"More successful investors, those who have built a substantial asset base, grow their portfolio through leveraging off the capital growth of their investments."
You don’t have to choose between positive cashflow and capital growth in property
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Now that we’re at the stage of the property cycle where capital growth is lower, and it’s likely to remain that way for some time, more investors are asking: “what’s the right investment strategy?”
Recently Gail Kelly, CEO of Westpac, warned that Australia is unlikely to ever again see the type of housing boom that sparked a massive rise in personal wealth in the past decade.
At around the same time Reserve Bank of Australia governor Glenn Stevens said the RBA was not trying to “engineer a return to a housing price boom” by lowering interest rates.
So what is an investor meant to do? Is it time to consider cashflow-positive properties?
How property investors make their money
Firstly it’s important to understand property investors make their money in four ways:
Smart investors benefit from a combination of all of these.
Can I still get capital growth?
While there is little doubt that average capital growth will be lower for the next few years, there will always be some pockets that outperform the averages. And within those areas there will be some properties that grow strongly in value while others perform poorly. That’s how averages work.
What about positive cashflow?
In general properties with higher capital growth have lower rental returns. This means you can’t find cashflow-positive properties in the higher growth, better locations of our capital cities. You must look to regional areas or mining towns where buyers require a higher rental yield (cashflow) to make up for the lack of capital growth.
Of course buyers with lower loan-to-value ratios, those who put more money in the deal may also experience positive gearing. The problem is they miss out on the benefit of leverage.