Why great cashflow doesn't always equate to a great property investment
While we would all love to invest in property, the reality is that we don't all have the incomes to hold multiple negatively geared properties. Josh Masters explains why great cashflow doesn'talways equate to a great property investment.
While we would all love to invest in property, the reality is that we don’t all have the incomes to hold multiple negatively geared properties.
So it’s not surprising that one of the key requirements that a lot of people ask for when they sit down with a property advisor is that they would like the investment to be as close to break-even as possible.
Now while this sounds reasonable, it often comes with a small dilemma.
In Australia, the relationship between cashflow and capital growth are often at odds with each other, that is, you don’t generally get them in the same investment.
Think of it like two levers – when you push one up, the other goes down.
Sometimes you get great cashflow and are left with money in your pocket, other times you get great capital growth but the rent doesn’t keep up, so you end up having to chip in some of your own income each month.
So why is this concept to important to understand?
Because if you’re looking to build wealth in property and you are chasing investments that break-even, you could be sacrificing some strong growth opportunities that could set you back years when building your portfolio.
Look at some of the strongest capital growth suburbs in Australia in the last 5 years – Birchgrove and Bronte in Sydney, or Wheelers Hill and Macleod in Melbourne.
Here you will find many investors who had fantastic growth in the value of their property, but if they have borrowed at 80% or 90%, are undoubtedly faced with mortgage repayments that exceed their rental income.
These suburbs are known for their capital growth, not their rental return, and have generated great levels of wealth for their owners.
From a cash flow perspective, investors in these suburbs would have been faced with shortfalls of around $5,000 to $10,000 from their own pockets in order to make up the difference between the rental income and expenses such as rates and mortgage repayments.
So if you're looking to build a successful portfolio, it’s important to understand what you're sacrificing when looking for neutral or positively geared properties.
Neutral or positive cash flow properties may be for you – they certainly alleviate some of the financial pressures when it comes to holding a property - but don’t expect to see your suburb at the top of the charts when it comes to price gains.
However, if you can afford to outlay $5,000 - $10,000 from your income over the course of the year, without putting pressure on your own financial situation, you will often be rewarded with substantially stronger price growth.
Pursuing stronger price growth, rather than cash flow perks, will often leave you with the opportunity to tap into your equity at a later date to use as a deposit on the next property.