We are all humans after all and generally humans want everything so I am sure everyone has exclaimed, “we want both!” I’m sure with certain properties and at certain times during an investment cycle you may just get both but lets look at things from a start up, ie when you have just purchased. What is the best strategy for you as the property investor?
Obviously this question is surrounded by individual preference. On one hand, you’ll have the investor who is looking to buy a property with excellent rent. They don’t want their lifestyle affected by having to contribute to an investment property and they may have an eye to the future, possibly setting the property up as an unencumbered income stream upon retirement. Not a bad strategy if you don’t want to rely on one of the various government pensions, or if your super may not be adequate to service your lifestyle.
On the other hand, you may have that aggressive investor who is looking at capital growth, the type of person who has what I like to call “a ladder strategy” in that they are using each investment property as an opportunity and tool to buy another in the future. What I mean by this for example, an investor buys a $400k property and has a $350k loan against it. What they would like is for the value of that property to increase as quickly as possible. They would then get their broker or bank to get this property re valued so they can check “usable equity” ie the amount they may be able to “take out” or loan against the property that they can then use for a deposit/contribution on another investment. They would then look at repeating this strategy to increase their asset base. This type of investor isn’t as fussed about having to contribute to the costs associated with holding an investment such as loan repayments as long as the property they own is growing in equity.
The third type of investor is the rest of us, the one who wants both! For now, lets not worry about the best case scenario and look at the other two strategies, which is more desirable?
There are pros and cons to both strategies and buying a property purely for cash flow can certainly have its pitfalls. As a property buyer, be it an investment purchase or an owner occupied home, you should treat every purchase as an investment. What I mean by that is, the property you are buying is an asset and you want an appreciating asset, not a depreciating one such as car. An asset that appreciates gives you options, options to sell and cash in, options to leverage against and buy another property or shares or invest in a business or managed funds or leave assets for your children or family etc. Without this appreciating asset, these options are gone.
We all need cash flow, so cash flow cannot be discounted as we need it for our day to day living but sacrificing capital growth and long term asset appreciation because you are unwilling to contribute $100 a week to your investment purchase may not always be the best option. The properties that give you instant and positive cash flows can sometimes come with inherent risks and I’ll go through a few. Student accommodation, one of the old favourites because the returns are high however they are hard to lend against so unless you want to commit all your savings to buying one outright, not a great option. They are also hard to re sell because the available buyers are limited and there is minimal capital growth. So if you are considering this, really use that cash flow you earn from the property wisely and try and use it to supplement other investments you may have.
Another favourite is buying properties in mining towns that can have extreme cash flow positive aspects. These are great while the boom is on but at times like now, properties are empty so you are getting nil return and still servicing debt, you want to sell out yet the values have dropped dramatically. Timing the market with these type of purchases is key. An astute property investor mentioned to me once, never buy a property in a location that relies on one industry only. Sound advice if you think about what happens when that industry experiences a downturn. I mentioned some of the pros of cash flow focused properties, no affect to current lifestyle, less strain on cash flow, income source for now and the future as well as the ability to save.
Buying for capital growth can be harder
It is just how it is. We need to commit, at least initially, part of our income towards maintaining the investment property and then there are the added costs such as rates, water, maintenance etc. Also high capital growth properties are more likely to be in well known areas with proven growth track records, not exactly cheap! Also with part of your income already committed to the one investment property, it may make things harder if you want to acquire further properties, your cash flow may be stretched beyond its limits. On the other hand, you have an asset that is growing aggressively, hopeful 7% plus per Annam and you may also be eligible for any negative gearing benefits associated with the investment, depending on your individual situation.
So which one is the better option?
My personal preference is capital growth but my situation won’t be exactly the same as yours. If you were going to buy 1 investment property only, go for capital growth every time. Get the appreciating asset you can use, leave to family or sell and live off. Keep in mind that property investment is always part of a greater overall investment strategy and should not be viewed solely. You might want to diversify your investments, spread the risk and if one sector downturns, it will not affect you as greatly as it could if you had all your eggs in one basket.
Speak to the team at National Property Buyers, we’ll soon advise you of the best option to achieve your goals, we might just have a property in mind that can achieve both capital growth and excellent cash flow for you!