoy. I've also bought a couple over the last 2 years that are more growth focussed and will be slightly negative geared. We've just sold off an ip though so will put some of the money into the 2 negative ones to make them neutral.

Each to their own, personally I just don't want a couple of properties that are so expensive I have to work full time for the next 10yrs to pay for them, whilst waiting for them to become positively geared. Only then to say I don't want to sell them because of the costs involved, so I'll just buy another with the equity (wtf?)

As for your ip in Coburg, you missed out on a few hundred k's but really, can you put a price on the massive financial and emotional stress that you also avoided by selling? Sounds like you continued investing aggressively anyway (just in a different product). So what's the problem?

 

I would just like one of these please.....I dont care which one, anything to get past negative would be good

 

Anyone who bought in Western Sydney pre-boom certainly did

 

You still pay tax on the difference between buy & sell price when you do sell. The more equity you've "withdrawn", the less profit you'll get, and after paying tax you may even make a loss. I think this is something that is easily overlooked.

 

That's all well and good if you make it to 50-60 but many don't or pop off not much later. Not meaning to sound miserable but the point is that there is a risk if you buy 'growth' properties with the view to slogging away at work for the next 20-30yrs and then enjoying your dream retirement that you might not actually make it. Positive geared property does allow you more freedom much earlier on. Plus if you buy in the right place and/or are lucky you'll also get growth. Each to their own, I'm just lazy and like lots of long breaks from work.

 

I buy and sell all the time, IMO many investors get way too caught up with the tax side of things, treat property investing as a business and you open your mind to many more opportunities.

What investors don't realise is there are strategies/clever ways to reduce tax and you also need a very good accountant for this.

Also sometimes its best to sell, rather than ride a downturn, especially if you no longer can service debt...... because all we have is time, we can not buy that back, opportunities lost because you can no longer play in the market is a real killer in the investing game.

 

Correct but if you withdraw 100k from a property and buy a 500k property which will turn into 1M in time. You haven't lost that 100k you have gained 500k.

I am planning on leaving a huge problem for my children and if they don't like it I am sure others would love it.

 

Ditto.... and Melbourne and Perth....there were also some very good gains here and also Melb is continuing to outperform every market in Australia at the moment

MTR

 

Yup see some real issues here in making it to 60...

I would feel cheated if I didn't make it to 80.

Yes you never know when your life will end but I am conservative in nature and when I talk about negative geared properties we are not talking about $200 a week neg. I still use 7% on my calcs even though we would lock in interest at ~4%.

I wouldn't be able to sleep at night in my current financial situation holding a 3M property that is only getting 1k p/w in rent.

 

Can't win them all @MTR. you already done good with thomastown and croydon devs. I think it is a combination of positive and CG. if you buy a reasonable CBD apartment with a deposit that does not have LMI, chances are it is positive as rents are high in melbourne through CG would be next to zero. Say you bought for e.g. 600K villa in balwyn 2014 now it could be 1 mil now though rental is not high but the CG is. a combination balanced of ips is always good.

I was reading the new investor who bought something in QLD and then thanking some forum members. All good for him until he said it was 350 negative geared for his first IP. and others came on saying tick all boxes and cheering him on. i understand if you buy in Sydney and Melb chances it is negative for most but in QLD it really should be positive due to the current prices. i think for the first IP buy it should be positive otherwise if you income is not X amount, you will be bogged down being unable to buy the next one or just affect your lifestyle. Was watching nathan birch's recent interview which popped up on facebook and he goes "the numbers need to stack up from day 1"

 

Thanks for the graph, that's a real revelation to me. I didn't realise that was the actual life expectancy rate. Gosh. Oh oops, it says EXPECTED.

You wouldn't feel anything if you didn't make it to 80 because you'd be dead.

I can live very comfortably on $4+ k p/m net. I'd personally prefer that to working 37hrs p/w in a job that pays about $5k p/m net but then having to cough some of that up to pay for property that will help me to retire in 30yrs. I'm not knocking your strategy, so not sure what the sarcasm is about. As I said, each to their own.

 

I have only ever sold two properties and both I wished I still owned:

1. Bought for $26,000; sold for $39,000; now worth $550k to $600k

2. Bought for $54,000; sold for $92,000; now worth $600k to $650k

That is $1.1million of tax-free capital gain I could have had. it is only money .

 

As others have already it really depends on what your overall cash flow position is both within your investing portfolio and your household to enable you to hold high growth low yielding properties,time to retirement,etc etc
In my situation my household income has increased due to my better half returning to work and this time next year I will no longer be paying school fee's for the first time in 20 yrs.
So for me it will change my buying strategy slightly to hopefully acquiring higher growth properties moving forward whilst factoring in buffers to allow for rate increases over time.

 

There's almost nothing you can do with CF that will help your servicing nowadays. I think it was @euro73 who showed that you'd need a yield of about 11% or something high to essentially be neutral in most servicing calculators. With rents the way they are - good luck!
All those who boughts before APRA, like @ellejay and others, the choice between the three was harder IMO - CF only (eg. retired), CG only, or a little CF and then reasonable CG. All were reasonable plays for different people.
But now, I'm not convinced that the combined CF AND CG is an option.
So given that the best that CF will give you post-APRA is anything from worse to slightly worse servicability, I'm playing CG and choosing slightly negative to neutral CF.

 

Yeah but it would of cost you money to hold in the early days...Should of bought in Broken Hill where CF is excellent.

Median house price
07 - 124k
15 - 115k
Yield - 11.7%
Rent today - $13455 p.a. (using 2015 price and the yield)
Mortgage - $4,140 p.a. (80% of 115k)
CF + 9315 (less tax 30% ~$6,520.5)

However you have lost 9k in property value for your 6k gain, giving CF property every advantage (took the mortgage from the lowest price). In the 7 years net return is 36.6k (6.5k*7 - 9k loss in capital)

Reservoir (this one is harder)
07 - 355k
16 - 630k
Yield 2.9
Rent on day 1 - $10,295
Rent today - $18,270
Mortgage - $12,780
CF Day 1 - -$2,485
CF Today - +$5,490
Difference in CF- +$3,005 (less 30% tax - $2,103.5)

7 years with the difference CF = $14,724.50 (after tax)
CG - 275k
Total - 289.7k

To help equal BH to Reservoir you bought 3 BH properties (total capital is 372k vs 355k, excluding all costs).

The 3x BH would of returned 109.8k
The 1x Reservoir returned 289.7k

Difference is 179.9k

Obviously you cant make it this simple as interest rates changed throughout all this time, I haven't accounted for purchasing costs (3x stamp BH would be 3.2k each or total 9.6k vs 17.5k for VIC), vacancy periods, agent fees, maintenance issues or a million other things. However my calculations might not be 100% accurate but I think you get the general gist of where CG will out perform in the long run.