I want to cry every time I meet a bright-eyed and bushy-tailed Gen Y who tells me that they are madly in the acquisition phase of their Positive Cash Flow Property Investment Strategy. I positively want to howl when I meet a Gen Xer hanging onto the same dream.
Expecting any “investment strategy” to quickly turn you into a millionaire is like expecting the latest fad diet to work. The scientifically proven best way to lose weight is to eat less and exercise more. But that just sounds so boring (and like hard work) compared with the latest ‘miracle’ diet, shake or pill.
In exactly the same way, wise property investment is simply not sexy when compared to slogans like “retire richer sooner” and “make millions fast”. Wise property investors do it slowly, they are careful to manage their debt levels. They aren’t in a screaming hurry to buy the next property. They don’t mind paying a bit out of their own pocket every month as long as they have bought a really good property in an area that will deliver medium to long term capital growth. They don’t try to get on the next hotspot bandwagon. It’s quality they want, not quantity. Pretty boring, huh?
The Great Australian Dream or Nightmare on Easy Street?
A couple of weeks ago I read a tale of woe about a young poster couple for the Get Rich Quick property investor set. Kate Moloney and her partner Matt were crowned “2012 Australia’s Property Investor of the Year” by Your Property Investment Magazine after acquiring a portfolio of 16 properties over 5 years. Only 3 short years later, Moloney writes on her website, “we owe in excess of $5.8 million on property worth $2.3 million”. How on earth could this happen?
Well, it happens when positive cash flow is more important than capital growth. When people don’t adequately consider the risks associated with buying property. When we try to buy too many, too fast. When it all seems so easy and we don’t think we can fail. When dare I say it, we get greedy.
What makes people think that they can really get rich so easily? Personally, I think a great deal of it is wishful thinking, encouraged by an industry that makes its fortune on selling this version of the great Australian dream – the dream of creating passive income and retiring young.
To build a property portfolio you need capital growth.
These days Sydney property has been losing favour with investment spruikers because “there is no growth left in it” or due to sheer unaffordability. And yet, when you take a long-term view, inner Sydney continues to offer some of the safest and best-performing investment opportunities. And it is my firm held belief that property should only ever be invested in for the long-term (at least 5 years anyway).
Recently I undertook a little exercise in order to illustrate the difference in outcomes between a positive cash flow strategy and a capital growth objective. I used median statistics from realestate.com.au and compared a 2 bedroom apartment in Brisbane City with a 1 bedder in Sydney’s Surry Hills.
Given the stats (median price, median rent, median growth) and assumptions (equity, interest rates, CPI, costs) I used for this exercise, the Sydney investor would need to put in an extra $30K upfront and the investment would cost them a further $5K in the first year (with that figure reducing a little every following year), while the Brisbane investment would be cashflow positive. Fast forward 10 years and the difference is astounding. If both properties were sold at that point, the Sydney investor would be almost $750K better off after taking into account the annual “losses” (and not factoring in tax benefits)*.
Shall I say that again louder? By focusing on capital growth, not positive cash flow, our example Sydney investor would be better off after a period of 10 years to the tune of three-quarters of a million dollars! Now, that is what I call a return on investment.
Sacrificing capital growth for a higher rental yield simply doesn’t provide the foundation for building a property portfolio. Capital growth over time gives you equity, whereas collecting an extra $100 per week in rent is never going to make you rich. And using that extra $100 to go into further debt on another cashflow positive property just doesn’t make sense to me. It’s like robbing Peter to pay Paul and far too risky in my view. Much better to learn how to choose a low risk investment property.
Remember that old Aesop’s Fable called “The Hare & the Tortoise”? It’s a fitting analogy for the positive cashflow versus capital growth debate. The hare takes the lead first but quickly runs out of steam while the tortoise ends up winning the long race. And that’s the sort of property investor who ends up retiring well.
*(Happy to share my workings with you if you want to send an email to email@example.com).
Published 9 March 2016
Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.