Expert Advice with Kate Forbes
If you’re thinking you can invest for cashflow to grow your wealth, I have news for you.
It never has been, but especially in 2020 in the current investment environment, chasing cashflow might not be the most financially rewarding decision.
Here’s why – and what you should do instead.
What are high cashflow properties?
First, you may be wondering what it means to invest in cashflow properties.
In terms of property investing, you can either invest for cashflow or capital growth.
The choice is entirely yours, depending on your strategy, but there are many factors to take into account.
Put simply, when you invest for cashflow, you receive regular cash income from that investment that is in excess of the cost of owning it.
Cashflow investments are properties with a higher rental yield and a resulting rental income that add up to more than the expenses generated in keeping the asset (such as maintenance, repairs, property management fees, and so on).
For instance: if the property costs you $500 per week in mortgage interest, council rates and management fees, but it earns $600 per week rent, then you’re receiving a positive cashflow of $100 per week.
Cashflow investments are favoured for their higher income, although investors need to be aware that it often comes at a trade off of lower capital growth.
Doesn't that sound like a great way to invest?
Sure it does – in theory.
In reality, however, investing for cashflow comes with some definite downsides.
It can be a fantastic strategy under the right circumstances and for the right investor, but investors in 2020 should keep in mind that interest rates are the lowest they’ve ever been.
This means that with almost any property you consider investing in, a decent cashflow will be likely!
That doesn’t necessarily mean it’s a good investment prospect, though.
It’s simple maths: if a mortgage costs 3% and the rental yield is 6%, then the investment will generate more profit than it costs.
But it is important to keep in mind a few other factors, including tax: given that these investments generate income, you will need to pay tax on that income.
This aspect alone can make it quite difficult to build a substantial amount of wealth based off cashflow investing, especially if you’re a high income earner.
Another potential downside to cashflow investing is the location and market issues that can impact your property.
Cash flow positive properties tend to be in secondary or regional location and, in general, they can be more heavily affected by market fluctuations and economic cycles than more solid, capital city locations.
These locations also have less market depth form affluent owner occupiers and less scarcity so values increase much more slowly than well located capital city properties.
So – how can you invest smarter in 2020?
Instead of investing solely for cashflow, invest with capital growth at the top of your wish list.
With interest rates so low, the holding costs on owning an investment property have never been more affordable, so you may be able to use this opportunity to snap up some capital growth investments that would otherwise have been out of your price range.
To do this…
Do you need a high cashflow property in order to invest? Or do you have more than enough disposable income to sustain a negatively geared, high growth investment property?
Why do you want to invest in the first place: to own several properties outright, so you can live off the rental income in retirement? To make a profit and then plough those proceeds into your own home mortgage?
Once you know your goals, you can come up with a clear cut strategy to help you work towards them.
Explore all the options, taking into consideration your own personal circumstances – and when in doubt, seek some professional advice.
All of the above information is designed to educate, and doesn’t mean you can’t or shouldn’t invest for cashflow in 2020.
Just be sure to do your research and due diligence, to ensure that the property you buy is going to help you reach your property and wealth creation goals.
Remember...cash flow keeps you in the game, capital growth gets you out of the rat race.
Kate Forbes is a National Director at Metropole Property Strategists. She has over 20 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a Chartered Financial Analyst (CFA).
She is a regular commentator for Michael Yardney’s Property Update
Read more Expert Advice from Kate here!
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.