What is the best property strategy?

[tpr2]

What is the best property strategy?

Other than all the “alternative” methods that require time effort and expertise I would like to hear what people think is the best property strategy.

I often here it must be cashflow + and never negative gearing however I would like to challenge those two extremes.

If we consider that any investment fits into 3 big broad categories and lets cal those Cashflow +, cashflow with the potential for capital growth and Capital Growth with poor cashflow then it may help me in understanding where people are coming from.

My opinion is that it all depends on each individuals goal’s, resources and risk profile.
So to make a statement that all property investment must be cash-flow only or never negative gear makes me wonder if there has been two many years of the RM’s and Steve McNights of the world delivering seminars to our country.

To me a purely cashflow investment is something I would have when I wanted and needed income and as such I would not look at property as the vehicle for that. When I amusing a gearing strategy then I would require a property that provided both income and the potential for capital growth otherwise why on earth buy the property in the first place. Thirdly I may make a lifestyle choice and purchase a property that would provide very little income but potential for capital growth is above average.

As I read many stories here on PT I notice that the people who have actually done really well out of property are the ones who have purchased property that is cash flow strong but has great potential for capital growth. This allows for debt to be managed and the wealth comes from the property increasing in value. What I hear so often though is forget about growth go only for cash flow or cash flow is king.

What is also quite interesting is the definition of what makes a property cash flow positive or not. That seems to be an area of quite a lot of miscommunication.

My definition of cash flow property is one where if you borrow 100% of the property it will pay for everything from the rent. That includes the rates insurances etc.
It is way to easy to chip in a big deposit and then say hey I have a cash flow positive property.

Is this the definition others have for describing a property as cash flow positive? For many I suspect and I have seen it in the numbers provided by some of the seminar presenters you put in a 20% deposit and then the property becomes cash flow positive. That’s cheating J

So what’s the best strategy in my opinion…. Strong cash-flow with potential for capital growth and capital growth property in combination if you can afford it.

I would be interested to hear if anybody has actually become rich from property that has not had any capital growth. After all this is the formula purported by many a seminar presenter.

[Jurgs]

The successful property investment strategies I have seen all have one thing in common - they are long term strategies. Every investors circumstances are unique at each point they consider each property, and the factors they consider may be as much about their personal circumstances, as the property itself.

Clearly the optimum property is good cashflow, good capital gain , but securing those regularly seems to be an art not a science.

The investors I have seen over the years that are truly wealthy through property, have tempered their enthusiasm during a boom with well managed equity levels, buffers in place to cover unforeseen circumstances. Essentially these people have rules that they stick to that go beyond the price and yeild of the property.

The other thing I have seen is that people whose 'paper' wealth has been created in property over a relatively short timeframe, often lose it alot faster than they 'theoretically' made it. Specifically, any advice/seminar that involves the quick aquisition of multiple properties to create 'financial freedom' blah blah, usually ends in tears (in my experience).

Slow and steady, tortoise and hare - the appropriate analogies go back thorugh the ages.

[tpr2]

The successful property investment strategies I have seen all have one thing in common - they are long term strategies. Every investors circumstances are unique at each point they consider each property, and the factors they consider may be as much about their personal circumstances, as the property itself.

Clearly the optimum property is good cashflow, good capital gain , but securing those regularly seems to be an art not a science.

The investors I have seen over the years that are truly wealthy through property, have tempered their enthusiasm during a boom with well managed equity levels, buffers in place to cover unforeseen circumstances. Essentially these people have rules that they stick to that go beyond the price and yeild of the property.

The other thing I have seen is that people whose 'paper' wealth has been created in property over a relatively short timeframe, often lose it alot faster than they 'theoretically' made it. Specifically, any advice/seminar that involves the quick aquisition of multiple properties to create 'financial freedom' blah blah, usually ends in tears (in my experience).

Slow and steady, tortoise and hare - the appropriate analogies go back thorugh the ages.

Looks like we are on the same page jurgs.

Thanks again for the 3 way split strategy on the mortgages the other day too. I used it with a slight variation in a structure just this week, I added a Line of Credit based on the budget they completed that was equivalent to the amount they would repay over the next two years.

cheers

[Glen]

I'm of the thinking that it's basically all mindset.

Keep your modest house and pay it off (this is your backstop)

Keep your job ( with all tax advantages), but use all the facilities that your employer provides, to better yourself.

Use the 'system', tax and otherwise to your advantage.

(i.e. working for yourself in a small business, can actually stifle your financial progress)

Try and understand the tax system (i'm still trying to get my head around the basics, but I truely believe that understanding tax, plus holding property is my path to financial freedom).

Buy as many properties as you can afford on a buy and hold mindset.

[Jurgs]

I agree with most of that, but not 'buy as much as you can afford'

What are the characteristics of a 'buy and hold' market? I think people get this wrong - and buy as much as they think they can afford, and it turns out, that in the end they can't afford it.

If you buy a bit less than you can afford, and things turn against you, you might still be able to afford it till things get better again, and not lose your shirt.

[SmallBrain]

Jurgs

I agree that many who are in trouble now are the ones thought they could afford to hold a couple of years back when the interest rates were much lower, not forecasting the what ifs - higher interest rates, losing a job, higher expenses, etc.

