The Final Word On Cash flow Vs. Capital Growth

There have been absolute volumes written on the subject of whether investment properties geared towards capital gains or cash flow are best.

The argument is founded on the long-held belief you can have either high rental return or huge value upside, but not both.

This opinion seems to have remained substantially unchallenged by academics and the media, and as much fun as it is watching the intellectual cage fight unfold, I believe there’s a simple answer to this question

I’ve bought and sold several hundred properties to date (personally and professionally) and I can say with confidence the idea you can’t have a balance of return and growth is just plain wrong.

 

The fallacy you’ve been fed

What’s sold to us as investors is that each potential property’s appeal has drivers that fall in favour of one side or the other.

For high cash flow holdings, it’s said they’ll be located in areas of high tenant demand. They will offer the ability to achieve more return per dollar outlaid in purchase because every possible square metre of space is being utilised for renter appeal.

They will be in locations where strong employment – particularly for transient workers with high paying jobs – will see renters fighting over the available stock.

It’s also said high yield property will often be located away from major capital cities and the majority of surrounding residents will not be homeowners.

Finally – many believe high cash flow properties rarely achieve decent capital gains.

For capital growth holdings, it’s believed these will be located in suburbs where homeowner demand is huge. Great schools, convenient shopping and ready access to a CBD is a must apparently.

According to this argument, capital growth property is best found in blue-chip inner-city locations. It will be unique in design and appeal which improves its scarcity factor. This sort of ‘limitation of supply’ supposedly translates into stronger growth.

Classic blue-chip holdings are deemed to be detached houses in high price addresses that avoid secondary fundamentals such as busy road frontages or undesirable neighbours like service stations.

 

The risks of each

Both approaches to investing have their benefits and flaws.

High cash flow is great if your available funds for investing are limited. The high yield will help you service the loan and stay ahead of repayments.

The downside is, as a gross generalisation, high yield does not create the sort of long-term returns that help investors achieve real wealth. It may put you into a comfortable position, but the capital value upside is limited.

In addition, if you buy high yield in a regional centre that relies on a limited economic base of, say, one major employer, they can be risky. Ask anyone who was enjoying their seven-plus per cent yield in one of Queensland’s mining centres a few years back, but held out for more. They’re in a world of hurt now.

With high growth, the long-term upside is excellent. It’s a passive way to build extraordinary wealth, because if you hold $1 million-dollar property in a location where values go up by six per cent per year on average, then in year one alone you will have likely gained $60,000. High growth also works with the magic of compounding which sees exponential value rises over a long time. The longer you hold it, the wealthier you’ll be.

There is a downside however. High growth, blue chip usually costs more to acquire and many investors will overextend themselves to become landlords. In addition, the relatively low yield will not assist all that much in servicing the loan. High-growth investors need to be super careful. A rise in interest rates or unexpected job loss can be devastating.

 

The solution

To me, the answer is simple.

I believe you must first determine what you can afford to pay and where the best growth potential locations are for your price point.

Next, I think you should look at property types within your location that will appeal to the local renter base. For example, If the most tenants are students, don’t look for a home with high-end finishes and plenty of family space. Seek a practical layout with the potential for privacy. Perhaps you will find a duplex or triplex in this growth zone?

If you can achieve the best possible yield in a growth locations, it buys you time in the market… and time is your friend.

Look for property that has a future twist too. Something that could be a renovatable home or re-developable block that will generate additional equity down the track.

 

These properties do exist, but it takes a lot of effort and analysis to locate them. This is what we do as a specialist buyers’ agent and property investment advisor. If you feel overwhelmed and out of your depth, then talk to us. We can strike the right balance with your next purchase.

 

Happy hunting.

The post The Final Word On Cash flow Vs. Capital Growth appeared first on Pure Property Investment.

The Final Word On Cash flow Vs. Capital Growth

There have been absolute volumes written on the subject of whether investment properties geared towards capital gains or cash flow are best.

The argument is founded on the long-held belief you can have either high rental return or huge value upside, but not both.

This opinion seems to have remained substantially unchallenged by academics and the media, and as much fun as it is watching the intellectual cage fight unfold, I believe there’s a simple answer to this question

I’ve bought and sold several hundred properties to date (personally and professionally) and I can say with confidence the idea you can’t have a balance of return and growth is just plain wrong.

 

The fallacy you’ve been fed

What’s sold to us as investors is that each potential property’s appeal has drivers that fall in favour of one side or the other.

For high cash flow holdings, it’s said they’ll be located in areas of high tenant demand. They will offer the ability to achieve more return per dollar outlaid in purchase because every possible square metre of space is being utilised for renter appeal.

