API Connect

Finding finance, growth and yield...

Finding finance

Q I've just finished a renovation project in Sydney which took about 11 months to complete. I've kept the property and it's rented out. I would be very interested in how you're able to manage (and finance) several at the same time. Are you using a purchase, renovate/develop and sell strategy?

From your article, I understand that you're using your cash reserves to finance these projects while continuing to build your reserves up. While I would love to be in that position, currently my only access to funds is through low-doc refinance with a cash-out option, which has become nearly impossible of late. I don't want to sell any of my property assets and I was hoping you might have some advice on how to proceed.

A Congratulations on your Sydney reno. The situation you're in is the same one most investors start off in. There are only a few options if you don't want to sell: one, save more cash from your job; two, improve your properties to gain a higher valuation; or three, be patient and wait for prices to increase.

I do have a strategy that went something like the old saying, "you must first learn to crawl before walking to then learning to run". In time you'll do another project and then maybe two at the one time and so on until you could be juggling dozens at a time. The first ones are the hardest and things only get easier after that and you've already done the hardest one, the first one.

Growth and yield

Q Margaret Lomas speaks of capital growth having no correlation with rental yield. Isn't it the case that you can have both high yield and high growth but you need to take high risk to do this?

I've always thought that when you're in a capital city the higher capital growth areas are where the land component is at its greatest - i.e. buildings depreciate, land appreciates. Where the land is the highest component of the purchase, the rental yield will be much lower, however the capital growth will be much higher. Does Margaret think this correlation doesn't exist?

A In fact it's not that I don't think that rental growth/yield and values growth have a correlation - indeed I believe very strongly in that. What I don't believe is that there's any evidence to suggest that you must buy in a capital city in order to obtain capital growth and I also don't believe that buying in outer suburbs or regional areas means that you sacrifice growth for higher rental yield. I also don't believe that you necessarily must take a higher risk to get higher rental yield or that buying away from the capital cities means you risk lower growth. Recent studies very clearly show that during the past 10 years capital cities and seaside areas have had the worst growth, while outer suburbs and larger regional areas with diversity of industry have been the strongest and most consistent performers. My own portfolio, spread amongst many different areas, supports this wholeheartedly.

The greatest risk is in not only listening to experts who aren't in possession of all of the facts, but in not understanding the intrinsic growth drivers which give an assurance of growth. These drivers can exist in spades in many areas and rely on such factors as future infrastructure planning, growth in population, diversity of industry and strong local government leadership. Many capital cities are oversupplied or overheated and unaffordable and as such outer suburbs and regional areas displaying these growth drivers present as much better prognosis for consistent growth in both property values and rental yields.