It's only prudent to have a buffer and not always go for broke.

[Kerry Christian]

What to do

TPR2

Use the startegy that works in the current property cycle

Here is an example - Spec building or renovating to flick, ---------Is this a good strategy today ...NO

Was it a good stragegy in 2004 - yes

Why - in todays market you need to buy a bargain to sell a bargain and in 2004 - capital gain appreciation took care of the variations or over zealous property investors

[Jurgs]

BB, so what you're saying is; the trick is to read the market perfectly all the time?

That, I can not argue with.

[Bob Kane]

I think keeping your portfolio cashflow + at all times.
That is, more cash comes in than goes out.
The first investment will be the hardest and maybe you need a good deposit to get started.
Then as your cashflow builds up, buy more - either for cashflow or capital gain as you see fit.
But always have your portfolio cashflow +

Notice that this strategy means you can avoid the positive cashflow/capital gain dilemma. Don't avoid either - use both in your portfolio.

[exnzpat]

Different financial times call for very different financial strategies. The current strategy: Circle the Wagons!

Put emotion aside and act. Divest yourself of your dogs and shore up your premium properties.

And always, always buy back debt! Though, this is true in any market – this, at least, is at the heart of my strategy.

[tpr2]

I think keeping your portfolio cashflow + at all times.
That is, more cash comes in than goes out.
The first investment will be the hardest and maybe you need a good deposit to get started.
Then as your cashflow builds up, buy more - either for cashflow or capital gain as you see fit.
But always have your portfolio cashflow +

Notice that this strategy means you can avoid the positive cashflow/capital gain dilemma. Don't avoid either - use both in your portfolio.

Hi Bob
I agree. I wanted to start this thread because I notice a lot of broad sweeping comments like "only buy cash flow + property" or "never buy on the Gold Coast" and I ask myself "what is a cash flow property" Is it the one that is cash flow positive when you have paid no deposit, a 20% deposit or a 50% deposit?

My training for CFP states categorically never borrow money to invest unless there is potential for growth, which makes sense. After all why borrow 100k to invest in something that is still going to be worth 100k in 10 years time. Yes if the yield is higher than what you are paying for the debt that makes sense but as others point out interest rates will zip up before you know it and suddenly you are loosing money on something that will still be worth 100k in 10 years.

My portfolio have been built over nearly 20 years now and has grown nearly exactly as you describe it. Also expatnz I agree with the buying back debt comment (I think I do anyway, I take it you are talking about reducing debt in this market).


BB I did not include buying and renovating as a strategy in this lot because I don't consider that to be investing. I consider that to be working.

It's a strategy (sideline business) that will work like you said at that particular point in time however it is not an investment. You need to put a lot of time and effort into the renovating.

A strategy for making money, yes it is that, but so is building my business.

[Kre8eve]

3 way split strategy

Looks like we are on the same page jurgs.

Thanks again for the 3 way split strategy on the mortgages the other day too. I used it with a slight variation in a structure just this week, I added a Line of Credit based on the budget they completed that was equivalent to the amount they would repay over the next two years.

cheers

Please elaborate on this, or post a link to this discussion. Thx in advance!

[Bluekiwi]

Please elaborate on this, or post a link to this discussion. Thx in advance!

Sounds intriguing.

[watchful]

My personal take on this is that recent times have instilled a huge sense of greed among many investors. Keeping up with the Jones' type mentality.

Many property seminars promoted no money down, quick returns. A four year old could've thought-up a sound property investment strategy five years ago. Simply it would've been BUY - ANYTHING.

Now I think the misconception is that CF+ properties should be attained with 0% or low % deposit. This is incorrect.

As everyone has mentioned, when property is soaring, and credit is cheap, purchasing -VE geared properties can be good practice. This is on the proviso that you are comfortable making up the shortfall in funds. The problem with this strategy is that unless you are Graeme Hart, this will slowly erode your incomings until you can't buy a block of cheese. Some 'mentors' have promoted releasing equity in these properties to ease this burden, however when the market declines and the equity evaporates you are left without a shirt.

CF+ for me is not about 0%, 10%, 50% deposit or equity in the property. It is purely that the property or investment is not costing you to manage it. You are receiving positive cashflow from it. When people say cashflow is king then it is for the simple reason that if you own all CF+ properties (and have factored in a reasonable allowance for untenanted periods, no one industry towns, maybe the effect of recession on likely tenants etc etc) then it doesnt matter what economy is doing, you are still receiving positive cashflow. It is not costing you a cent.

My personal strategy is to buy good quality properties (although I have a few in small town NZ where there is a large shortage of dwellings that I purchased 5 years ago). Buy in areas where people want to live, not have to live. This often commands a higher price and you may struggle to do so with a low deposit to make the property CF+ however, I think the strategy is safer.

Our strategy, has been to buy property (ex state usually) close to Auckland city centre (Eden Terrace, Westmere, Grey Lynn) and top the mortgage up enough to ensure the rents we receive (based on 47 weeks tenanted) make them CF+.

Our net worth has certainly decreased in the last six months, however in the long term we think our strategy will pay off.

My 2c worth...

[watchful]

Fully agree with exnzpat. Servicing your debt should be priority.