In property circles, there’s always been an argument about growth versus cash flow.
Should you buy in good locations and blue chip suburbs in Sydney and Melbourne or should you chase the higher yields on offer in the smaller capital cities and regional areas?
The reality is that there is no right answer and the way you should look at this question depends on your personal circumstances and what you’re hoping to achieve.
Many people believe that cash flow is the answer because it’s able to produce income for you every week. My take on this is that blue-chip property can not only produce more income, it can also achieve far higher growth over a long period of time.
So how does a blue chip property portfolio actually produce money for you to live off?
Let’s take a hypothetical example of a property portfolio that is worth $5 million. As we’ve seen over the past few years, property prices in good locations can grow very rapidly. We’ve seen over 40% growth in many areas of Sydney in just a short period of time, but let’s say conservatively that our property portfolio increases by just 20% in a few years.
That takes the value of the portfolio to $6 million, representing a $1 million increase in equity. Now, the big assumption here is that you have an income that can allow you to continue to borrow from the banks.
I personally favour a blue chip investment strategy, because I have my own business and am able to control my income to a certain degree. That’s why this type of approach is a great fit.
When we have the extra $1 million we can hypothetically refinance and withdraw $800,000 (80% to avoid Lenders Mortgage Insurance) and then put those funds in an offset account. While that is technically debt, it’s not debt until we use it.
But what this does, is give us a large cash buffer that we’re able to use to either continue to invest or use to fund our lifestyle. And the great thing about this is you don’t have to pay tax on that money.
Compare that to generating cash flow from that same $5 million property. Even if you could manage to draw out a positive cash flow it’s likely that your positively geared portfolio would only make a fraction of that every year and that would also be subject to income tax.
Would you rather have $800,000 today to invest as you see fit, or $50,000 per year that you need to pay tax on?
Once again, this type of approach is not for everyone. In my case, I’m young, I own a business and I’m prepared to not only take on some risk with my portfolio, but I’m also willing and able to make up the cash flow shortfall each year through my income.
If you were Mum and Dad investors approaching retirement age, then this type of strategy might not be for you. Again, it all depends on your personal circumstance and what you’re hoping to achieve. That’s where the best buyers agent in Newcastle come in, we help investors find their ideal investment property based on their circumstances and goal.
There are many ways to skin a cat, but it’s important to understand that just because you’re investing in high-quality properties in highly desirable locations doesn’t mean you won’t be able to access any cash flow along the way.