Michael Yardney's Guide to Investing Successfully by Yardney Michael

Author:Yardney, Michael
Language: eng
Format: epub
Publisher: Wilkinson Publishing
Published: 2017-05-09T00:00:00+00:00

Chapter 15: Property investing for capital growth or cash flow

When it comes to property investment you’ll often hear two somewhat conflicting philosophies advocated.

Some suggest you should invest in property to achieve positive cash flow (rental returns that are higher than your mortgage repayments and expenses leaving money in your pocket each month).

Others suggest you should invest for capital growth (an increase in the value of your property).

But there is a third element to investment that many commentators forget to mention and that is risk. Considering cash flow, capital growth and risk, when investing in residential property you can only typically have two out of the three.

If you want a property investment that is low-risk and has a high cash flow you will have to forgo high capital growth. If you are looking for a low-risk investment that has strong capital growth, you will usually have to forgo high rental returns ( cash flow).

Of course, in an ideal world we’d all like to buy properties that have all three elements and while this combination is possible, it’s far from the norm. I manage to achieve all of these by purchasing properties in high growth areas and then adding value by renovating them or redeveloping them into townhouses. The extra rent and the taxation benefits I achieve give me high-growth properties with high yields.

Investment success fact There’s no doubt in my mind that if I had to choose between cash flow and capital growth, I would invest for capital growth every single time.

So let me explain why investing for capital growth is the best wealth creation strategy in my experience and how you can harness it to achieve investment success.

The power of capital growth

The fact is that in Australia (but not necessarily other parts of the world) residential real estate is a high growth, relatively low yield (cash flow or rental return) investment.

Now I know that’s not how some people see it. Magazines will flaunt the next positive cash flow “hotspot” and courses will lure you with the promise of instant “cash flow” from property — but that’s not how successful property investment works.

Sure in secondary locations or regional centres you could achieve a higher rental return on your investment property but, in general, you wouldn’t get strong long-term capital growth.

If you have any doubt about the importance of capital growth, the calculations in the table I’m about to discuss may change your mind.

Over the long-term, “average” property investments in Australia’s four big capital cities tend to return around seven per cent capital growth (averaged over a number of years) and four per cent rental yield. The table would be turned the other way in many regional areas that may only achieve five per cent capital growth, but a higher rental yield of, say, seven per cent.

The argument then continues: If you’re going to achieve 11 or 12 per cent per annum from your property why not go for the high rental returns? I guess that’s why many new investors make the

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