CG v cashflow — Which type of property should I buy next?

As investors, we always ask ourselves whether the next step is to purchase a capital gain-focused or cashflow-focused property to add to our portfolio.

David Shih

I’m no exception, and having gone through purchasing seven properties now, I thought I could share some of my own experiences in this regard to help everyone decide where they could go from here.

If you look at my current portfolio, the roles and underlying thinking of each property are:

1. Investment property - Granville unit, NSW - CG
- One kilometre to train station
- Granville is in close proximity to Parramatta, Sydney's second CBD

2. Principle place of residence - Hornsby unit, NSW - CG
- 500 metres to Horsnby train station, 700 metres to Westfield shopping centre
- Hornsby is self-sufficient. Has a Westfield, hospital, plenty of good schools around the suburb.


3. Investment property - Slacks Creek house, QLD - Cashflow
- Highset with rumpus and bathroom downstairs to be able to rent out for more
- Can also expect some CG due to close proximity to Springwood (based on Greater Springwood Master Plan)

4. Investment property - Woodridge house, QLD - Cashflow
- Highset with downstairs not fully built out. Can be made into dual-living
- Existing powered big shed can be converted into granny flat

5. Investment property - Murrumba Downs house, QLD - CG
- 500 metres to new Kallangur train station
- Within two kilometres radius to Petrie train station and the upcoming new University of Sunshine Coast

6. Investment property - Eagleby house, QLD - Cashflow
- 750 square metres corner block, can be subdivided later down the track if desired
- Perfect configuration for Granny Flat from side street

7. Investment property - Newcomb house, VIC - CG
- Within three kilometres to Geelong CBD
- Two bedroom to three bedroom transformation to manufacture equity

So within the portfolio, four are defined as CG players and three as cashflow players. If we exclude the principle place of residence, then it's three CG and three cashflow. In essence, for every one CG player purchased I would buy a cashflow player to offset the negative cashflow and make the portfolio easier to hold in the long-term.

Because most of my portfolio is based in Queensland, the general yield is not too bad. For example, even though Murrumba Downs was defined as a CG player by me, it's gross yield during settlement was at 5.4 per cent. At that time, my intention was to offset with a cashflow player so I looked at Logan again, picking Eagleby, which was returning gross at 6 per cent yield from day one. Later on, if I build a granny flat, can take the gross yield over 10 per cent easily.

By having this concept in mind, that's when I was able to take more risk and jump into the Geelong market in early 2017 and focused on picking another CG player. Note Newcomb's gross yield from day one was only at 5 per cent.

For investors in the current environment I would suggest you review your portfolio to determine the yield and cashflow that the portfolio is doing for you. My general advice is for each CG player you would want to offset with at least one cashflow player.

If your CG players are heavily negative (say at 3 per cent gross yield) then you may want to consider offsetting with two cashflow players at 6 per cent or even 7 per cent. The goal is to try bring the overall portfolio cashflow to positive if not neutral which will make it easier to hold long term.

With interest rate currently at record level, this is one strategy to mitigate the risk of having to force sale any of the IPs when interest rate returns to 6 per cent or even the historical level of 7 per cent.

As always, if you have any questions about any of the above content feel free to leave a comment.

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