Every property investor is looking for the secret to success aren’t they?
Some spend years searching for a mythical investment strategy that will be their path to untold riches.
Alas, while they are on their unhelpful hunt, they miss golden opportunities that could have helped them achieve their financial goals and dreams much earlier.
And one of the most common mistakes that novice investors make is being fixated on cash flow instead of on capital growth, which is where the secret really lies.
To prove my point, let’s take a look at some capital growth facts.
1. It’s the key to duplication
The thing is most people’s incomes means they only have the capacity to invest in one property at a time.
These days you can’t invest in property without a deposit and it’s always been hard to save one of those.
The key to growing your portfolio is duplication, which necessitates more deposits.
It’s highly unlikely that many people can save multiple deposits over their lifetimes.
But what they can do is use the capital growth (or equity) in their properties instead.
If they’d invested in cash flow properties, while they might have solid rent coming in, it generally won’t do anything to help you with a deposit for your next property.
2. A question of debt
How do you feel about carrying debt?
Some people can’t sleep at night for fear of a market crash or interest rate rises.
But, as I’ve said before, good debt like mortgages on investment properties can provide you with leverage to magnify your gains.
Yet in order for this to work, you need to have gains to start off with, which isn’t necessarily the case with cash flow properties.
I’ve seen more than my fair share of investors whose borrowing capacity has been limited by owning low capital growth assets, which prevent them from borrowing to buy better performing properties.
3. Less than ideal liquidity
It should come as no surprise that cash flow properties have less than ideal liquidity.
What I mean by that is they can more difficult to sell if your circumstances change.
Plus, you’ll likely walk away with very little additional proceeds from the sale because it hasn’t increased in price overly much.
Selling real estate also carries high divestment costs such as agent fees and advertising, which will further eat into any potential profits from a cash flow property.
On the other hand, an investment grade capital growth property will be more attractive to potential buyers and you’re likely to walk away with much more money in your back pocket after the sale.
4. Equity means choices
My final point is that if you buy a property that doesn’t grow in value you have to hope that the rent continues to cover the costs of ownership.
But if you buy one that goes up in value, you have a number of options that increase over time.
If you want to, you could use the equity to buy another property and maybe refinance in order to free up cash flow for other investments.
Another strategy could be to renovate to add value or you might choose to sell it at the point of retirement in order to pay down debt.
So let’s clarify…
Chasing a magic property investment formula can be a fruitless exercise and if you do what most property investors do, you’re likely to get the same result – your wealth creation journey will come to a halt as while cash flow keeps you in the property game, it’s really capital growth that gets you out of the rate race.
That’s why I recommend you only buy investment grade properties – the type of real estate will always be in demand by owner occupiers and in locations that will continue to be desirable because of their proximity to infrastructure and amenities.
The fact of the matter is no one ever saved their way to financial freedom.
No, they invested wisely in assets that grew in value over time to provide them with a lifestyle everyone dreams of, but unfortunately relatively few accomplish.
If you’re looking at buying your next home or investment property here’s 4 ways we can help you:
Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.
Why not get the independent team of property strategists and buyers’ agents at Metropole to help level the playing field for you?
We help our clients grow, protect and pass on their wealth through a range of services including:
- Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family. Planning is bringing the future into the present so you can do something about it now! Click here to learn more
- Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property. Click here to learn how we can help you.
- Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
- Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.