Capital Gains vs Cashflow

i've sold more than 10 i think as i have lost count over the years. i use to do refurbish of apartments and townhouses in melbourne.

 

So, in your experience, was the selling of your 10+ properties a smart decision or something you regret?

In my case, I didn't know any better. I was brought up where one bought a PPOR and then spent the rest of one's life paying it off. If one moved, one sold the current PPOR and bought a new one.

The interest payments on the first property I sold was less than $15 per week (3% staff loan). It was a two bedroom unit; I lived in one and rented out the other for $32 per week. Knowing what I know now, I should have kept it, rented out the unit for $60 to $65 per week, paid the Interest of $15 per week, etc, etc. I didn't know any better.

 

no regrets as there is not much capital gain growth in apartments in melbourne. My gains were made within months upon refurbishment. Maybe from cashflow persepctive yes. i paid off my PPOR nearly 10 years ago but then again my PPOR kept shifting.

 

if you are playing CG most markets have already boomed or close to peak or falling, those left well check out the economy in each State before jumping in, CG is not a given unless it's already started rising or you can manufacture growth

Reading posts to me it becomes clear why property should provide growth and cashflow, the reason most don't have both is because the focus is on one or the other, if you can have both why not, makes sense

 

Appreciate the example, but you chose a crap area to represent.

Could you now do the same for a cashflow positive area in the same city please. Say tarneit. You could have bought 2 properties in Tarniet for under 300k.

Cheers.

 

You've got more energy than me, personally I couldn't be bothered arguing. Some will always see cashflow positive as = Broken Hill or some other random crap area with zero growth potential.

 

Yep I did say that, but I also talk often about how surplus CF can be used to improve servicing if you redeploy it for debt reduction. It also allows you to hold the asset for longer without needing to sell, which gives you a greater chance of enjoying a growth cycle or two.

The cold hard truth is; if you don't have borrowing power, surplus equity isn't able to be harvested without selling something. And if you don't have equity to seed deposits, stamps etc, having surplus borrowing capacity isn't much use either.

This has always been the case of course ie - you have always needed both, but it simply hasn't been very important to many investors in the past because in the previous 2 decades it has not been a significant impediment. And that's simply because equity has been created in spades because prices have surged , which is a direct consequence of borrowing capacity surging, which is a direct consequence of the 20+ year expansionary credit environment we have just enjoyed, which coincided with a massive increase in Australian incomes, which except for some very short periods of time, has allowed pretty much everyone's borrowing capacity to grow year on year. We have lived through a very rapid expansion in LVR's, more and more aggressive servicing calcs, no docs, lo docs, no gen savings, and on and on and on.... but all those levers became fully exhausted following the GFC, and then all we had left was "actuals" , which combined with rates falling from mid 9%'s in 2007 to low 5%'s until mid 2015, gave it all one last almighty kick along.

But that too, is now exhausted , and we have now entered a more regulated credit environment, where at all but a very small number of lenders, all debt is now assessed at sensitised rates and higher HEM's... so no amount of rate cuts will improve your capacity at 99% of lenders . BUT, if you use the low rates or CF surpluses to reduce debt, you will get improvements to your borrowing capacity

And there will be more regulation to come. BASEL IV for starters, and the one no one here is talking about ; comprehensive credit scoring , and how that has the potential to influence and shape the type of rate or LVR individuals can secure... or the speed with which they can transact and re - transact... It all adds up to the same thing - the era of rapid credit expansion is for the time being - done

So managing both sides of the portfolio will become increasingly important , whether others here realise it yet or not.

 

I just thought it would be fare to people reading the thread, that proper examples should be used. We shouldn't select a suburb to illustrate someone's veiw point, especially broken hill.

Also the past is past. I would love to see someone buy for capital growth at today's prices and hope to achieve the results of yesterday's. You will be stuck moving forward pretty quickly after 1 or 2 propertys, even if your wages are up in the high end. You will need everyone's wages to be high to continue to push those prices up so you can acheive the CG.

 

and that sort of high wage growth will mean massive inflation...and that will mean extremely high interest rates.... and that will nullify any borrowing capacity improvement

 

We buy property for CG because our cash flow comes much easier from elsewhere.

 

At first I was focused on cash flow however my stubborn mind has slowly started to shift towards capital growth. CG is like a catch all for me. When properties rise in value the rent typically goes up as the suburb average rent is pushed upwards. When my properties gain in value I can draw equity to give them a quick reno when required (fresh paint, carpet, update kitchen and bathroom) by using the banks money (split loan or LOC). This reno means higher rental returns which means higher cash flow.

 

I only buy property for cash flow now (last one 9% gross). If the property value is the same in 10 years time that is ok, I do not expect or rely on CG (though nice if it happens).
Prefer value doesn't drop though that would probably be accompanied by yield drops also.

