Does CF Triumphs CG?

I have been a fan of CG for creating wealth via property, however, the issue with this is that you run out of borrowing capacity quickly. I have noticed that a number of successful investors on PropertyChat and even outside this forum (Nathan Birch, Eddie Dilleen, Arjan Palliwal, Victor Kumar, Lloyd Edge, etc.) have created substantial wealth by adopting a CF approach. I have also seen people on the other camp - CG (Empower Wealth guys, Michael Yardney, Konrad Bobilak, etc.) create wealth through adopting CG as their primary investing strategy. But it seems that there are more number of people especially on PropertyChat who have created substantial wealth by adopting a CF strategy and not a CG approach. Is the CF approach a more superior way to build max wealth for most people? What is the optimum strategy to build wealth?

Assumptions
- CG (Capital Growth) Stragety: High growth, low yield, dents borrowing capacity after a few 1 or 2 purchases for most people.
Examples include buying properties in Sydney and Melbourne such as units in Bondi, Coogee, or semis in Inner West such as Newton, or home & land packges in North West such as Castle Hill.

- CF (Cash Flow) Streategy: Moderate to low growth, high yield, maintains sufficient borrowing capacity to purchase multiple properties.
Examples include buying properties such as stand alone houses in Brisbane, Adelaide, Perth and some regional centres such as Geelong, Bendigo, Ballarat, etc.

 

Hi @Ashwin Sashi
While you have got the crux, the concepts are all wrong.
Focusing on cashflow does not mean you lack on growth. The regionals that you have listed in VIC have grown by over 50% in past 5 to 6 years. Even other states listed have grown and started growing as we speak.

Personally, you can always follow a balanced approach. Figure out markets that may grow or are growing. is it east, absolutely no.
But a 5% to 7% growth with 5% to 6% yield is amazing to have. My take is that cashflow keeps you going and equity let's you exit.

You need both and there is no reason why one should only be chasing one out of two. You also need to remove many notions in order to achieve this.

Regards

 

The optimum strategy is individual.
If you have a higher income, you might be surprised where your lending limits are if you also use non bank lenders. If your tax rate is high, CF properties might end up lowering your returns because of your tax rate.

Another option is focus on CG, then switch to more income producing assets like shares.

Then there's your own preferences and skills. If you aren't willing to buy outside Sydney, CF may not be that viable and you might as well focus on CG.

Overall, having one H&L you bought in Schofields 4 years ago, at the peak of the last cycle (if you think it's currently a new cycle), might not be enough experience for you to make an informed decision. You've read a lot, it looks like, but do you have the experience to interpret what you've read?

 

Great points. Read your post a couple of times. I am using a non-bank lender now for purchasing the investment property. I am just thinking after I purchase this, how long do I need to wait before borrowing gets back up again?
How do I develop my investment strategy without paying exorbitant amounts of money to some wealth creation firm? What is the next property I need to target - how much yield, how much expected/likely/forecasted growth, at what purchase price, etc.? How do I get advice backed with some numbers?

 

This is a question for your mortgage broker and should have been discussed when you bought the first one, and certainly when you discussed loans for the IP.

A good mortgage conversation is something like "I have these properties, I want to buy as much as possible in the future. What is the suggested loan strategy?' and the broker answers something like 'go with this lender now, then we can save lender B and C for later and we can borrow $x. They have higher rates, but DTI doesn't apply.'

No one has a crystal ball. Yet, people who have bought in spite of the uncertainty have done well over the long term.

Why did you buy H&L in Schofields in 2017?

 

I wasn't thinking about creating wealth through property earlier. I bought the Schofields property to find some place to live and park my savings. I did not even think about building a multi-property portfolio back then.

My broker has gone with a non-bank lender with pre-loan approval. I now need to know what my next purchase should be - what yield, growth, market, etc. should I targetting to ensure I can borrow again.

 

You need cash flow it is fundamental, you can have CG with cashflow. CG with out cashflow is useless, but if you have cashflow you can use equity to leverage into high growth assets and scale quickly. I have property that has given 9% CG and 5% yeild. The capital growth camp you mention are enslaved by their properties fund their purchases from spruiking, selling services and books books. MY was even selling properties where he was telling other people to buy. There is big money in facilitating the selling of property better to get your growth by using cash flow and equity to invest in Zillow and Redfin who have had 200% CG in the last year..

 

That old chestnut .......

Grow Capital First

 

There's some truth to what you said. The below article adds weight to regional areas. Will take note if it.

Which is better state capital or region? - Select Residential Property

 

My belief is that cashflow supports/enables CG.

For me, (after-tax) cashflow is the fuel that drives my CG engine:

• If I use Octane 98 fuel, I can turbocharge my CG engine (and my net worth generation).
• If I use Octane 95 fuel, my CG engine is running pretty well but at a performance level less than Octane 98 fuel.
  
• If I use Octane 91 fuel, my CG engine is running but way less than Octane 95 and/or 98 fuel.

With regards to net worth generation:

• Octane 98 is owning one’s own business.
• Octane 95 is high paid salary/shares.
• Octane 91 is property.

Some people never develop a CG engine or they try to run it on water .

 

That's a really good analogy. Brilliant! Cashflow is the fuel and CG is the engine.
I am less inclined to run my own business, so Octane 98 is not for me. I can dwelve into shares to keep up my CF and invest in properties mainly for CF. As Trainee suggested - "Another option is focus on CG, then switch to more income producing assets like shares".

 

If you want passive income you will first need to grow capital, catch 22.... as per link I posted

 

Not true.

Own/start one’s own business, then (passive) cashflow will come first. Once one grows a sustainable business, then CG is automatic due to the capitalisation factor .

Think outside the square .

 

The answer to this question will depend a lot on the circumstances of who you ask. Eg Someone with a high employment income would be likely be more focussed on CG whereas someone who has less employment income will need CF to support their purchases to get CG. There’s no right or wrong answer....

 

What is considered a high enough employment income for CG approach - $100k, $125k, $200k, $300k? Is there some sort of chart/table/formula that states that for a certain income (say $100k), you should be chasing a property with "x" (say 4%) CG and "y" (say 6%) yield? That is what I am looking for - a definite answer in terms of numbers. I know there are other factors to consider too, but these are 2 main factors. Once I find this out, it will be easier to target markets that have properties with these 2 parameters.

 

Side issue.......
What’s interesting today is with intro of APRA we can now only borrow 5 x salary. Some lenders 6 x salary?

Prior to APRA it was I think 12 x salary

So my point is servicing debt/growing a portfolio even with higher income has become much more difficult in current lending environment.


I miss the good old days low doc and no doc

 

I’m sure someone out there is smart enough to come up with a magical formula but that is not me I guess it would depend also on your lifestyle and expenses.

 

Salary or total income? If it’s salary then that’s quite limiting...

 

Can the mortgage brokers comment? If using non apra lenders as well, whats the approx possible dti, 10-12?

 

Lets get @euro73 to comment