06/12/2018
Now that the effects of the Australian Prudential Regulation Authority and the Royal Banking Inquiry are farther and farther away, potential real estate investors are finding it increasingly difficult, even the impossibility of obtaining funding.
With funding becoming a scarce resource, borrowers need to be much more strategic in their investment decisions.
When they develop their strategy and decide on the type of property to buy, many investors will wonder whether they should buy a property generating cash flow or a capital growth asset – but this is not the case. 39 is the wrong question to ask, says Philippe Brach of Multifocus Property and Finance.
"When we talk about capital growth versus cash flow properties, it's a bad debate," he says.
"When you're looking for cash-flow properties, they're typically in a region where capital growth is not going to be big, but you'll get better rent to compensate for that. Mt Isa is an example. Yields are very high, but it is a mine-based city, and when this mine is closed, what will be the economy of the region as a whole? If it collapses, the value of your assets does the same. "
Brach, the author of Creating Wealth in All Markets, states that he generally does not believe in investing solely in a positive monthly return, although he acknowledges the role played by the flows cash.
"Capital growth is the name of the game, but cash flow is important. You do not want to find yourself in a situation where interest rates are rising and you are under severe financial pressure because you can not afford your repayments, "he said.
In this case, how do you find the perfect balance and build a property that will advance your wealth without costing you a fortune from month to month?
Different Performances
It is often mistakenly believed that the value of all properties increases, but according to Veronica Morgan, director at Good Deeds Property Buyers, this is simply not the case.
"Some properties are losing money, some are making modest gains and others are making good investments. Performances vary enormously from one place to another, and even within the same suburbs, the disparities can be considerable, "she explains.
"But what further confuses the matter is that there is no universally accepted framework for measuring performance."
Most people decide to invest in real estate because they want to accumulate wealth, Morgan explains, so that they can finally experience financial freedom. However, the podcast co-hosts of Location, Location, Location Australia on Foxtel and The Elephant in the Room say that "this dream will not change if they own a property that does not run."
The consequences of a bad performer may include a limited ability to buy or renovate your family home. In addition, the opportunity cost of "keeping your money in a property that does not take value can not be underestimated," she adds.
"I've always thought that real estate investors should focus on capital growth rather than return because if you just want to generate income, there are other less risky investment vehicles. and more liquid, "says Morgan.
"If you want positive cash flow because you can not afford to buy in an area of ​​high growth or if you want to quickly build a portfolio, I suggest you carefully consider the risk you take. "
Choosing the right property for you
It is commonly accepted that when you buy for a return, you usually sacrifice capital growth.
"It is a well-accepted principle that it is impossible to have both at once. More than that, the regions with the best returns are often disadvantaged socio-economic areas where locals do not buy the majority of properties, but investors, "says Morgan.
"However, if there is no local demand for real estate, when investors withdraw their money, there is only one way to go for a price, and it can take years, if not years. decades, before you see any signs of recovery. To compensate for the loss of capital, you must obtain extremely high rent, and even a return of up to 8% will not reduce it. "
"There is a way to increase your returns to a level A location and it forces you to refine the choice of your property"
That being said, it is essential for investors to understand that not all real estate is behaving at the same rate in these areas, Morgan adds.
"It's possible to have a lemon in a luxury suburb, and even a Grade B property can create a loss of opportunity.
"For example, a property to my knowledge, a small terrace located in Sydney's much sought-after neighborhood of Balmain, has actually lost its appeal to the rest of the market, at $ 180,000 out of 12 years. The longer the owners keep it, the more it will fall away from the rest of the market. "
Although Morgan does not defend companies that generate cash flow, she points out that cash flow should be taken into account – there is no point in investing excessively in a property to create wealth in the long run if you have trouble keeping up financially. along the way.
"Investing in low-risk properties will require cash flow for a few years, so you'll need a good income, not only to get the loan approved, but also to maintain the investment." , she says.
For investors wanting to find one of these ideally balanced buildings, which will generate long-term capital growth without having to invest thousands of dollars a year to hold the asset, the secret is simple : Mr. Morgan all comes down to the selection of properties by experts.
"Property is a long game, and I'm in favor of high-class suburbs, because over time, these sites have the foundation needed to generate sustainable capital growth. However, there is a way to increase your returns in a Class A location, and this requires you to fine-tune your property selection, "she says.
"You can do this by understanding the characteristics that interest the greatest number of buyers in a given suburb and by ensuring that your property is well maintained."
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