{"id":11042,"date":"2017-04-04T03:00:38","date_gmt":"2017-04-03T17:00:38","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=11042"},"modified":"2017-04-04T03:00:38","modified_gmt":"2017-04-03T17:00:38","slug":"why-capital-growth-trumps-cashflow-michael-yardney","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/why-capital-growth-trumps-cashflow-michael-yardney\/","title":{"rendered":"Why capital growth trumps cashflow – Michael Yardney"},"content":{"rendered":"

A question from a listener about if it is best to have a property return cash or capital growth has prompted a discussion with Michael Yardney<\/strong><\/a>.
\nTranscript:<\/strong>
\nKevin<\/b>:\u00a0 Here\u2019s a question we\u2019re asked from time to time: how do you decide between capital growth and cash flow? I\u2019m going to ask Michael Yardney to make a comment.
\nI think I know what you\u2019re going to say, Michael, but I want to hear it anyway, then I want to be able to discuss the pros and cons with you. Michael Yardney from Metropole Property Strategists.
\nHi, Michael.
\nMichael<\/b>:\u00a0 Hello, Kevin.
\nKevin<\/b>:\u00a0 Michael, I want to ask you that question. How do we decide between capital growth and cash flow?
\nMichael<\/b>:\u00a0 Well, Kevin, there are clearly two camps, aren\u2019t there? There are the cash flow followers, and they suggest you should invest in property that returns more cash than it expends. In other words, they want rental returns that give them some cash in their pocket every month.
\nAnd then of course, there\u2019s the capital growth crew. They favor investing in capital growth over cash flow. In other words, you buy properties that produce above-average capital growth in value, and usually you have to carry some negative gearing along the way.
\nBut, Kevin, I guess if there was only one way to do it, both wouldn\u2019t exist. So there probably is room for both of them.
\nIn my mind, I think there are three phases of your property journey. The first one is the accumulation phase. That\u2019s the stage where you build up a high-growth portfolio of investment-grade properties. Kevin, that\u2019s building your assets \u2013 asset accumulation \u2013 and that takes 10 or 15 years. That\u2019s why I believe capital growth comes first.
\nThen there\u2019s the consolidation phase, where you slowly lower your loan-to-value ratios, and conversely, that increases your cash flow.
\nThen the lifestyle phase. This is where you live the life you want to live using the proceeds of your cash machine.
\nBut Kevin, most people get it the wrong way around and they look for cash flow first.
\nA really good example, Kevin, was a couple of weeks ago a new investor \u2013 somebody who hadn\u2019t invested before but picked up one of my books at the airport \u2013 came along and said to us, \u201cMichael, I want to buy an investment property because I\u2019m actually cutting back my hours, I\u2019m going to have another baby, and I want the property to pay for the school fees for my first child.\u201d She assumed, from a thing she\u2019d read in the magazines that she could actually buy property and it would spit out enough money to pay for school. Then others say, \u201cI\u2019d like to buy an investment property because it\u2019ll pay for my holidays.\u201d
\nResidential real estate doesn\u2019t work that way. In my mind, residential real estate is a high-growth, relatively low-yield investment, and if you do get some cash slow, Kevin, it\u2019s not hundreds of dollars a week, it\u2019s not enough to change your lifestyle
\nKevin<\/b>:\u00a0 Michael, that makes so much sense to me. You\u2019ve actually swung that whole argument around. But I can really understand why someone who\u2019s just starting out, maybe limited cash flow, looking at it and saying, \u201cWell, I have to make this thing pay off so that I can actually let it grow.\u201d But you\u2019re saying it\u2019s the other way around.
\nMichael<\/b>:\u00a0 You\u2019re right, Kevin. The common philosophy is that \u201cI need more cash flow.\u201d That\u2019s what most Australians say, because the money runs out before the month does. But the trouble is if you look at the result of most investors, you\u2019re going to find that half sell up in the first five years, and of those who stay in the property game, less than 8% own more than two properties \u2013 92% never get past their second property \u2013 which means that if you do what everyone else does, if you listen to what everyone else says, you\u2019re going to end up getting the same results.
\nKevin, it\u2019s just too hard to get the deposit for your next property out of a\u00a0<\/b>couple of dollars a week positive cash flow or out of your savings. So, the way you grow a substantial portfolio is through capital growth.
\nBut, Kevin, you actually can have your cake and eat it too. What I\u2019ve been proposing is that you buy a high-growth property, a property in an area where it\u2019s going to have substantial capital growth and over time, rental return, and then you make it a high-yield property by adding value.
\nYou\u2019re going to increase the value of your property, but more importantly you\u2019re going to increase the rent because it\u2019s more attractive. It\u2019s going to give you good depreciation allowances. And it\u2019s very likely that you\u2019re going to find a property that had a reasonable amount of negative gearing could well be cash flow neutral, or even a little bit cash flow positive, because you\u2019ve manufactured the rental returns and the capital growth.
\nThat\u2019s, in my mind, having your cake and eating it too.
\nKevin<\/b>:\u00a0 Michael, many people will just look at it and ignore the fact that as a property grows, or you get good capital growth, you therefore get a lot more equity in it. You can then use that equity to gear, to help you get into the next property.
\nMichael<\/b>:\u00a0 Exactly right, Kevin. And the other thing, of course, is as the property goes up in value, so does the rental. A high-growth property, over time, will have higher returns than a lower-growth property that isn\u2019t growing as fast, even though it starts with a better return.
\nI think the other point, Kevin, is that you make your money in property in four ways. You make it out of capital growth, you make it out of rental returns, you make it out of the tax depreciation and other benefits \u2013 not that that\u2019s a reason to invest in it \u2013 and you make it out of forced appreciation by manufacturing some capital growth.
\nBut capital growth\u00a0is\u00a0<\/i>income. Sure you can\u2019t bank it in the short term, you can\u2019t eat it, but capital growth is income because you can borrow against it, and in turn, you can use it to make more money.
\nKevin<\/b>:\u00a0 Great talking to you. Michael Yardney from Metropole Property Strategists.
\nThanks for your time, Michael.
\nMichael<\/b>:\u00a0 My pleasure, Kevin.<\/p>\n","protected":false},"excerpt":{"rendered":"

A question from a listener about if it is best to have a property return cash or capital growth has prompted a discussion with Michael Yardney. Transcript: Kevin:\u00a0 Here\u2019s a question we\u2019re asked from time to time: how do you decide between capital growth and…<\/p>\n","protected":false},"author":176692471,"featured_media":11043,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[34,10,11,13,36,25],"tags":[101],"class_list":["post-11042","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-topic","category-kevin-turner-sponsored-channels","category-kevin-update","category-latest-story","category-property-investment-topic","category-sponsored-channels","tag-podcast"],"yoast_head":"\nWhy capital growth trumps cashflow - Michael Yardney - Realty Talk<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/channels.realty.com.au\/realtytalk\/why-capital-growth-trumps-cashflow-michael-yardney\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why capital growth trumps cashflow - Michael Yardney - Realty Talk\" \/>\n<meta property=\"og:description\" content=\"A question from a listener about if it is best to have a property return cash or capital growth has prompted a discussion with Michael Yardney. 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