Imagine if the sausage sandwich stand outside Bunnings only offered you ‘bread’ or a ‘sausage’!
Residential property investors were once divided over their preference between properties they felt offered the best strong capital growth potential, or properties offering positive cash flow. Today we require equal portions of both elements, but that’s not always been the case.
In the past, these two opposing perspectives often fuelled extreme examples that increased the risk profile of both strategies.
‘Capital Growth’ Bulldozers
Blue-chip postcodes perceived to be the areas that would experience the strongest capital growth are often heavily targeted by investors following this strategy. These locations offer low rental yields (often 2.5% or less) typically resulting in many of these investors suffering heavy lifestyle draining holding costs while they patiently await growth to their property values.
Once the purchasing costs (such as massive stamp duty fees) are considered, annual land tax obligations are paid, all holding costs and the Agents sale commission are calculated, these properties can take years to even reach a value where they could be sold at a break-even point. This doesn’t prohibit some high-income investors from ‘bulldozing’ through these expensive challenges, many delaying retirement and countless lifestyle opportunities, to emerge very wealthy many years down the road.
Yes, substantial wealth can be created, but at what cost?
‘Positive Cash Flow’ Addiction
A trend emerged in the ’90s that saw lower-income earning investors focus on positive cash properties. Some investors pushed this cash flow to the extreme by targeting high-risk markets with incredibly affordable housing that allowed them to accumulate multiple properties quickly.
Over the following years, this trend started to look more like an addition as banks increased their support, and as small regional towns started to offer the promise of creating ‘overnight millionaires’ thanks to a rapidly emerging mining industry.
During this period, I was publicly criticised for my views on why investors should avoid chasing the ‘mining boom’. I pointed out the risks and encouraged investors to limit their exposure to a level that didn’t result in their portfolio becoming a house of cards if the mining boom ended. Sadly many investors lost everything, including their family homes, when this sector came crashing down.
Getting the Balance Right
Astute Investors now understand that there is a ‘sweet spot’ that offers reliable capital growth, smart cash flow and a low-risk profile.
I’ve learned that there are dozens of suitable property markets nationally offering this combination of elements at any given time. Allowing informed investors to limit their buying focus to our capital cities and the secondary cities in each state, dramatically reducing any unnecessary risks.