“What do you mean strategy” I hear you say! Don’t fear, we are here to help you understand! Note: Always consult a professional.
Surprise surprise, it’s not as easy as throwing money at a house/apartment and reaping the sweet sweet fruits of early retirement.
To preface, we are talking about scenarios here that assume a ‘passive investment’ in property. This assumes the investor is putting his money in, and leaving it to effectively do it’s thing. This is opposed to an ‘active investment’, whereby you may increase the cash flow potential of the property by developing further, or renovating, which involves financial outlay, and lots of time.
‘Passive investment’ assumes a minimal time investment.
There are generally two main strategies when it comes to investing in property. As a general rule, you’ll often have to opt or aim for one or the other, however there are occasions where you can take full advantage of both.
This depends entirely on your circumstances. Which reminds me, everyone, and every property is vastly different. Investing is sadly not an exact science, and with so many different variables, there is no simple answer.
Make sure to take guides like this as general in nature only, and to seek professional advice from your trusted advisors, such as Financial Planners, Accountants, or Buyers Agents for example.
A cash flow investment strategy suggests that you should invest in property that can generate high rental returns, in order to achieve a positive cash flow. This does not just include your mortgage repayments, but also includes any other outgoings, such as strata, bills and maintenance where applicable.
A capital growth investment strategy suggests that you should invest in property that achieves a higher increase in value over a long term period. Generally in Australia, properties with a high capital growth rate have a lower rental return (relatively speaking of course).
What is important?
There is never a correct answer, and again can depend on your exact circumstances. There are times where cash flow is important in the structure of your investment portfolio, and times when capital growth is more important to consider.
It’s important to analyse the situation you are in, and in most cases, seek professional advice from Financial Planners, Buyers Agents etc.
In most cases, it is important to look at the best of both worlds. Having a property that generates a high enough return where it is not just a draining money pit, and requires minimal financial outlay, but also increases at a relatively attractive rate in value. It is also important to view cash flow not just as a number, but also in terms of frequency. It is equally if not more important that you have a regular cash flow. You’d rather be out of pocket $50 a week, than 1 month in a year.
How to find (or create) the best of both worlds?
There are ways to find properties that have a balance of capital growth potential and cash flow.
Firstly, make sure you are buying a property with a realistic rental expectation. That comes down to the property, and also you as the owner. You must be realistic with price, and rental return, and prepare for the worst possible scenario. If the strategy works in that instance, it works even better when things take a turn for the best.
This is important in assessing a regular cash flow. You want it to be rentable, in the shortest amount of time.
Many buyers will seek properties where they can add their own touch. Buying a property that is slightly under the weather (but not too under the weather) can be a great opportunity to add some touches, get your hands slightly dirty and effectively add your own value. By sprucing up the place, adding some touches, slight renovations, and maybe new paint, you can increase the rental return, as well as creating some capital growth for yourself.