The perfect balance.

So, we all seek to find the sweet spot with investing. And if we consider only realestate what’s peoples opinions on capital gains v cash flow.
I’ve always been quite avid of cash flow, because if you’re like me, in the beginning of your investment life then cash flow is needed to be able to support the expenses, to then ultimately be able to hang in long enough to experience capital gains.
But then again I’ve seen many investors in the Sydney and Melbourne markets receiving returns in the 3%’s and being happy with that. They’re definitely more established than me but gee that doesn’t even cover the mortgage interest (depending on LVR).
Am I just naive? Am I missing something? Am I right?
Looking to see everyone’s thoughts.

Disclaimer: my investment goals are to one day have a passive income generous enough to support a (hopefully very) early retirement.

- Rob

 

IMHO, you will never achieve those goals by investing in property.

Property is only good for capital growth, and mainly through the use of leverage.

 

I am with you. We bought into a REIT way back in 2007 (GFC time)and it has achieved 8% pa growth and 4% pa income over the last 12 years.

Hard to achieve that with Australian residential property .

 

^^^^ this.

In Australian resi property you won't get to early retirement on these small yields alone.

My view was to flip the yield/CG order the other way around. I'm AU, those who invested prior to the recent boom years, did very well, CG-wise. The yields were still pretty poor/average given the amount of debt one had to take on.

But then, if you take the big CG gains as equity releases (during of course the times when equity releases/extractions were a bit easier), and re-invest those equities in much higher-yielding asset classes (e.g. specific stock/index funds, some REITS, or property in other countries or even commercial property in Australia), then you can have a great balance that yes, will get you much closer to early retirement, and quicker.

 

Aussie residential at a simplistic view sits in 3 categories. Organic Capital Gains, Cashflow, Manufactured Capital Gains.

In this day and age I think only manufactured capital gains can take you to the promised land of early retirement. However then it really steps outside the realm of investing and more becomes a business.

 

The simple part about property investing it is simple and understandable and if you have the courage to resist selling then if it's the right location's and bought at the right price then time and compounding does it's magic.

,But I have to agree with ..Kierank..Property alone may or may not put you into the middle ground where you are no longer a worker or the boss and your total incomes from investments ,I know very few that live like that and the few I do have it spread between the top 20 asx listed and property just depends on what you want..imho..

 

The perfect balance is 8%p/a CG and 5% p/a net yield . It just happens naturally if you pay the right price for the right type of property in the right location. It is hard to get more of either but easy to achieve that. A higher yield would mean the tenant would be better off to offer more and buy the property themselves which would lower yield and make it not a particularly good investment for an investor. Gives you all the CG you could probably be able to use or need, and the 5% yield increasing and compounding with CG, will give much greater and useful income growth than 3.5% yield. A growing 5% yield can give you surplus to enable cash or equity to be used for buying more growth assets. It is surprizing with all the noise that goes on here about what and where and when to buy ,how the only simple thing you need to know is ignored. Much easier to do this with commercial property but a higher deposit is needed.

 

At the retirement phase all most self fundeds tell me they really need is 5% yield. The growth becomes much more optional in later stages. Not saying it isn't still worth having of course. But most in their 70's and 80's I talk to tell me they are willing to move cash around, buy and sell property and shares to ensure they get around 5% on average.

 

Don’t cheat yourself with the 4% rule

Its called the 4% rule.

5% is the safer version.

In essence you never run out of principal.

 

Isn't that article focused on a 'safe' rate of withdrawing capital? Most of the folk I talk to have a goal of not touching any capital but generating cash returns to live on (rent, dividends etc) and having an inheritance to hand to the kids at the end. That is mentioned in the article as a negative, people I talk to tell me it is what they want to do. Depends what you can afford of course. Also major capital items like a move into a nursing home are exceptions and almost always require dipping into the capital base. No right and wrong I guess, Just feedback from my chats with people.