Mar 19, 2018
What's the right investment strategy now that we've
moved to the next stage of the property cycle?
When it comes to property
investing, you will often hear two conflicting
philosophies.
Some say you should invest for
capital growth, and others say you should invest for positive cash
flow.
Now that we are in a period
where capital growth is going to be lower, more investors are
wondering if they should change their investment strategy and look
for cash flow positive properties.
This is exactly what we discuss
in today’s show.
The first half of the show we
talk about finding the right investment strategy,
and in the second half we talk about finding the right
property.
So whether you’re a beginning
investor or a seasoned pro, there’s something for you.
What’s the Right Property Investment Strategy for This
New Phase of the Cycle:
- More
beginning investors tend to invest in cash flow positive
properties. On the other hand, successful investors - those who’ve
built a substantial asset base grow their portfolio through
leveraging the capital growth of their investments.
- While
cash flow positive properties allow you to get short term income,
they will never allow you to accumulate enough equity and assets to
become financially free.
- The
few extra dollars a week in cash flow that you might receive isn’t
going to make a difference in your lifestyle, but the lack of
capital growth is going to hamper your ability to get the deposit
for your next property. And the lack of rental growth is
going to hamper your ability to service more debts.
- When
interest rates rise, and the will sooner rather than later, a cash
flow positive property can become cash flow negative – an you lose
out because you don’t have the cash flow and you don’t have the
capital growth.
- Investors should focus on building their asset
base. Asset growth first and then cash flow.
- You
should only buy properties with a high land to asset ratio.
- The
first phase is the accumulation
phase. This is where you
build your net worth and asset base. You can speed things up by
manufacturing capital growth through renovations.
- The
next phase is the transition
phase. This is where you
lower your loan-to-value ratio after you have built an asset base.
Then eventually you can.
- Live off the cash
machine of your investment
property portfolio
- You
have to get your investment phases in the right order.
- When
you retire the majority of your assets will be the capital growth
of your property.
- Setup
the correct loan structures before you buy to cover shortfalls for
two or three years.
- You
need to invest in high quality
“investment grade”
properties.
The Big Difference Between Winners and
Losers:
- Most
successful investors realize that success is a mindset. People fall
into two groups those who make excuses and those who don’t. Winners
stop themselves from making excuses, and they get the job
done.
The Right Property for This New Phase of the
Cycle:
- We
are now in for a period of lower growth for a number of
years.
- There
is no such thing as the perfect investment.
- Strong means you’ll get capital appreciation at
wealth producing rates of return.
- Stable means your asset won’t fluctuate in
price much.
- Look
for an investment that is strong
and stable
- steady cash flow.
- Liquidity either through selling or borrowing
against the investment.
- Easy
management.
- A
hedge against inflation.
- An
investment with good tax benefits.
- Look
for properties with
- I’d
take stability in my investments over liquidity.
- Put
your money into a “how to” investment such as an established
capital city property.
Links and resources:
Some of our favourite show quotes:
“I tend to see more successful
investors, those who’ve built a substantial asset base, grow their
portfolio through leveraging the capital growth of their
investments.” Michael Yardney
“If you buy in a low capital
growth area, your rents won’t increase as much as properties bought
in a high capital growth area.” Michael Yardney
“The few extra dollars a week in
cash flow that you might receive isn’t going to make a difference
in your lifestyle, but the lack of capital growth is going to
hamper your ability to get the deposit for your next property. The
lack of rental growth is going to hamper your ability to service
more debts.” Michael Yardney
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