Capital Gains vs Cashflow

I haven't read the 4 pages preceding this but this is just my opinion, Ill keep it short and sweet.

If you want to build wealth and then convert that into nice CF later on, you need CG and lots of it (depending on your goals and how much CF you want later on). CF properties from day one is fine, as long as the deal your buying has strong indications of good CG in the future.

It really depends on a few things and imho its not a simple question to answer.

1. Your financial position now.
2. Your goals.
3. The strategy you want to employ.

NG property will only get you so far, eventually there has to be a CF balance to the equation at some point, but at the same time you may be in a strong position now to focus on CG deals, add value deals etc. Don't know. But you need to think about 1,2,3 above.


One word of warning, you need to heed advice from people who are giving you advice for YOUR specific situation and not theirs. Huge difference.

my 2 cents.

 

CF+ properties allow you to have a substantially larger portfolio than cf- properties
So even if the CG is less on the cf+ properties the volume more than makes up for it

 

Took me precisely 4 years .

Im talking about $160 -200 per week CF+ ie 8-10K CF+ Net, not Gross.

$1million of after CGT cash invested in a high interest bank account would make you 10K per annum these days. ( after the initial 90 day "wow" rate) and if you put it into LIC's or ETF's... well they just lost 1.6% today. The sharemarket has barely tread water since the GFC.

But if took $1 million and deployed into 20% deposits + stamp duty for 10 x 400K cash cows or 8 x 500K cash cows would be generating 80-100K per annum CF+


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Yep... and resi investors are about to find out why CF is valuable. There has NEVER... EVER...been a time like this in lending, since deregulation in the late 80's. No one on these forums - not even the most successful that many here dream of replicating, have had to deal with 30% I/O quota's .

You wont be able to buy much of anything at all using I/O lending pretty soon without very large deposits and super strong borrowing capacity. It wont be enough to pass a servicing calc. The 30% quota means banks are actively trying to say NO to I/O loan applications. Waaaay more than 30% of applications for I/O lending will pass servicing, so it just wont be enough to have borrowing power. Only the very cream of applicants will be getting I/O terms while this quota is hovering over every credit manager in every bank in the land. Credit Scoring algorythms at lenders are already being detuned to cull deals that would ordinarily be approved any day of the week. You have to pay off debt or you have to go to P&I, or you have to sell, or you have to put the cue in the rack. Those are the choices. Equity from growth is now an almost useless commodity for the purposes of getting a loan approved. Equity from debt reduction is extremely valuable however. By all means, investors are absolutely free to continue to ignore the merits of CF , but lets see where that leaves you in the 30% quota world ...

 

30% I/O loans would kill off the market and the banks would lose billions.

I dont think that will happen anytime soon. 20% is already quite hard as it is.

Saying 30% deposit I/O loans is coming is one thing but how will the banks make up the difference in money they make?

I dont see it happening anytime in the near future. Like I said the banks need to tread a very very tight line. Independent increases in interest rates could cause a catastrophic failure, reducing LVR to 70% once again would be catastrophic for their fundamental business model.

Imagine trying to buy a 1 million dollar house? $300k deposit + stamp duty? The market will die.

 

You mis understand.

A lot of words were used to say, finance has changed completely, totally disrupted.

 

He's referring to the 30% quota for interest only lending imposed on banks by APRA.

 

My bad. I thought that was not sounding right.

 

Nope.

I am a complete failure .

 

I think the perfect mixture is a bit of both CF and CG but I believe in the end the winner for me is CG.

Just as people are arguing that while CF properties allow multiple buys and being able to be in the game and have multiple growth cycles the same can be said for CG. Not relating to circumstances now but in the past you could buy with poor yield/capital but with rents increasing over time it would increase yield over time. (ie buy at a price with poor yield but with increasing rents due to inflation can make a property become CF neutral -happened to me both times one in QLD and one in VIC). We are in economy with low inflation and wage growth therefore no rental increases in real terms. Once inflation increases with wages and interest rates, wages should grow with increased rents to follow.

I do agree that cash flow keeps you in the game but in the end the capital gains is what can change your life or exit the game. As people have said an extra $200 a week won't change your life but 1-2 million would.

 

Perhaps the Sydney investor is laughing all the way to the bank ...to pull equity out
But a yield driven investors can have a substantially larger portfolio
Taking the CG route most could only afford maybe 5 or 6 properties before running out of cash
Those CG properties perhaps could produced an average of $500k CG a year ?

The high yield approach can have ten times that portfolio producing triple that in income and double that in CG even on a substantially lower CG % (due to the larger base)

Volume can easily makes up for lower growth

 

Neither am I
But I am half way there

 

I don't think you need 1-2million a week to change your life
I think $100k a week is enough

 

In NZ it is already 40pc required for residential investments!

