Recommendations/examples of net positive cash-flow IPs?

Both sides of the CF/CG debate tend to gloss over the shortcomings in their approaches. Regional CF+ pundits always quote nice big double digit gross yield numbers but by the time you subtract out expenses plus depreciation, maintenance, vacancies etc the yields are pretty woeful relative to other asset classes.

Likewise, Team CG never subtract their cumulative yearly cashflow losses from their equity gains or the huge CGT loss they cop at the end when converting equity to income. Or the times when CG evaporates (cough - Sydney)

Remind me why I am investing in property again? Oh that’s right - Leverage baby!

 

You have compounded the CG over the period but not the rent, need to assume that rental income is finding a good investment home as well (maybe subsidising a nice 10% CG property)

 

Ok whats average income tax rate and investment rate for each scenario and is that investment into a capital growth or yielding product?

 

There are a ton of variables that will favour one over the other, they are all hypothetical and will waste a beautiful sunny Brisbane Friday afternoon which I have off work running financial scenarios.

I am not arguing the case for a portfolio made up entirely of high CF properties at the expense of CG. I can think of nothing worse than managing a portfolio of 20+ low grade regional properties to maybe eek out $100k income at the end of the year. But I maintain that it is not as cut and dry as just focusing 100% on CG. If so, we should all just buy a vacant block in Point Piper, rent it out as a tent site for $100 a week to get the negative gearing benefits and then let it bleed us $250k/year until that glorious payday 20 years down the track!

 

Agree with this
The other thing a lot of new investors forget is the time factor , admin, accountant fees, tenant headaches, general pain in the ass factor of being a landlord. Factor in your hourly rate / sweat equity, land tax, repairs And I don’t see any of the CF prop are worth the hassle. Receiving 6 x council rates and 6 x insurance policies to Renew is no fun either esp when the properties are not going up in price and rent is minimal.

I would much rather focus on my day job for my primary cashflow and acquire a few high growth blue chip / developable properties . Simple and let compound mathematics do its magic. Cash out / roll post cgt proceeds into commercial property or shares when you have your asset base Large enough in 10-15 years ...

 

Opposite here..absolutely bucketing down ..Almost 7 days in a row now ... Stupid monsoon.

 

Until the maintenance costs come in and put you back in the negative.
Nothing wrong with cheapies, but think outside the box.
You can achieve both cashflow and growth, you just need to have equity to fund the renovation / development costs.
But if starting out, no harm in having both, but to focus on just one would be doing yourself a disservice in the long term.

 

Ah the cash flow vs capital growth debate.

I am a Sydney focused capital-growth biased investor.

There is little doubt that growth based investing yields higher net worth at the end. Cash flow investing is more like an annuity, but doesn't benefit from compounding.

That said really good investing has both: growth for wealth accumulation, and cash flow for servicing. So really both have their place in a portfolio.

I listened to a podcast which interviewed the chap who wrote the new book Investopoly. He described it this way (I paraphrase): you can get to your goals in more than one way. But building wealth with CF properties is like trying to get to the golf hole using a putter. You will get there, but it will take a lot more swings.

Good analogy.

 

Once a cheapie requires maintenance cashflow positive can quickly become cashflow negative. I’d also point out that over time rents for blue chip properties will outperform rural ones and the blue chip will eventually be a cashflow positive asset for you.

Though a blue chip comes with some significant short term holding costs and as a result probably only suits investors on high incomes or with mature portfolios. Thus, I think a balanced approach is the way to go and I would target large regional centres and or H&L packages in well placed areas.

 

not sure about blue chip areas having great rents ...
rent is an inelastic thing
I used to live in an area where median hous price is 1.5mill
yet it's still easy to find a rental for $5-600 a week

on the flipside it's very easy to buy a 300k house in SE qld and get $400 a week or buy a house in rural Victoria or Tasmania for 200k and get $350 a week

 

Rental growth for blue chips tends to be stronger. The yield is low on purchase; but if you hold for long enough it will eventually be cashflow positive and rental growth as well as capital growth will then be compounding at a higher value. My point is that if you're taking a long term retirement view then then after 15+ years you will probably find you have a cashflow positive asset with strong rental growth and continuing strong capital growth with costs associated with holding the property making up a lower portion of the value of the asset (rates, insurance maintenance etc. But as I also stated, only works well for high income earners who can afford the holding costs with no stress.

 

Here's my strategy,
buy a prime asset in a depressed market with neutral cash flow.
I recently bought a 2 beddie in west perth, its cf neutral. I believe I got a good deal on the unit.
My aim is for this market to recover over the next 5 years, both rent & cg

 

To answer everyone its the shoe that fits you.

and more importantly than the silly discussion of CF+ or Growth is the devil is in the detail

I would much rather get a property for $100,000 thats worth $500,000

than have great growth of great CF+.

its a mood point, the more important thing is knowing how that exact property fits your exact goals and is setting your next footstep to get there.

 

How do you do that?

 

@Leo2413
Flux capacitor. Duh.
Don't you have one?

 

Had to google that!

 

I have done this mostly via H&L packages early on the cycle:

Mickleham - 301k build returns $365pw
Officer - 330k build returns 370pw
Armstrong Creek - 260k build returns $365pw
Armstrong Creek - 337k build returns $415pw

Try to see if you can get neutral CF within 3 years...over 10 years if you bought well....you get 9% plus returns.

I try to buy areas which will grow otherwise you will not make money.

 

My question is. Personally what would you do if youre accumulating today.

It seems cg for most of the capital cities is minimal whilst most are heading out to the regionals

 

I think anyone is nuts who thinks blue chips are good rents for cash flow.
It will be a long time before a 1.5m prop in blue chip will be renting for 5.2% ie 1500 per week

 

Great question TMNT.

Look, it depends on what your goals are and where you are right now, what your income is, etc etc etc.

If I were accumulating today, I wouldn't change anything fundamental about the strategy. I accumulated Sydney property very slowly, and that does work and will work again. If you are in Sydney, you don't need to obsess about owning detached houses, as units/townhouses make perfectly good investments and give some yield.

What I suggest to clients these days is a "pairing" approach. Buy a middle ring property in Sydney, followed by an outer ring property in Brisbane or also Sydney (but never regional). Growth then yield, growth then yield, and repeat.

Lastly, I think a big error many people do now is that they are too impatient to build their portfolios and buy "something" now, that they buy cashflow properties and never acquire true wealth. If you already own properties, sometimes you just need to wait for compounding to work it's magic.

I actually see very significant capital growth in the early part of next decade, and so you should be setting up the chess pieces for that now.

Hope this helps,
John