With the latest RBA rate increase again making headlines, worries about cash flows are again starting to surface. Investors worried about paying their mortgages are increasingly focusing on yield to try and find a way to grow their property portfolio.
While cash flow is certainly an important part of property investing, I think it’s a mistake to focus on yield alone when you’re trying to build your portfolio.
For example, if your goal is to create a passive income of $200,000 per year, most people think that the way they have to do this is through purchasing positively geared properties.
My thinking on this has always been a little different and I believe that you are making a mistake if you think about your yield right now when you’re purchasing a property. For one, the yield and the interest rate that you’ll be paying will change over time. And secondly, even a positively geared property will still hurt your borrowing capacity in the eyes of a lender.
So, what’s the solution?
For me, it’s always about focusing on capital growth. I believe that you are far better off building a property portfolio that will be big enough that the yield can then support your financial goals. Not the other way around. In some ways, your cash flow is just a tax outcome and shouldn’t be the crux of your investment strategy.
At the same time, real estate might not even be the most effective asset class for cash flow, so when you’ve been able to build up a large enough portfolio, you then at least have the option of looking at different asset classes.
To build up a large portfolio by focusing on growth, I will always suggest buying the highest quality assets that you can in areas that have a long-term track record of capital growth. These types of locations include the Eastern Suburbs of Sydney, the Inner West, or the Northern Beaches, just to name a few.
You’re far better off focusing on growing your income or your own business and then funneling that money into your repayments, instead of trying to purchase inferior assets with higher cash flow.
When you take a longer-term perspective, you can also see how this is a reasonable strategy. In my case, I am carrying around $20 million of debt. The latest round of interest rate increases has seen my mortgage repayments jump to a high level.
And while that means I will need to reach into my own pocket to cover the shortfall over the coming years, I also understand that in 10 years’ time, the value of those assets will be far higher than they are today. So while I might lose out in the short term as rates rise, over the long term, I will be far and away better off because of the capital growth.
So next time you’re looking to make an investment decision, always revert back to the long-term picture. Stop focusing on short-term metrics when making long-term decisions.
Forget about what the cash rate is today, or the exact rental yield you’ll be getting, and focus on quality assets that will perform year after year. That’s how you truly get ahead and build real wealth.
And if you’re unhappy with your current financial position start investing in learning better skills that can help you earn more income in the short term, then use that money to invest in quality assets for the long term.
If you would like to know more, or speak with one of our expert buyers agents, feel free to reach out via the contact us page.
