How Much Emphasis Do You Put On Capital Growth vs Cash Flow?
When investing in positive cash flow how much emphasis, if any, do you put on capital growth potential?
Ryan: Brian C. is asking if you focused on buying positive cash flow property, how much weight do you put on capital growth and what capital growth indicators do you focus on?
Ben: It’s a good question, because I don’t buy cash flow without capital growth. It’s not one or the other, it’s a 100% both when I’m focusing on it. So, the indicators that I focus on very simply is, Sidney, Melbourne, Bris burn.
In terms of market places, and then within those market places, if you really want cash flow you can probably get it from units which I don’t personally like. Again, if you look at the capital growth units historically in the last 30 years haven’t performed quite as well.
Ryan: Yours can be hard for cash flow sometimes too because body corporate fees can just strip any cash flow that you get.
Ben: I talked to this guy yesterday that bought something on the northern side of the Gold Coast from another buyer’s agency and they bought it for 265,000. It was like a three bed, one bath townhouse and it’s currently renting for 420 a week and that was only purchased just last year.
I was like, if I was just trying to get cash flow even though it’s going to cost me 30 or 40 bucks a week extra to hold it, because of the type of property it is, that if you bought a few of those outright a million bucks might get you, you know, sixty grand a year in passive income or whatever.
I was like that’s interesting from that perspective, but I think coming back to that question, once you’ve identified the market, if you want cash flow and capital growth in my opinion you need to be targeting July.
Which could be an existing house, you know cutting under the existing roof line and trading it under a roof line or buying a house out of your granny’s flat or buying land, building a house in the granny flat at the same time.
But, that’s the only way that I’ve been able to find cash flow above 6% without going into commercial and the Bris burn and Sidney markets and in Melbourne there’s that boarding house option as well, which more and more people are considering. I just don’t know how much legs it has long term, because if you were to start having some general related and issues like that now.
Ryan: It also comes down to, how good are you at identifying capital growth areas, because you could say that what weight do you put on capital growth, but then depending on how sophisticated you are as an investor and how good you are at actually identifying capital growth areas, and those indicators will make a huge difference as to how much weight you put on it.
So, one of the great things about positive cash flow is that … say capital growth wasn’t a thing, let’s just like ignore that for a second, but you can actually look at, “Okay, well how much is this property cost? What’s my expenses likely going to be? What’s the rental income and what’s my like cash on cash return or how much money am I going to get every year?” and you can kind of work out an investment strategy to achieve your goals based off that with all without capital growth, like it’s right there.
Whereas capital growth even when you get up to a high level, it’s still like speculation. To a point you don’t know-
Ben: It’s a 100% speculation. Just because it’s happened for the last 100 years doesn’t mean it’s going to continue and I think like Japan is the best case example of that. Just because it did happen, doesn’t mean it will continue to.
You look at countries in Scandinavia and Germany like doesn’t grow at all, like prices not being increased or just below CPIA so, it’s interesting to say different models and this Australian model that we’ve got, which is way you’ll make money from property, the more sophisticated I’ve become and the more alone, the more I realize like at the end of the day, true cash flow literally only comes from owning assets completely outright.
That’s the only way they can play to control it long turn, everything else around that is speculation and so sometimes it’s the easiest-
Ryan: Well, that’s the thing. If you own it outright, you don’t have to worry about interest rates changing, interest rates would go like back up to 14, 16% and it wouldn’t affect your cash flow at all. The market could crumble, like the prices of properties could crumble, but if you’re still getting good rental income, then that’s not actually going to affect you anyway. It will affect your idea of your net worth, but it won’t actually affect the cash flow coming in.
Ben: The thing is like when interest rates rise and when people start losing jobs and markets crumble as you mentioned, it has the reverse effect on cash flow, because cash flow improves. Every time there’s a recession, every time interest rates rise, it means there’s less buyers in the market, more rentals and it puts pressure on rental returns so, you end up most of the time being in a better position.
Even in the right depression, rental returns drop by 20% in the first few years and then by the end of it, it was so high that people had to stop buying property again because it was way cheaper to buy.
Ryan: I think in summary, it’s silly not to consider capital growth, if you’re trying to invest in positive cash flow property. I think you should definitely try and get both, if you want own cash flow, you want to get capital growth as well, and like I know I’m beating on the same drum but buy under market value.
Buy something with a potential to manufacture growth or to manufacture cash flow as well. It might be through jewel occupancy like Ben talked about, or through cosmetic renovations, or sometimes the subdivision opportunities and things like that.
So, don’t just limit yourself to cash flow. I think look for capital growth, do your best but depending on how sophisticated you are that might be hard to pick the right area, and then you’ve got to try to have other opportunities as well.
Ben: I sent out an email the other day that is because I really do value capital growth even though I can’t … just in case history continues to repeat itself like it has for the last 200 years, I want to make the most of capital growth if it does come, So, I worked out a possible 500k property today and 3% on it, that’s just buying a 500k property today and getting 6% on it. Compounded year on year for the next 20 years.
Obviously there’s going to be great years, shit years, and flat years but the average is 6%, the difference between a 3 and a 6% return compounded for that amount of time is 500 grand.
That’s just massive money that you’re leaving off the table, so if you can get a 6 or 7% rental year, and buy quality area that might get anything above 3% per annum long term, you’re putting yourself into a position where the compound effects over time with leverage of super powerful.
Ryan: Well, that’s the thing. You try your best to get capital growth and try your best to choose the right area, and the right market and if it happens then you get the 6%, then like you get that extra 500 grand.
If it doesn’t happen then hopefully you’ve invested well enough that you could maybe pull out a 100,000 through creating equity or that you continue to get your cash flow so you still achieve your goals anyway, but you want to capital growth to be like a windfall, like an added bonus on top of that.
Ben: You’ve got to remember that like in all of Australia’s history the worst 10 year period that we ever had, was the last 10 years that we’ve just gone through where the average growth rates in most areas were still 5% prime in compounded.
So, again just because it’s happened doesn’t mean it’s going to, but for a 170 years processed double. You know for 20 other, last 30 years it grew by 7.5% per year across Australia, and then 5% per annum in the last 10 years.
You can’t bank on capital growth, but there’s pretty good statistical history to say that, the past will probably repeat itself as long as people continue to speculate in property.
Ryan: Hi guys. I hope that you enjoyed the answer to this question, which came from my live Q and A episode with Ben on YouTube. We will be doing more of these in the future. If you want to check out Ben, then he is offering free strategy sessions to On Property listeners.
To find out more about that, go to onproperty.com.you/session and you can see all the details of there. That’s it for today and until next time stay positive.