Does high yield result in low capital growth? No, not by a long shot!
As a property investor and the owner of investment property buyer’s agency Pure Property Investment, I’m constantly asked what I believe is the better investment grade option: high cash flow or strong capital growth markets?
The truth is that there are many markets within the Australian property landscape that provide both strong cash flow and long-term capital growth. So, why would you not target both?
We have recently reviewed data published by CoreLogic which looks at the best performing capital growth markets over the past decade.
The second layer of research our team at Pure Property Investment have looked at is comparing the internal rate of return, or cash-on-cash return, of each of the best performing capital growth markets over the past decade.
Here’s where the penny needs to drop for all investors who think that cash flow and capital growth are not mutually exclusive. Considering data for the past 10 years, the top 10 capital growth (major city) markets within Australia were:
NSW
- Pennant Hills - 126 per cent growth
- Rouse Hill - 117 per cent growth
- Fairfield - 115 per cent growth
- Campbelltown - 113 per cent growth
- Canterbury - 113 per cent growth
Victoria
- Wyndham - 129 per cent
- Melton - 124 per cent
- Casey - 124 per cent
- Cardinia - 112 per cent
- Dandenong - 109 per cent
It does not take a trained eye to see that there is, realistically, only one market within the top 10 list which would be considered “blue chip”.
Within the nine middle/outer suburbs, we have assessed the yields each of these markets was providing between 2008 and 2012 and the numbers range between 5.5 per cent and 7.5 per cent gross (in today’s money, they would be cash flow positive). Pure Property Investment has invested in four of the top 10 markets over this specific period.
Ultimately, the brass tacks of the assessment we have completed is that the fundamentals of property investing need to be based on a broad range of factors. Specifically:
- Specific asset selection (with a focus on long-term capital growth drivers)
- Your personal borrowing power (ensuring that you have a clear understanding of your borrowing capacity and are working with a broker who understands these factors)
- Cash flow (ensuring that the net cash flow your property will provide will be sufficient for you to be able to hold the property long term and also aid your ability to re-borrow for future purchases depending on your objectives)
In the ever-changing lending environment and the current transitions within the Sydney and Melbourne markets, investors, now more than ever, need to fully focus on long-term capital growth drivers (10 years plus), have a true understanding of their cash flows and make sure their next investment delivers on both fronts.
Happy hunting!