How to achieve both cash flow and capital growth
It shouldn’t have to be a choice between the two – if you do your due diligence, you will find an investment property that offers stable cash flow as well as long-term capital growth.
Blogger: Paul Glossop, director, Pure Property Investment
As a professional property investor, I am always on the hunt for the next investment, whether it is for my own portfolio or for a client. My team are constantly conducting research and inspecting properties in a range of cities across the country that have strong prospects for both cash flow and long-term capital growth.
However, of late I have noticed a distinct trend in the property investment public domain implying that you have to invest for either capital growth OR cash flow, not both.
I'll expand a little further.
When referring to capital growth properties, we mean an investment with a potential longer-term approach, in which the investor’s aim is to buy a property in an area with a projection for growth. Investors aim for these properties to increase in value in the long term so that when the time comes to sell, the increase in value will far outweigh the original costs associated with buying and holding the property. These properties typically receive lower rental yields and could see the investor with more outgoing expenses (property management, interest repayments, rates, etc) in the short term than what is made from the incoming rent.
Conversely, positive cash flow is generally associated with properties that have a high rental yield. The aim is to invest in properties that will receive a higher income than the outgoing property expenses. This creates a passive income and a cash flow-positive property. These types of properties are typically labelled as low growth properties, and don’t provide strong capital growth in the long term.
This is where we see the greatest opportunity for investors: finding areas that provide strong rental yields and are cash flow positive while focusing on mid- to long-term fundamental aspects pointing to strong capital growth. Now, I’m not going to say this is an easy proposition, but it is certainly not impossible. I’ll start with the simplest tip I can provide: this suburb is almost certainly not the suburb you live in, nor is it likely to be the suburb next to the one you live in; in fact, there is a good chance it may not even be in the city you live in.
Now, I’m not talking about the next big regional town that currently has 8 per cent plus yields with a proposed high-speed rail station to be built in 25 years’ time (because I’d rather keep my money in the bank). I’m talking about major cities that show current strong yields, with long term infrastructure spend and development that shows a true vision of becoming something much greater than what it currently presents.
Our top tips for finding these high-performing investments? Look for the following attributes:
- Long-term vacancy rates below 2 per cent
- Mortgage repayments to net household income below 25 per cent, e.g. $1,000 per week take-home income/$250 weekly mortgage repayments
- Approved rail/bus/highway upgrades that will directly benefit the suburb
- Approved projects that will provide sustained local jobs, e.g. business park developments, new hospitals, new schools, new industrial parks, etc
- Buying at a price point that reflects the bottom of the market or a slight upturn, rather than once the area has shown three to four years of consecutive growth
- Do your sums on the current yields, including ALL outgoings and a buffer for a minimum interest rate increase of 1 per cent
These are only a selection of aspects you can look at when trying to invest in a property that will provide both positive cash flow and strong long-term capital growth. But, speaking from experience, these properties are out there. It’s a matter of putting in the time and research to find them.