Capital Gains vs Cashflow

I have 15 properties and sleep like a new born..... constantly waking up

 

MyState just reduced to 50% LVR as well.

 

I think there's a very good reason for this.

Looking back on all the years I've been on the forum (this & SS), there are really only a small number that have been able to retire on rents. I know there are names that I have forgotten over the years, but there are a few that stand out.

These people all bought cheap properties with good cashflow. LOTS of them! The cashflow helps in the serviceability to get the next loan, so they can go again, and again, and again.

I hear the talk over the years about how its not about the quantity of properties, it's about the quality....and how it's better to have one well located property, than it is to have several poorly located ones, and it's usually from people on high incomes that want to buy innercity properties with very low yields, not outer ring, higher yield, cheaper ones.

Well, in all honesty, I think they're wrong! Yes, you do need to look at where you are buying, but you NEED quantity! If you only have one IP worth $500k and it goes up to $1m, you've made $500k in CG. While that's great, you can't retire on it. On the otherhand, if you have, say, 20 properties worth $250k each & they go up to $500k each, you can sell half of them, pay out the loans on the rest & live on the rents.....OR, you may only have to sell, say, 5 of them, pay out the loans on another 5 AND still have enough to live on because the other 10 are cf positive anyway.

OR if you are @euro73 , on a very high income & all your properties are NRAS.....maybe you don't have to sell anything at all, but the end result will be the same. Retired (if you want to retire) on rents.

 

I recall asking @skater this same exact question in 2014 at a Somersoft meetup. How many forumites have retired through a cashflow vs capital growth strategy. Your answer being cashflow shaped my investment journey, and grateful for that golden nugget.

Personally find alot more risk holding $2mil portfolio @ 3% rental return vs $5mil portfolio @ 7% rental return. The additional cashflow allows you to hold a bigger base safely and is the buffer against unexpected events, rising interest rates etc.

Video from Robert Kiyosaki on Capital Growth - it's a bit blunt but does have some truth to it.



Cheers,
Michael

 

Not all of them... 12 are NRAS. 3 are not. About to move into new PPOR and retaining the current one , which is unencumbered of any PPOR debt, so that will be 4 that arent NRAS. But yes, the NRAS cash flow adds lots of potency. Dual Occ will do the same. I dont want to retire just yet.... but you are correct that I certainly could.

I achieved this position through building a business - yes. But I also reinvested all profits from my business towards paying down my PPOR debt, which 4-5 years ago was sitting at @440K . Took @ 2 years, but once that was done, I drew down equity and used it to fund deposits and costs to purchase multiple cash cows. Then I redeployed all the surpluses from those cash cows towards paying off INV debt on my non NRAS properties, which I have owned for many years and are providing me with zero deductions at this point. Those properties have all been switched to P&I as well... the rents easily cover the repayments and other outgoings so its just good business to migrate those parts of my portfolio to P&I and start paying them down. So I now have a portfolio that is already starting its migration to P&I, and those properties which are still I/O are immune from rate rise up to 7.5 - 8% before they require me to start contributing even a dollar, because of the NRAS or dual incomes they generate. And because my PPOR is paid in full, even if that P&I cliff of 7.5 or 8% were to happen I can afford it because the PPOR debt is gone and the cash flow is ultra strong.

So in simple terms I leveraged up and bought lots of extra income ( cash cows ) so I could then deleverage without needing to sell anything , meaning I have no reliance on growth to get out alive in a disaster scenario such as 7.5 or 8% P&I rates for example. . Very simple to do. Very safe. Very good outcomes. LOgical. mathematically sound. Financially smart. Good business. In other words, a no brainer one would think. But the stumbling block is investor greed and psychology. 25-30 years of easy credit has convinced far too many investors that CG rates like the last 3 decades has produced, are going to continue. But like you @skater, I believe thats erroneous - especially now. New ingredients. Different cake. Lets see how many of the young guns here who have shot to 10,11,12 properties on razor thin yields , using 4% I/O rates, handle the P&I cliff at 5-6% .... I suspect some of these folks will find their business model ill equipped for APRA 2.

Now, not everyone can do as much as I did as fast as I did, but at any level, on any scale - the concept is the same. Deploy whatever equity and borrowing capacity you have available to get at least 1 or 2 cash cows into the mix and start the deleveraging process so that you arent left dealing with a large PPOR mortgage and a P&I cliff in the coming years, all at a time when wage growth is dead. Squeeze all the juice out of YOUR particular lemon. Not mine. Not anyone else's. Yours. Pay off your PPOR as fast as possible and give yourself the best possible chance to retain all your assets, and all their incomes.

 

My last PPOR was a dual occ. Two three bedders purchased for a similar price as a single home, at the time. It's basically unencumbered as well (well, offsets in place). It's a nice little earner!

 

I have a nice mix. Apartments and duplexes that produce very nice reliable and positive yields. Some houses neutralsh. And some houses that are in amazng locations but negative and held for land value and future capital gain. Nicely balanced out and indeed overall my accumulated losses are not enough to offset the massive capital gains I will make on a sale.

 

I wish my last purchase was CF+ but it isn't. However it being on 1,600m2 gives me options...

CF+ generally doesn't give you options.

Many ways to skin a cat and you can always take gains from a CG and move it into CF but you cant normally or harder take CF into CG.

RE who has retired from CG even after Sydney's great boom, My mentor has about a large portfolio but none are in Sydney. They have retired before the Sydney boom and waiting for the next boom to come most of their assets are in Brisbane.

