Two property investment strategies and how to make it work for you
When it comes to property investment, most assume that it’s as simple as purchasing either a house or apartment, renting it out and living off the profits when they reach retirement.
It is a mistake if you were to be of this mindset.
In property, it comes down to cash flow vs capital growth, these are the major property investment strategies promoted by experienced investors for novices to focus on.
So, let’s take a minute to walk through two strategies that follow the risk and reward hierarchy and some of the key points involved.
Cash flow
There’s an old adage that gets thrown around by experienced investors, “cash flow is king”. In many respects, this is true, but it doesn’t tell the whole story.
The importance of concentrating on cash flow when you’re investing can’t be overstated, because a strong cash flow keeps you afloat as an investor – particularly over the long, the aim should be to own cash flow positive investments.
Put simply, property is cash flow positive when the annual rental income covers all yearly costs, from mortgage repayments to maintenance to council rates, property management fees and charges, the lot, and there are some dollars left over that go straight back into your bank account.
The aim of this model is to build up a portfolio so big that the total combined net leftover income equals your wished-for retirement income. Simple!
However, there are hidden and obvious dangers in the ocean of sole positive cash flow investing. My earnest suggestion to those considering a cash flow only portfolio is: don’t hang your hat on this one measure or return.
Look for the fundamentals that help mitigate the risks, for example, multiple industries that are helping drive the local economy or a tightening or control of future housing supply.
Check how your home loan compares
Capital growth
You don’t have to travel far into the world of real estate investment before you stumble upon devotees of the capital growth approach to property investment.
Capital growth (or capital gains) refers to the increase in value of your asset over time. You’ll often see capital growth expressed as either a percentage or dollar amount stated alongside the period over which it improves (or, in the case of some mining towns, falls).
“But what determines capital growth?” I hear you asking. The elements that drive capital growth and property values sit squarely within the foundations of economics and they are the two measures on which entire societies operate and survive: perceived supply and demand.
Basically, if the demand for an asset exceeds the supply of that asset, then its price will rise. Conversely, if there’s little demand and plenty of supply, prices fall.
So, what are the factors that help push the demand side of the equation in your favour as an investor?
Find locations with a diverse economic base
Find locations with quality fundamental services – facilities and infrastructure make potential investment suburbs fairly easy to understand
Another key element is the ease in which residents can move around. Transport infrastructure is an excellent measure of possible value gains, like new rail extensions that bring outer suburbs closer to the CBD. Dedicated busways also ensure an easier commute
Parks, community sporting facilities, safety and security – these are all attributes that make any location a desirable place to live. Don’t discount their ability to help push prices when you’re looking at where to park your dollars
Think scarcity. This is a fundamental supply driver that helps investments continue to rise in value and will always be a determinant in long-term capital gains
Cash flow v capital growth
We now know cash flow helps us offset the monthly costs of our investment outgoings, but high cash flow carries risks that can see us miss out on big returns in a turning market, and there’s traditionally less exponential growth in your net wealth.
On the other hand, high-growth assets see your personal wealth increase exponentially on paper, but loan servicing costs can drive you to the financial brink.
What’s the solution? In my opinion, it’s balance and diversification that matter. If you choose one strategy to the exclusion of the other, you’re bound to hit a roadblock on your investment journey – so try to achieve a healthy mix of both.
You should always consider your current portfolio, position, income, dependants and financial and investment goals to determine what your next investment should be, whether that is a high-growth property or cash flow positive property or a blend of both.
The type of investment property you choose should always serve a purpose in achieving your investment goals. In the end, it will be your long-term plans that will help you decide which property to invest in.
Tell us: Enjoyed this article? Don’t forget to like and share.
And while you’re here, take our mortgage shredder challenge and discover how much you can save on your home and investment loans by using loansHub technology as your personal mortgage manager. To discover why loansHub and what we do, click here.
This article via Smart Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.