Cash flow vs capital growth… Why not have both???

As a professional property investor, I am always on the hunt for my next investment whether it be for my own portfolio or for my clients. My team are constantly conducting research and inspecting properties in a range of cities across the country which 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 either invest for capital growth OR cash flow and not both. ill expand a little further.

When referring to capital growth properties we are referring to an investment with a potential longer term approach. Whereby an investors 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 in the short term than what is made from the ingoing rent.

Conversely, a positive cash flow property is generally associated with buying 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. For example, property management, interest repayments, rates etc. This creates a passive income and a cash flow positive property. These types of properties are typically labeled as low growth properties which in the long term don’t provide strong capital growth.

This is where we see the greatest opportunity for investors. Finding areas which provide strong rental yields and are cash flow positive whilst focusing on mid – long term fundamental aspects pointing to strong capital growth. Now I’m not going to say that is an easy proposition because most of the time it isn’t.  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 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%+ 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 which show current strong yields with long term infrastructure spend and development that shows a true vision of becoming something much greater than what it current presents.

Our top tips for finding these high performing investments, look for the following attributes:

• Long term vacancy rates below 2%
• Mortgage repayments to net household income below 25% eg: $1000 pw take home income/ $250 weekly mortgage repayments
• Approved rail/ bus/ hwy upgrades which will directly benefit the suburb
• Approved projects that will provide sustained local jobs eg: business park developments, new hospitals, new schools, new industrial parks etc
• Buying at a price point that reflects the bottom of the market or on the slight improve rather than once the area has shown 3-4 years of consecutive growth
• Do your sums on the current yields, including ALL outgoings and a buffer for an interest rate increase of 1% minimum

Now these are only a selection of facets you can look at when trying to invest in a property that will provide both positive cash flow and long term strong 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.