They will be in locations where strong employment – particularly for transient workers with high paying jobs – will see renters fighting over the available stock.

It’s also said high yield property will often be located away from major capital cities and the majority of surrounding residents will not be homeowners.

Finally – many believe high cash flow properties rarely achieve decent capital gains.

For capital growth holdings, it’s believed these will be located in suburbs where homeowner demand is huge. Great schools, convenient shopping and ready access to a CBD is a must apparently.

According to this argument, capital growth property is best found in blue-chip inner-city locations. It will be unique in design and appeal which improves its scarcity factor. This sort of ‘limitation of supply’ supposedly translates into stronger growth.

Classic blue-chip holdings are deemed to be detached houses in high price addresses that avoid secondary fundamentals such as busy road frontages or undesirable neighbours like service stations.

 

The risks of each

Both approaches to investing have their benefits and flaws.

High cash flow is great if your available funds for investing are limited. The high yield will help you service the loan and stay ahead of repayments.

The downside is, as a gross generalisation, high yield does not create the sort of long-term returns that help investors achieve real wealth. It may put you into a comfortable position, but the capital value upside is limited.

In addition, if you buy high yield in a regional centre that relies on a limited economic base of, say, one major employer, they can be risky. Ask anyone who was enjoying their seven-plus per cent yield in one of Queensland’s mining centres a few years back, but held out for more. They’re in a world of hurt now.

With high growth, the long-term upside is excellent. It’s a passive way to build extraordinary wealth, because if you hold $1 million-dollar property in a location where values go up by six per cent per year on average, then in year one alone you will have likely gained $60,000. High growth also works with the magic of compounding which sees exponential value rises over a long time. The longer you hold it, the wealthier you’ll be.

There is a downside however. High growth, blue chip usually costs more to acquire and many investors will overextend themselves to become landlords. In addition, the relatively low yield will not assist all that much in servicing the loan. High-growth investors need to be super careful. A rise in interest rates or unexpected job loss can be devastating.

 

The solution

To me, the answer is simple.

I believe you must first determine what you can afford to pay and where the best growth potential locations are for your price point.

Next, I think you should look at property types within your location that will appeal to the local renter base. For example, If the most tenants are students, don’t look for a home with high-end finishes and plenty of family space. Seek a practical layout with the potential for privacy. Perhaps you will find a duplex or triplex in this growth zone?

If you can achieve the best possible yield in a growth locations, it buys you time in the market… and time is your friend.

Look for property that has a future twist too. Something that could be a renovatable home or re-developable block that will generate additional equity down the track.

 

These properties do exist, but it takes a lot of effort and analysis to locate them. This is what we do as a specialist buyers’ agent and property investment advisor. If you feel overwhelmed and out of your depth, then talk to us. We can strike the right balance with your next purchase.

 

Happy hunting.

The post The Final Word On Cash flow Vs. Capital Growth appeared first on Pure Property Investment.

Is The Wollongong and South Coast Market Slowing Like Sydney Did?

South and north of the Sydney market where the opportunities are down from Wollongong, further down the south coast, central coast and Newcastle and beyond. They’re probably about 6 to 12, sometimes 18 months beyond where we are as cycle wise. You know Wollongong grew about five and a half percent. Newcastle grew about seven or eight percent last year or this past 12 months, but they’re on a downward trajectory, so I expect them to probably be with Sydney’s and about six to 12 months and they’ll probably be in that position longer than what Sydney will be because the jobs are still going to be focused around the Sydney CBD.

The post Is The Wollongong and South Coast Market Slowing Like Sydney Did? appeared first on Pure Property Investment.

One Bedroom Apartments in Sydney. Are They Worth It?

One bedroom apartments as an example where a one bedroom apartment sitting as part of this grand scheme will probably that later. Part of that answer is there’s a lot of construction going on. The apartment space, there is still certain pockets in probably more the established areas with minimal amounts of available stock in the newest space that one bedroom apartments will do. Okay, and I’d probably more refer to those walkups red bricks in really the quite strategic areas that are walking distance to all amenities and probably more preferential to baby boomers downsizing and that’s probably the other components are really oversized luxury one bedders in certain areas where again, there’s limited available stock, but the problem with both of those is right now and in the Sydney market is that yields a pretty, pretty terrible. So to hold them cash flow wise is going to be a big stretch for me to justify that over two dozen different markets across Australia right now. I would never ever be able to justify that in this point in time.

The post One Bedroom Apartments in Sydney. Are They Worth It? appeared first on Pure Property Investment.

