Investment strategy: Should you prioritise yield over capital growth?

Mr Pham started investing in 2011 after being inspired by his own father, who was an avid investor for years. However, instead of chasing capital growth and thriving on negatively geared properties, he chose to aim for good yield and maintain positive cash flow.

As a result the passive income that he’s earning from his assets, the investor generally avoids sacrificing a comfortable lifestyle.

Yield play

One of the things that Mr Pham did to improve his cash flow is build a granny flat in the back of his principal place of residence.

The property alone gave him 15 per cent yield and pays for 30 per cent of the mortgage on his home.

Aside from that, he also acquired a few ‘jewel keys’ for his portfolio, which include old residential homes and commercial properties across the country.

The commercial properties—a $590,000-factory and a $490,000-commercial office—give him $1,000 a week each. One of them is particularly beneficial because its leases are at different points in time, which ensures that the investor don’t suffer from extended vacancies.

“If one decides to leave, I've still got the other person that pays for it,” Mr Pham highlighted.

His residential properties in New South Wales, which range from detached houses to units, are also mostly positively geared.

While a lot of investors are keen to find properties that will provide significant capital growth, Mr Pham’s focus has been on chasing high-yield properties.

According to him: “I see it as free money and it was a good time because credit was cheap. At the same time, my business is going well so, I guess, the income I generate helped support the portfolio and act as buffer if something goes wrong.”

Long-term strategy

Knowing that property investment is a long-term commitment, Mr Pham also considered the capital growth potential of the properties he buys.

For the most part, his residential properties have acted as the driver of capital growth in his portfolio.

His Sydney properties, in particular, which are mostly located in the western region, have been bought way before the property boom. In only three to four years, the value of one of houses he bought has doubled while one of his units has gained $80,000 more in two years.

Mr Pham said: “The two commercials, obviously, they're more of a yield play and they're pretty new in the last year or so. I haven't really looked at growth on that but I don't think it's going to be much different.”

Essentially, his commercial properties have been his primary tools for generating income that will support his mortgage repayments as well as the cost of holding his residential properties.

On the other hand, his residential properties will give him the growth necessary to stay in the investment game for the long-term.

However, the investor maintains that, while he has achieved a good balance between yield and capital growth on his portfolio, he’s still ‘not too fussed’ about the capital growth potential of his properties.

At the end of the day, it comes down to his main goal at the moment: To pay off his mortgage on his principal place of residence as soon as possible.

According to Mr Pham: “I guess properties have given me that equity to go and do the next one. I just pull that equity there and go again.”

“My goal was to help pay off my mortgage quicker. If I just continue making those repayments as I would if I didn't have these properties, I'm accelerating paying down my mortgage really, really quick.

“I find if there isn't any capital growth, you've released it that way as well by just paying down debt,” he added.

At the moment, Mr Pham has paid off $400,000 on his principal place of residence and within three to four years, he aims to pay off all non-deductible debt on his portfolio.

Managing debt

At the moment, Mr Pham has paid off $400,000 on his principal place of residence and within three to four years, he aims to pay off all non-deductible debt on his portfolio.

Non-deductible debt is, essentially, the interest cost on Mr Pham’s principal place of residence. All other debts on his portfolio he refers to as ‘investment debt’.

Since his place of residence is not income-producing, he cannot claim any interest cost, including council rates, insurance and other property-related expenses.

On the other hand, he explained: “If you drew out that money against your PPOR and you used it to buy an investment property, that debt is technically for an investment. Under the tax ruling, that's tax deductible. The interest you pay off, that is tax deductible. Council rates, insurances, any cost involved of running that investment is tax deductible.”

The ‘investment debt’, for him, is a good debt as it allows him to continue improving his cash flow through simple renovations and developments or ultimately purchase more properties.

As long as the risk based on loan-to-value ratio is reasonable, the property investor will continue his wealth-creation journey.

“If I can see the numbers working, I'd probably keep going, to be honest. I've been paying down the mortgage and I've been drawing it back out to go buy these investments. We call it debt recycling and it will probably allow me to keep going,” he concluded.

Tune in to Son Pham’s episode on The Smart Property Investment Show to more about finance, mortgages and serviceability in today’s market.