Finance advice
Steve Waters

Why arguing cash flow v capital growth is a mistake

By Steve Waters

More property magazine column inches have probably been devoted to this subject than just about any other – but I think those picking sides in the cash flow versus capital gains debate are missing the point.

Investment strategy 101

The theory behind the argument of whether to invest for either cash flow or capital gains, stems from the simplistic reasoning that investors can only have one or the other, but not both.

As a gross generalisation, if properties are located close to CBDs in blue-chip positions, then capital gains are sure to follow, but the relative rental return won’t be so hot.

Similarly, other investors seeking high rental returns from their ventures don’t expect the values to shoot up quickly, because high yield properties are often in fringe locations with less scarcity and more generic housing on offer.

Where it all falls apart

In essence, the main error in choosing a strategy is it fails to recognise that smart investors take a holistic approach to their multi-property portfolios - and healthy portfolios are balanced.

That way, depending on the investor’s requirements at a given point in time, the portfolio can be weighted slightly towards cash flow or capital gain.

Real estate accumulation shouldn’t be built on a ‘one strategy’ approach, but rather should comprise a mix of property types that will service the investor’s immediate needs with a long-term perspective on wealth building.

Each and every purchase needs to be deliberate and have a desired outcome that makes sense to the overall balance sheet. This is why multi-property portfolio’s make sound financial sense.

ABS data shows around 8 per cent of Australians own an investment property. That’s approximately 1.9 million people. The problem is that most – around 85% – of those investors only own one investment, and the percentage drops dramatically as you increase the number of holdings. Did you realise only around 0.07 per cent of Australia’s population own 6 or more investment properties?

That’s just under 17,000 Australians with a multi-property portfolio set for a healthy retirement.

When to hunt for cash flow

I realise the definition of ‘high rental returns’ can be different measures in different markets and during different time periods. An investor in metro Melbourne would be ecstatic with a 5 per cent gross yield while someone buying in regional Victoria would scoff at the idea of so little.

That said, the upside in buying a cash flow investment is that it provides sustainability to your portfolio by mitigating risk.

A high cash flow where all the income takes care of all the expenditure gives you serviceability, which gives you time in the market because you’re not at the mercy of high interest rate and market fluctuations. You have enough dough to take care of the bills.

The negative is you don’t get the same growth in dollar values as you do when you buy a capital gains-oriented property. Most would agree you don’t get truly wealthy from cash flow alone.

Why you need capital gains

Capital gains help make the big money, because in a sustainable market, if you’re holding $2 million in assets, an annual rise of 5 per cent in value translates into $100,000 in the first year which continues to compound as the property price cycle runs its course.

The downside to being heavily exposed to capital gains investments is there’s not as much risk mitigation, because you don’t have a high-income buffer to help in the down periods. Your susceptible to external risks such as interest rate movements, unexpected unemployment or vacancy rates.

You’re backing an odds-on favourite every time and sooner or later it’s bound to get beaten.

What’s the answer?

Constant vigilance is the key.

Don’t let anyone tell you property investment is a set-and-forget proposition because successful investors ensure their portfolio is consistently and periodically reviewed so their next purchase will be perfect for their requirements.

You need to understand the maximum shortfall you can tolerate out of your disposable income to support the whole portfolio and that should be your trigger to change tac or stop investing before you start getting into the red.

The best investments find a balance of both CF and CG where you can earn a decent cash flow in the short term, while realising a healthy capital gain in the long haul.

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About the Blogger

Steve Waters

Steve Waters

Steve has almost a decade of hands on, comprehensive property investment experience and is himself an accomplished property investor with a substantial property holding.

Steve is the director of Right Property Group where he acts as a professional negotiator, property strategist and licenced real estate agent. He has successfully negotiated more than 2,000 transactions from one-bedroom units to multi-level apartment blocks and renovated over 85 properties adding massive value and also substantially increasing rental yields.

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  ["title"]=>
  string(51) "Boost for investors as app sets up off-site bidding"
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  ["introtext"]=>
  string(144) "

Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

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Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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How a move to Hong Kong impacted Julia’s Australian property goals
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  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
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The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

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Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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