Renting Vs. Buying. The Debate

It’s a fascinating question for me because I look at the say I’m a longterm renter and I think a lot of people in this day and age are okay with longterm renting. The fascination with wanting to own is something that’s always going to be completely individual and I think that’s the part of the question there to say if you have to own physically to feel like you have succeeded or if that you feel like you’re secure. Yeah, that and you can raise a family and that’s what you need. Then I would say if that’s always going to be the fear, I’ll I will would deem that there’s probably always going to be a bit of confirmation bias that you always think it’s going to be better to buy than to rent and it comes down to what is your mindset? Are you comfortable never owning where you live, but still creating wealth elsewhere?

So fundamentally you can do so many predictable algorithms to say; I’ve got x amount of growth. If interest rates stayed here, if I went on a principle interest repayment of this year, then it’s going to lend. Then therefore say that my spreadsheet will tell me that this is the best time to start thinking about buying or selling or continue renting or vice versa, but I think that you could do that to the cows come home and you could stress yourself out and you could run through a million scenarios and you can basically get to different outcomes every time. For me it more comes down to what is the really, what is your passion and where does the fundamental need lie here and if you can get past the deemed yeah, I guess social pressures of owning your own home and knowing that your creating wealth and setting up your future, your family’s future and other markets.

Then those discussions kind of become redundant, so if you can’t, then for me it comes down to saying, I’d say jump in as soon as you potentially can afford to jump in because what will end up happening is you become disappointed in the fact that you didn’t buy when you should’ve bought and you’ll always find a reason and you’ll always second guess your decisions and 100 percent and you say it so often. You see so very, very often and typically what Lisa to people doing nothing. And that is usually the worst scenario. I’ve got actually quite a number of clients who I’ve been speaking with for almost, you know, some of them I can think of two or three years and we’re in. We’re at ground zero still and they’ve had capacity to start investing a long, long time ago and it’s not even one market. Now. We’ve talked about buying one market. Now we’ve stopped buying in that market because the growth has come. Now we’re in a different market and they’ve not chosen to buy in that market because they thought, well, well I’m just gonna. Hold out for this market and the pattern is obvious and I think ultimately comes down action and letting perfection get in the way of profit is always going to be the drama for most in that position.

The post Renting Vs. Buying. The Debate appeared first on Pure Property Investment.

Sydney’s Future. Will It Perform As Well As It Did In 2013-2015?

Where we’re at right now in Sydney and and look, we’re probably into our 11th, 12th, 13th month depending on what suburb you’re looking at, have a probably categorized sideways if not some declines in certain markets in Sydney and to what, to be honest, Melbourne’s only probably six months behind the same trend and we expect them to run more or less pretty similar correlations over the of the forthcoming cycle. We’ve got a big issue with a income to debt ratio and we’re sitting anywhere between eight and 10 times annual income to debt ratio. Historically we see that needs to be sitting well below probably six, six and a half times to see opportunity to grow. That’s part of that equation is wages growth. We don’t have an issue with with jobs at the moment and I don’t think over the next five years in Sydney specifically, especially in some of these really big infrastructure project corridors from the southwest to the west and even part of the up, the guts through in a west, et cetera.

There’s jobs, jobs galore and well paid jobs, white collar, blue collar, right across the board, skilled and unskilled. So I think the jobs are going to be there. The issue is affordability in conjunction with people being able to borrow money. So I think we need two things to start seeing this wave come back is one of which is wage growth, to see that debt debt to income ratio reduce. And the second, I think the second one is probably going to be that there’s going to have to be a restricted amount of supply consistently given to the market because we’re also going through this apartment building boom in Sydney is not a probably, i would say, they’re not going to be spared in certain areas. It’s not right across the board. We’ve got a lot of population growth, but we’re also got alot of construction. So I think we’re probably three to four years for those apartments really going through the market and then getting back to probably what I would deem to be an elite and an equilibrium position where you’ve got a deficit which we had for the previous 10 years in addition to a ramp up of wage growth and then cheaper money.

The post Sydney’s Future. Will It Perform As Well As It Did In 2013-2015? appeared first on Pure Property Investment.

Changes In The Funding Environment And The Investor Approach

 

I think there’s a lot of property investors as well as potentially other property investment strategists who have had certain modus operandi over the last 10 years which worked in certain cases. But when you start to get a changing environment in funding and in growth and in yields, you can’t just keep running the same race because unfortunately the different competitor and you’ve got to change.

The post Changes In The Funding Environment And The Investor Approach appeared first on Pure Property Investment.