 

During the initial stages we were focussed on capital growth. The negative gearing was no concern, as it was offset by the high income.

Now we've turned those growth assets into yield assets for cashflow. The next focus will be on sourcing cg assets again, as we search for the balance between milking the cash cow and investing for future growth.

 

I would like to hear from the folks on this forum who are low income earners to hear their take on this topic.

 

When I was in accumulation phase, I used businesses (I owned four over 26 years) for cashflow and bought properties for CG.

A well-run business will generate a lot more cashflow than a portfolio of CF+ properties.

The other thing about a well-run business, especially one that you start from scratch, is that you generate a lot of CG (which can be tax-free if you meet all the criteria) when you sell.

 

Airbnb gives me cashflow, albeit it does require work. Capital growth is what can turn you from a millionaire to a multimillionaire in a blink of an eye. So that's my focus.

 

As Simon (below) said, you can have both........

That's simply not true.

Being on a low income, the only properties we could afford were cheap properties & they simply HAD to be CF+. There was no strategy at all in the early years. We just bought what we could afford and as the rents went up, the increase in CF was very nice indeed.

As Hubby's income increased we kept on buying, but with more experience we made better choices, although I'm sure many high income earners turned their noses up at all our ex-housing commission properties scattered around the country.

Fast forward, Hubby has been able to retire from his job & we've made some significant CG.

If your timing is right, you can make a large CG from most CF+ properties, while also enjoying the cashflow while you are waiting. Let's look at some of our recent sales in Western Sydney:

Lethbridge Park: Bought $186K - Sold $411
Kingswood: $150k - Sold $309k
Tregear: Bought $186500 - Sold $490k

OK....outskirts of Sydney, you say. They were bound to get growth. Lets look at something more 'out there'.

Block of 4 Units in MOREE: Bought $210 - Sold $380k

All except for the Kingswood property were held for one cycle. They were bought well, at the wrong part of the cycle, and held until the next cycle. They were bought as long term holds, along with a heap of others with the intention that something would be sold at a later date. Kingswood was purely timing & bought about 5 years ago, specifically to sell. Moree was a cashflow play & was sold with strong cashflow. It didn't gain as much as the others, but it's still quite strong CG.

We are still sitting on a large portfolio with similar numbers, should we decide to sell. I believe the only reason we were able to grow such a large portfolio with such a modest salary is because we looked for CF. The equity meant we had built in deposits and the CF meant we had serviceability.

 

I have two distinct sets of properties in my porfolio.. the b&h's and the future development stock. B&H are CF+ and the future development are vacant land or poor yield and CF-. The CF+ properties mop up most of the losses on the development stock, so its easy enough to wear negative to 3% gross yields in the interim.

Meanwhile everything keeps going up and the CG is many many mutiples per annum of the overall losses... works well for me.

 

@MTR every single person has that storey so I don't think you can beat yourself up.
It's like my mum saying her and dad were tossing up between Kealba and Essendon but in the end they decided against paying the extra 10k. Mum sold last year for 350k, if they bought Essenson she would have sold for 1Mil.

It's all relevant though and can be applied to today. In 20 years I'm sure I could say I had the opportunity to buy in Airport West for 700k but chose St.Albans instead, now the APW is worth 2Mil.

In reality that extra payment would have a huge outcome on my life spanning the next 20 years. Who is even to say you would be financially better off? Yes comparing capital growth in isolation it's a no brained but what did that extra $$$ allow you to do? I imagine a lot that you would not be able to. Perhaps it allows you to start a more profitable business.etc

 

I'm low income. Same industry as @Bayview , but I'm a replaceable worker, not the business owner. Get ready for the honesty.
I buy for both. And I view property investing as my "business". So CF still has it's place for me as it allows me to hold my properties. With CG as a secondary bonus. For now. I would buy more IP's for CG (think Melbourne), but I'm sure like many Average Joes in the 70k PAYG, single income, school age children bracket, out of pocket weekly for NG is simply not feasible.
For Newbs, to do Equity Pulls from the CG that you do make to buy more properties costs more in repayments for both of the Loans, for the old and new properties, which you have to cover. So unless your rents/Income are increasing enough to cover your Credit Expansion with the addition of each new property, you are up against it. I'm grinding away at it, but growing the portfolio is getting harder post APRA. Once Mrs Sonamic returns to work things will get easier as debt reduction potential will increase our serviceability and borrowing capacity. So when pulling equity I'm mindfull not to dip into the negative side of neutral gearing with ALL Costs in, so IP's don't eat into my day to day and can look after themselves. Tax benefits are not that big a deal when you pay less than 15kpa. I'm all about a self funded secure retirement before Super age. Super is just a bonus boost as far as I'm concerned.

Critique.