If you want great gains, I bought a share that has gone up by 20% in the first 6 months of this year and yet the ASX200 has been flat during that same period. The price was $55 and now $65.80.. lets change this to a property 550k now 657k (107k gain in 6 months). This is in a 'flat' market.

Do I expect this share to keep increasing, I surely don't think so but would love it if it did. Am I looking at selling it, no as you cant really predict the market and I am 30 yo so in 30 years I would think the share price will be more than $65.80.

 

Yep...this what I am seeing...the longer you hold the luckier you get.

I know people who held properties for 15 years...and their net worth is out of this world....had they sold and bought again they would not have the net assets...

 

I started this thread 6 months ago.

I really did not expect this deal to come along, if we can continue to source these deals, I wont be too fussed about the capital growth. That is a massive addition to my cashflow/income

Commercial Property 2 - Atlanta

 

Thank you all for your comments,

I'm now on the side of CF+ for my next purchase(s)

Comments surrounding CG and a mixed approach have not gone unnoticed

I'm going to name it so i can claim it:

My short term goal is to purchase 4x CF+ IP's, then God willing i will be in a better position to buy my next CG IP.

Note, I can buy a CG IP now and remain CF+ but after reading the collective wisdom here on PC, it's not the right move for my circumstances or the current environment.

I would appreciate anyone willing to mentor me through the highs and lows of this journey.

 

The Robert Kiyosaki clip. His advice/comments to all investors worldwide:

"If you go for Capital Gains your an idiot"
" Capital Gains is a Ponzi scheme"
"Real Estate is Ponzi scheme if your going for Capital Gains"
" The stock market is a Ponzi scheme".

I am sorry but this guy is a Freakin idiot. I don't care how many properties he claims to have returning $100 a month. He is a *****. And his message is absolute nonsense. I am not against CF properties at all. Don't get me wrong. But his message regarding real estate as an asset class and how all investors should view it - complete and utter Bulls**t.

 

I'm reading Jan Somer's book with the 101 stories, and it's difficult reading the ones about people who sold early for whatever reason and missed out on millions. There's a story of a Greek immigrant who ignored his family's pleas in the 1990s to sell his properties to pay for tution/holiday/new car. They thanked him for ignoring their pleas when they saw how much they would've lost had they sold during their whingefest.

 

I would say though that if retirement via LOR or passive cashflow in the traditional sense is your primary goal, then resi isn't the ideal (or even right) vehicle for it. I think stocks, or commercial property or some variant of these fits the mould much better.

There are always exceptions and exceptional stories like skaters but honestly, how much cash will you realistically be left with after land tax, rates, repairs, mgt fees and how long would you have to wait before that materialises - even for a $250K property generating 6% gross? Then you get taxed on the balance. And what if interest rates rose to 6,7,8%? Game over for + CF.

No. To me, resi investing is a long term CG oriented investment. The yield side of the equation is a byproduct and obviously important because if you can't afford to hold it, you can't keep it. But the main criteria is immediate equity when you buy, and excellent CG prospects beyond that point. CG is the holy grail and cornerstone of buy and hold resi investing. End of story.

My numbers are similar to Sash's. I've had the CG boom to get my LVR to sub 60% ie a safe-ish zone, now its a rental boom I need. That's not gonna happen with the pipeline and Govt issues at hand, but I'm confident it will happen in the medium term.

 

Rubbish. Sorry...just absolute rubbish.

 

Your post tells me you got the timing right If you are chasing CG with resi it will only work if you actually time the market for growth, otherwise it will take years.

I agree, there are better vehicles for cash flow.

Otherwise you could look at developing property, where you perhaps build 3/4 and sell down to create cash flow. I think this strategy also requires getting the timing right.... always back to timing... damn it.

BTW, Skater got the timing right, Syd market boomed and sold down from my understanding.

Nothing wrong with resi if you get it right IMO.

MTR

 

I think he is referring perhaps to US market, a different beast, cashflow is much or was much easier to achieve and do not need to buy regional

 

He doesn't mention the US market specifically at all, his comments are very general. He also says "the stockmarket is a Ponzi scheme". Gimme a break. He has a huge agenda, and we all know what it is. 35k a pop, Rich Dad Poor Dad Mentoring, plus his books, seminars etc etc

 

Real estate a bad idea, says Kiyosaki


'Rich Dad' author Robert Kiyosaki warns investors to avoid real estate'
An American entrepreneur believes the Australian property market is a bubble about to burst.
December 2014.

"It's pretty bad when the Australian property market is making news all over the world."

"I would just sit back and wait for the crash," he said. "Find somewhere else where the money is safer."

"Right now, people are speculating on real estate. It doesn't make sense but they want to do something."

"Foreign investors are queuing up to buy anything they can get their hands on. This is causing average Australian punters to think they need to start buying now. It has created a bubble,"

"It will come down," he said. "It's not a real economy. Whenever you see too much money in one sector, you have a bubble."

Kiyosaki urged Australians to invest in gold or oil, where prices were falling.

Now I am no expert in commodity prices and how that world works by any means and I could be wrong here (so please correct me if I am), but he was recommending to buy oil and gold in 2014 actually much earlier than that, and not buy real estate. According to these graphs it doesn't look too good today.

 

Agree. I haven't seen too many houses not go up at least double in the last 15 years - or indeed my natural lifetime so far....(notwithstanding markets within markets where there have been serious drops in local economies such as some mining towns, or smaller rural towns).

However; to get the larger and ever-expanding footprint of properties; you need cashflow somewhere along the line; without a multiple 6 figure income to float it all out of your own pocket; the rent returns and depreciation etc need to be pretty healthy as well.

This is where - for most people trying to do the R/E caper - RK's philosophy starts to ring true to an extent.