 

I would love the cash, but does volume mean restless night?

 

Nope ...the more you have the less attachment you have to the property.
Loss of tenant, damage, maintenance. ..just a number on the income statement
My highest stress was on my first property
If i lost one tenant it was 100pc of my income
Now most of the tenants are about 1 to 2pc of the portfolio

 

I apply the same principle to wives .

 

Good work so far.

CG & Cashflow can go hand in hand. Think carefully about WHERE you are going to buy. By that, I mean, maybe don't buy in Sydney right now, as it's quite expensive & yields are very low. Look somewhere that has been flat for a while & is overdue for some CG. Something with higher yields. Maybe something that you can add value to, to create a bit of equity as well, if you've got the time and/or skills for that.

Don't buy something that YOU would want to live in. Buy something that SOMEONE ELSE would want to live in and has good appeal for tenants. I always look for simple homes, with no expensive maintenance items. So...no pools....no units with lifts etc.

Two words.....LANDLORD INSURANCE.

That's part of the purchase price. You could buy a property for $200k and do nothing, or another for $170k and spend $30 to bring it to the same level.

Restless nights and headaches are the result of being too emotionally involved. You need to treat it as a Business....not your treasured family home. An IP is just a Business asset. You insure it to protect your interests & minimise your losses. You employ a PM to do the day to day running around. You keep the rent at market rates. You fix maintenance issues promptly, and you don't over capitalise. You realise that tenants come & go. Losing one is not the end of the world, another is just around the corner, and the most important thing is to keep a buffer available, because sometimes sh$t happens. Like they say in the Boy Scouts...."Be prepared" because when something does go askew, it's always at the worst possible time.

 

Do you mean 30% deposits? I ask because we are already at 30% I/O quota levels.

By charging much higher rates for I/O, so that they make the same ROE on lower volumes, . They are already doing this. There will be more to come.

Its already happening. I write loans every day and I can tell you that every I/O deal Ive written over the last couple of weeks has been declined at 80% but approved at 65% or 70%. These are deals that pass servicing at 80% by a mile. Strong A+L. Strong employment history. In other words, strong deals that would otherwise fly through. Credit managers are telling me 80% is OK if we take P&I, but not OK for I/O. The reasons being given are "credit scoring".... now credit scoring is a complex beast, and each bank sets its own credit scoring algorythms and they dont tell staff or brokers what they are... only experience allows you to start to identify trends, but it seems clear to me they have detuned the algorhythms in just the last couple of weeks to dramatically reduce how many I/O deals can get approved. Yes, it is likely to be a temporary thing for a few months as they seek to meet the 30% quota, but because its a huge drop of I/O volume that the banks need to achieve in a very short time, I dont think a couple of rate rises and 80% LVR is going to get it done. I expect further LVR reductions and further servicing tightening- even if its only temporary.

Already we have seen multiple I/O rate hikes this year, some modest LVR restrictions (so far) and stricter credit scoring algorhythms, and I also believe that before long you'll also see valuers cotton on to this and start to put their usual backside protection in place by increasing risk rating on properties and possibly even taking 5 or 10% off the values- this will be especially true of new dwellings. P&I borrowers are seeing none of this.... so for those who can afford to use P&I lending for INV purchases, its going to be an easier path to loan approvals.

 

Bingo. I would also add - if CG alone is the great wealth creator, why is it that so few people have retired from CG even after almost 30 years of the greatest credit boom, and therefore the greatest CG in human history? Its a great concept, but it turns out to be a myth for most investors, 30 years later. But even if it had been more succesful, its now irrelevant. It was done during an expansionary credit boom. The credit environment is now heavily regulated and simply wont allow for the same levels of growth. Think about what drives prices- the availability of money. Investors have been a huge part of driving prices because they compete with Owner Occupiers and first home buyers . They have been able to do this because they have been able to access money easily , at high LVR's if required, and with stable long term I/O terms if required. None of that is true moving forward. Its like trying to argue that you can bake the same cake using completely different ingredients. You cant.

Growth is wonderful, and we would all love to have plenty of it , but if you cant borrow you cant buy. And if lots of other investors cant borrow, they cant buy either. And if lots of investors cant buy, growth slows. It takes years for first home buyers to replace the volume of investors who will increasingly be sidelined because they cant borrow any additional money to continue purchasing.

When the rules change like this, you have to adapt. If this was a business , you would immediately recognise that stronger cash flow + slower growth are now the preferred business model for building a portfolio. Said a couple of years back that the APRA regulations were the UBER of the property industry, because they will completely disrupt traditional investor models . That hasnt changed. Its even more the case now in 30% world. Continue to resist the reality of what the 30% quota will do to investors by all means... I understand how difficult it is after watching 30 years of uninterrupted growth, but I'm not wrong