The Blogs that appear on this page may be sourced from outdated material so please seek appropriate professional advice. The blog material is in no way intended to be personal financial planning advice.

Catherines Chat

Wholistic Financial Solutions provides a lot of essential information and updates regarding the property investment industry. Check this page for the updates.

The Importance of Capital Growth

Monday, July 15, 2013

"Population growth and housing demand are the strong fundamentals that create capital growth"

Capital growth = the difference between the value of the property and the original cost price

Capital growth is the main reason so many investors choose to invest in real estate over any other investment option.

Put simply, the supply of land is finite, as they say ‘they’ve stopped making it’, whereas the population is ever-increasing and the demand for property is growing at a faster rate than the supply.

These facts alone provide a very stable support mechanism for continued capital growth in Australia.

When I say Capital Growth is the ‘main’ reason investors choose real estate I am cognisant of the fact that some investor focus on cash flow rather than capital gain.  This strategy is viable in certain circumstances which I will explain in later chapters.  However, capital growth IS, without a doubt, the best way to maximise your wealth creation.  Take a look at the graph below.

The above graph illustrates that the property is making an $85 a week loss (also known as negative gearing which I will explain in later chapters).    $85 a week equates to a $4420 pa loss (before tax breaks considered).  However, the property has gone up by 10% (which is within Australia’s long term average of houses doubling every 7 – 10 years). 

So this Investor has lost $4,420 to make $35,000, or a Net Profit of $30,580* 

*(35,000 – 4,420)

I believe this is a far superior strategy than to invest in positive cash flow properties which may put $50 a week in your pocket but not grow in value.  However, there are horses for courses and I will explain in later chapters when, how and why – positive cash flow property can work for some investors.

To maximize your capital gains in a property, it would be best to buy at a time when the market is close to the bottom of the demand cycle.   However, the ‘bottom’ of the cycle can’t always be picked so it’s better to be in the market anyway, rather than hold back waiting for the next ‘bottom’.  This is known as ‘time IN’ the market rather than ‘timing’ the market.
Investors who are interested in making the best capital gain possible should focus on areas where house prices are likely to rise by more than the national average. Later chapters in this book will give you an idea as to what to look for to identify these areas.

Factors such as

1)      Has the property got good capital growth potential, i.e. is the current price likely to increase as demand increases in the area?

2)      Is there a ripple effect?

3)       Is the land size desirable?

4)      What is the prospect of splitting the block? 

A good strategy can be to create instant capital growth by buying a property at less than market value.  Just because a property might be listed at market value, it doesn't mean the seller won't take less for it. Sometimes an urgent sale is required for reasons such as ill health, divorce or the vendor needing to settle on another property. Decide on what you think it is worth and what you're willing to pay in order to get the best capital growth possible.
Shop around. To invest in real estate and create wealth through capital growth you must buy smart with careful consideration not to over capitalize on the investment.  The later chapters of this book will help you learn to buy smart.

 

Do you want to know more? Click here to watch five free webinars on - ‘Proven, Must Know, Property Investment Advice’

Positive Cashflow Investing

Thursday, February 21, 2013

A Positive Cash Flow property is a property where monthly income exceeds holding costs.

Cash flow Positive Property investing is generally contrasted with negative gearing (or negative cash flow), where the income returns do not offset holding costs, and the investor uses the tax treatment of the loses to their recoup some of the short fall.

The main argument for Positive Cash flow Properties is the advantages of owning income-generating assets rather than having to put your hand into your pocket and fund a shortfall on a negative cash flow property.
Calculating Cash Flow

Cashflow is simply equal to income less expenses

.

  Income

  •    Rent
  •    Advance rent
  •    Late rent
  •    Insurance payments from loss of rent

Expenses

 

  •     Monthly Mortgage Payments
  •     Maintenance and repairs
  •     Body-corporate / property management fees
  •     Taxes and charges
  •     Repairs and maintenance
  •     Costs associated with finding new tenants

Pros and Cons of the Positive Cashflow Strategy



Pros


  • Having access to a monthly cash flow has an obvious appeal and can therefore be an excellent entry point for beginner investors.
  • Cash flow properties can balance your portfolio as the extra cash can be used to pay the shortfall that may be associated with holding properties that have negative cash flow but high capital growth potential.
  •     Positive cashflow properties increases your serviceability towards a loan and can make you more attractive to lenders.
  •     Properties that are cash flow positive AND appreciating quickly are often touted as the ‘holy grail’ of property investors. Mining towns have offered up some impressive examples in recent years. However, such properties are difficult to come without the right tools and technology.

Cons


  •     The positive income generated is taxable and so it can be difficult therefore to build real wealth off income alone.
  •     Cash flow positive properties are sometimes associated with lower levels of capital growth over the longer term although this varies from property to property - careful research can find examples that demonstrate a healthy yield and strong capital growth potential.

Defining your search criteria when looking for cash flow properties



For many the only way this will occur is to buy a property in a high rental yield area or to wait until enough of the loan is paid off and for rental yields to rise over time.

Taking out a smaller loan as a percentage of the purchase price (e.g. at a 60% LVR instead of 80-90%) can ensure immediate positive cash flow surpluses.

The property however, can still be negatively geared for tax purposes after deducting depreciation, which is a tax-deductible expense albeit a non-cash cost.

7 ideas to help you achieve cash-flow deals



  1. Look for suburbs with yields of 8% to 16% and analyse the highest net cash-flow
  2. Focus around the 154 mining towns around Australia, then narrow your search to those within your budget, cash-flow and yielding expectations.
  3. Initiate your search around properties within a 3-5km range of Australia’s 154 universities, which have a strong rental market, and potentially high demand.
  4. Change a negatively geared property to a positive cash flow property by either reducing your expenses or increasing the income it provides.
  5. Buy 20-40% under median and look to drive yields up.
  6. Buy dual income properties for example those with granny flats.
  7. Fix interest rates when they are at low points in the cycle.

Discover How to Build A Property Portfolio The Right Way Right From The Start

Recent Posts


Tags


Archive