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Now that the effects of the Australian Prudential Regulation Authority and the royal commission into banking are being felt far and wide, would-be property investors are finding it increasingly difficult \u2013 and often impossible \u2013 to obtain finance.<\/p>\n
Since funding is becoming a scarce resource, borrowers need to be much more strategic about their investing decisions.<\/p>\n
When pulling together your strategy and deciding what type of property to buy next, many investors will ask themselves whether they should be buying a cash flow property or a capital growth asset \u2013 but it\u2019s the wrong question to ask, says Philippe Brach from Multifocus Property and Finance.<\/p>\n
\u201cWhen people talk about capital growth versus cash flow properties, it\u2019s the wrong debate to have,\u201d he says.<\/p>\n
\u201cWhen you\u2019re going for cash flow properties, they\u2019re usually in a regional area where you\u2019re not going to get a lot of capital growth, but you get a better rent to compensate for that. An example of this would be Mt Isa \u2013 the returns are very high there, but it is a town that relies on one mine, and when that mine closes what is the economy of the whole area going to do? If it collapses, then so does the value of your asset.\u201d<\/p>\n
Brach, who is the author of\u00a0Creating Property Wealth in Any Market<\/em>, says he doesn\u2019t generally believe in investing solely for a positive monthly return, though he does acknowledge the role that cash flow plays.<\/p>\n \u201cCapital growth is the name of the game, but cash flow is important. You don\u2019t want to get into a situation where interest rates increase and you\u2019re under severe financial pressure because you can\u2019t afford your repayments,\u201d he says.<\/p>\n In that case, how do you strike the perfect balance and build a property that moves your wealth forward without costing you a fortune month to month?<\/p>\n \u201cSome properties lose money, some make modest gains, and some are excellent investments. Performance varies dramatically between locations, and even within an individual suburb there can be great disparity,\u201d she says.<\/p>\n \u201cBut what clouds the issue even further is the fact that there is no universally accepted framework for measuring performance.\u201d<\/p>\n Most people decide to invest in property because they want to accumulate wealth, Morgan explains, so they can ultimately experience financial freedom. However, the co-host of\u00a0Location, Location, Location Australia<\/em>\u00a0on Foxtel and\u00a0The Elephant in the Room<\/em>\u00a0property podcast, says \u201cthis dream won\u2019t eventuate if they hold a property that doesn\u2019t perform\u201d.<\/p>\n The consequences of a poor performer could include limited ability to buy or upgrade your family home. Furthermore, the opportunity cost of \u201chaving your money tied up in a property that is not growing in value cannot be underestimated\u201d, she adds.<\/p>\n \u201cI\u2019ve always believed that property investors should focus on capital growth rather than yield, because if you simply want to derive an income, there are other less risky and more liquid investment vehicles,\u201d Morgan says.<\/p>\n \u201cIf you want positive cash flow because you can\u2019t afford to buy in a good growth area or you want to quickly build a portfolio, then I suggest you look carefully at the risk you\u2019re taking on.\u201d<\/p>\n Choosing your property wisely<\/strong> \u201cIt\u2019s a well-accepted principle that you can\u2019t have both at once. More than that, the areas with the greatest yields are often the lower socio-economic areas where locals don\u2019t buy the majority of property \u2013 investors do,\u201d Morgan says.<\/p>\n \u201cHowever, if there is no local demand for property, when the investors pull out their money there\u2019s only one way for prices to go, and it could be years \u2013 sometimes even decades \u2013 before you see any sign of a recovery. In order to offset the loss of capital you\u2019ll need to get awfully high rent, and even a yield as high as 8% simply won\u2019t cut it.\u201d<\/p>\n \u201cThere is a way to magnify your returns in an A-grade location, and it requires you to fine-tune your property selection\u201d<\/strong><\/em><\/p>\n \u201cIt\u2019s possible to have a lemon in blue-chip suburbs, and even a B-grade property can create opportunity loss.<\/p>\n \u201cFor example, one property I know of \u2013 a small terrace in Sydney\u2019s upper-crust in-demand Balmain \u2013 has actually lost traction against the rest of the market to the tune of $180,000 over 12 years. The longer the owners hold it, the further away from the rest of the market it will fall.\u201d<\/p>\n While Morgan is not an advocate for cash flow performers, she stresses that cash flow must be considered \u2013 there\u2019s no point in overcommitting to a property for long-term wealth creation if you\u2019re going to struggle to keep up with it financially along the way.<\/p>\n \u201cInvesting in low-risk property will require cash input for some years, so you\u2019ll need a good income not only to get the loan approved but also in order to maintain the investment,\u201d she says.<\/p>\n For investors who are keen to find one of these ideally balanced properties, which will deliver long-term capital growth without the investor having to pitch in thousands of dollars per year to hold the asset, Morgan says the secret is simple: it all comes down to expert property selection.<\/p>\n \u201cProperty is a long game, and I favour blue-chip suburbs, because over time these locations have the foundations to deliver sustainable capital growth. However, there is a way to magnify your returns in an A-grade location, and it requires you to fine-tune your property selection,\u201d she says.<\/p>\n \u201cYou can achieve this by understanding the characteristics that appeal to the largest proportion of buyers in any given suburb, and making sure your property is well maintained.\u201d<\/p>\n![\"\"](\"https:\/\/i0.wp.com\/au.res.keymedia.com\/files\/image\/YIP%20136%2044-47%20risky%20strategies.jpg?w=1060&ssl=1\")
Differing performances<\/strong>
\nIt\u2019s a common misconception that all property goes up in value, but according to Veronica Morgan, principal at Good Deeds Property Buyers, this is simply not the case.<\/p>\n
\nIt\u2019s commonly accepted that when you buy for yield you are typically sacrificing capital growth.<\/p>\n![\"\"](\"https:\/\/i0.wp.com\/au.res.keymedia.com\/files\/image\/YIP%20136%2044-47%20green%20dollar.jpg?resize=275%2C360&ssl=1\")
That said, it\u2019s essential that investors understand that not all property performs at the same rate in these areas, Morgan adds.<\/p>\n