Does CF Triumphs CG?

Oh no!!! Another looooong post coming .

 

I started my investment journey post APRA- my borrowing capacity is 8X total gross income (salary + rental income). This is a mixture of the big 4 and non banks.

 

For me CG does trump CF, HOWEVER most people building a portfolio will need some balance of both, otherwise the portfolio's progression won't get very far.

So you need CF to help sustain your portfolio while CG compounds over time.


However if put differently, if I had to choose a CF property or a strong growth property and either would be fine for my growing portfolio. I'd choose CG everytime.

There is a third category, a good CF and CG property but they aren't easy to come by, regardless of what some may have you think.

 

As it stands:

• CG - 13 votes
• CF - 6 votes

It seems that CG is the optimum strategy to develop wealth, however, you first need to focus on CF to get the CG.

CF is like the horse, CG is the cart, you are in the person in the cart, and the destination is the pot of gold.

By that anology, you can still get to the destination by getting rid of the cart (CG) and instead just riding on the horse (CF), which should it a very bump ride! At least you get there faster as the horse is not pulling the cart, but the pot of gold that you can collect and take home (as you don't have the cart anymore) is a lot lesser. Maybe I have gone too much with this analogy!

 

You don't need to necessarily focus first on CF to get CG. It all depends on your shifting balance of the equation in relation to your debt and serviceability.

 

Dont understand 1234’s analogy.

Depends if you think cf means lower or no cg. In the 2000s, brisbane gave both, then cg stopped.

the problem with cf with little cg is that you have relatively little capital at the end. Which is a problem if you want it to upgrade ppor in syd / mel or leave to kids.

go cg first, bit of forced saving, and once you get the cg its not hard to convert cg into cf.

Though many here invested when lending was loose, so serviceability was less of a concern.

 

@euro73
I hear your argument and understand the rationale and I'm sure there are probably many folks who would benefit from it. Personally I don't believe it's the holy grail for everyone ( doesn't exist) as others will have different capabilities allowing them to employ different strategies which may yield even better results. Though that's not certain either. Nothing is certain in this game.

Most important thing I learnt along my journey is to keep an open mind.

 

Are you sure?

 

Many folks certainly became equity wealthy over the last 30 years, there's no question about that. The number of folks who then went on to convert that equity to CF is another story. But thats got more to do with their own decisions rather than not having the ability to convert it.

Also the definition of "rich" will vary for individuals. Some prefer their wealth in equity for different reasons while others want more CF.

 

Where are all the self funded retirees with robust income streams ? They had 30 years where prices doubled , then doubled again, then doubled again . We should have huge numbers of people in their late 50s, 60s and beyond who are swimming in income wealth by now, and not so reliant on dividend imputation or negative gearing that thwir removal makes their portfolio's unviable. Yet the opposite is true if the last election results are any guide, and the amount we spend on age pensions is any guide. It became very clear that those crutches were simply too important for that generation to let go of, which would indicate their income streams still need that sort of propping up .

Don’t misunderstand me ; I didn’t say no one makes it through growth alone. I said most do not. Only small numbers made it ( percentage wise ) and converted it to good income when it was easier, during 30 years of ultra expansionary credit availability . Many people are undoubtedly asset rich as a result - there's no doubt about that. My point is that they are also still relatively cash flow poor with the same or similar household budgets they have always had, in spite of all that growth.

If the argument that growth alone makes you wealthy were accurate , the picture would be different .

Also important to accept that for people in their 20's,30's or 40's, with 20-30 years + ahead of them before retirement, and wanting to get 5,6,7 8 properties under their belt and set themselves up for a better retirement , the credit environment is different. It's far more difficult to buy larger numbers of assets now, due to changes to serviceability ... and its also more difficult to hold them for long periods under IO conditions, for the same reasons . So any portfolio being constructed today should ensure it has adequate cash flow to at least hold under P&I . Yet another reason CF is more important than it used to be

Have said it before, will say it again. You can't bake the same cake using different ingredients. But even if you could( and you cannot - let's be real) , I don't understand why would you want to pursue a strategy that only worked for a small % of those who tried it, when conditions were far more generous...

 

Developing can help achieve that magic combination of both as you are not buying at retail

 

That's precisely one of the major benefits with developing, the strong CF plus ( hopefully) the equity created But that strategy and risk tolerance won't be for everyone.

 

I say not to be fanatical about one strategy, as there are many ways to skin a cat and why close the door. Not referring to anyone on this forum, but ego can get in the way of growing

 

Agree. And I'm sure if I let go of some of my ego in my earlier days I could have probably capitalised on some nice deals which I didn't explore. But that's life, as you grow older you hopefully get wiser

 

It's a see-saw.


They feed into each other and create a beautiful thing.

Notes:

1. As @kierank states. Business buys many properties. A property doesn't buy many businesses.
Business when done right, is a phenomenal vehicle for growth. Have done a post about the difference between investing in real-estate and being in the business-of-real-estate. Very different things. Won't get into it again.

2. There's cash-flow +, and cash-flow ++++++++. Know the difference. Earning $3k/year extra on a property in Logan is a long path to nowhere. Cash-flow in my mind is more, build 4, sell 3, keep 1. The 1 you keep is debt free and almost every dollar is cash-flow.

3. Similarly, there's capital growth, and CAPITAL GROWTH. Rezoned land going from $700k/acre to $1,400k/acre is a different beast to a reno adding $30k equity where you can only access 70% (if your income even allows access).

4. CG and CF+ are not mutually exclusive. I purchased properties for $250k. + $100k granny flat. Rents for $700/wk, and are valued at $700k. The growth was market driven, the rent was always as high as it is now. Capital growth on its own is a limiting strategy. Manufacturing growth is a powerful tool that needs to be learnt to drive growth.

5. As above. Everyone's target is different. The target moves as you develop yourself. When I started 9 years ago, the dream was $100k passive by 65. A duplex site seemed like a dream. A duplex now seems quite vanilla, and my understanding of passive has matured also. It's a beautiful journey, doesn't mean anything, just something to enjoy if it's your jam.

Took me 6-7 years to see the above. 8 years to understand and act on it.
Hopefully it can shave a few years off the journey.

 

I reckon there are three parts to this as you want to enjoy the journey as well.as the destination

1) grow capital to achieve ff..this takes a while
2) grow and sustain cf so you can supplement and replace your income as you go to do more of what you want sooner...who wants to be a slave to the job until you get there mix of lics, cg props and high yield props
3)move to end state ff by transitioning a chunk of your capital to income streams such as lics retaining a mix of property and lics for income streams to balance the risk.

For me (2) is the most important part and often forgotten

 

Nice, it seems that Property Development is the one of the best strategies to get CG and CF.

 

CG trumps cashflow today, throw a dart

 

It depends on income. A wealthy person can sustain cashflow and be patient. They can also afford a property in a area with growth potential. This is sort of what lenders assess for their risk.