Capital Gains vs Cashflow

Great topic.

It will take a long time for cashflow to make you financial free, the additional $50 per week extra cashflow won't change your life but capital growth can do that. Anyone who bought pre the boom in Sydney is laughing all the way to the bank.

In saying that, cashflow adds stability and a buffer against unexpected events (interest rate increases, job lose, financial stress etc). Speaking to more experienced investors, it's quite common to hear that their high yielding property allowed them to withstand financial stress at one point in the cycle. If their portfolio was negative, they might have been wiped out and if they sold at the wrong time, they would have crystallised their loses.

By definition, capital growth is speculation. No one can say how well Sydney, Melbourne, Brisbane etc will do over the next 12 months. Take for example Brisbane, I recall on Somersoft investors saying 2014 was going to be Brisbane's year then it was 2015 and really today still waiting. No one has that crystal ball.

So my strategy is cashflow first, you want to put cashflow buffers in place and then buy in areas with potential capital growth. Who knows when the potential will bear fruit but usually hold it long enough and you will see gains. Chasing capital growth without cashflow could be gambling. If it pays off you are cheering but if it doesn't, you could go bust.

Of course this depends on the individual's resource, if you have a high income and a good cash buffer then 4% yield may be adequate and better to speculate on capital growth but if you are on a low income then it's a dangerous game to play. Holding that negatively geared property in the hope of capital growth isn't fun. Hope isn't a strategy.

Robert Kiyosaki puts this very well in the video below, watch from 7:00 for his take on Cash Flow vs Capital Growth.



Cheers,
Michael

 

Good points @Michael_X

If you can get to a stage of cashflow positive and use the excess to cover off P&I repayments you'll be streets ahead.

 

Hi Michael some good points.

Speculation - if you are a property investor you are speculator regardless whether you are chasing CG/CF.........because for example even if you buy for cash flow you are buying at today's interest rate and you are also assuming rents will continue to rise or stay the same, wrong, rents can fall and do fall and interest rates can rise, and do rise which could impact negatively on cashflow.


Timing the market is a clever way to make short term gains, no one has a crystal ball of course, however property booms generally last for 3 years, close to the peak is where you achieve the greater gains, history proves this.

We had 3 booming markets in Australia since 2013, Perth, Sydney and Melbourne.... there was media coverage about this everywhere, seriously how could anyone have not read somewhere that these markets were booming, auction clearances were recorded weekly and there were a number of threads indicating the shortage of stock.

Its nearly impossible to jump in from the start of a rising market because the evidence may take at least 3-6 months to work out that the market is in fact rising, however we have perhaps 3 years of CG, as long as you jump in somewhere in the middle you should make a killing in a boom cycle. My point is you do not need a crystal ball, what you need is not to ignore the signs/indicators that a market is rising and we all know this means there is not enough stock to meet the demand...BOOM

Anyway, that is my rant for the day. LOL

 

Ive been banging on about this for years. NRAS = a dividend reinvestment plan /debt reduction plan using property and non margin lending.

Take the example , someone with a 300K PPOR mortgage, 65K of equity to fund deposits and costs and buffer to be used for a 400K NRAS purchase, and sufficient borrowing capacity to borrow that 65K and the balance.

They will generate 9 -10K of fully franked ( tax free) dividends after tax, from that purchase.

If they then reinvest the 9 -10K towards paying off the 300K PPOR non deductible debt, they will see the kind of result that Ive attached above.

Note - this outcome is understated, as it assumes the 9-10K is tipped into the loan in monthly increments of $750, as it's the only way these extra repayment calcs work. But if the entire 9-10K was deployed as a lump sum at once, the result would be significantly better than what the screenshot indicates.

It's further understated because I haven't accounted for the annual increases to the surpluses.

It's even further understated because non NRAS investors often have to quarantine money to cover holding costs , which is then not available to them to use towards PPOR repayments. NRAS investors dont. This means NRAS investors can direct those monies towards PPOR repayments as well.

Meanwhile, you get to hold the asset itself with $0 cost to you... After 10 years the NRAS credits cease, the rent reverts to full market rent and the property will run under its own steam thereafter, allowing you to continue to hold it at $0 cost to you, post NRAS.

The probability that over a 10+ year ownership cycle, you aren't also going to enjoy some CG, is remote. But even if that occurred, you are paying down your PPOR mortgage either way, and freeing yourself up to have the ability to grow your portfolio either way, as you are creating equity and borrowing capacity through the accelerated repayment of PPOR debt , either way. But unlike a CG only strategy, you arent having to sell to reduce debt or increase servicing.

It's how share investors get rich. Dividend Reinvestment. NRAS allows you to run a property portfolio the same way.

 

euro73, you can bang on stuff all you like, but unfortunately if no one is listening then its a bit like.... "you can take a horse to water, but you can't make it drink"

 

Plenty of people have listened MTR

 

Unfortunately many even on this forum encourage others to invest for CG, even their first IP. Recently someone posted a thread about their first buy in north morton bay which is CF neg. Thats like people losing money expecting they will get heaps more back sometime in the future.

 

As corny as it is

Cash flow keeps in the market whilst Capitial growth lets you exit

 

It's not all falling on deaf ears. All debts have to be paid eventually. That's why Exit Strategies should always be on the goal sheet.

 

The real question is where do we see CG going in the short to medium term. That will drive investment decisions. And then, there are people on here who will make a good profit no matter what the market conditions. Good on em.

I don't trust my judgement to pick CG properties, so I'm happy to with go with decent CF. Add a little CG at current inflation rates and I'm quite happy.

 

...but the key is when buying for CG markets actually need to be rising, now don't you think those who purchased in Syd and Melb in the last 3 years would be too worried about cashflow when they have doubled their capital

 

Me...USA
Melb - some markets still going strong

 

But what about those who didn't buy in Sydney and Melbourne in the last 3 years?

 

Learn from it and find other markets that are moving or start learning new skills/strategies where you can add value to property and achieve both - CG and CF ie developing, renovating ... start small

 

That is what i thought too, how could it tick all the boxes and cross out when you're still negative. There are so many other suburbs australian wide which will give you CG and neutral at the very least. Some more some less.

i'll take nathan birch's line - "the numbers need to stack up from day 1" and not day 730

 

it doesn't necessarily have to be Sydney or Melbourne in last 3 years. i never really relied on the boom in melbourne. I was buying and selling refurbished apartments since the mid 2000s and just relying on manufacturing growth through renovations. I didn't rely on market valuations or bank valuations but on my actual sale price to generate gains so there was no hypothetical scenarios. You don't have to rely on buying in location, you can buy anywhere as long as there is room for renovation, sub division, granny flat or even getting council plans for devs.

 

yes, a very good way to add value, with developing you can achieve both, ie build 4 townhouses sell 3 own 1 outright

 

I did one or two of those over the years but was time resource poor in the earlier years

 

Although most people are in one camp or the other really the answer is in portfolio management where each property has a place in assisting the goal being reached. Cashflow properties are required to keep the beast moving forward however in my opinion the real money is made through capital gain .
However age , life and the ' position ' in the journey will also determine the best mix and as life changes this balance would ideally be tweaked along the way.

Having come to a crossroads in my journey , this is how I believe I should best move forward.

Tim

 

And after all that advice, if you still want to use a buyers agent in Brisbane i think you could contact Karen young from property zest. I've not used her but she knows the area and won buyers agent of the year two years running. She has a podcast which has taught me a huge amount from scratch which is free called Everyday Property Investing. Easy to stick in on the USB stick and listen to it on a drive.