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Capital gains vs high returns

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  • Capital gains vs high returns

    Im interested to get the over all consensus on this topic by the majority!

  • #2
    A mix of both.
    Traditional theory says to have some cash flow properties supports a lower cash flow High capital gain property.


    • #3
      Capital gains vs cashflow.

      Agree with a mix of both. In the beginning you need cashflow to service mortgages. Long term capital growth is more important later for the value of the portfoliio as cashflow requirements are less due to lower leverage.


      • #4
        nice to have the comments of professionals.
        would there be a leaning towards high returns in the first instance given they have the benefit of capital gains in addition?


        • #5
          Not necessarily. Generally speaking high returns come from lower priced property and therefore lower capital growth. I like property that has land on the back to build another dwelling. Capital growth is much faster this way.


          • #6
            Hi. This is the big question isn't it. It really comes down to having a good strategy based on where your starting point is. How much equity you already have etc. I suggest that the best way forward is to actually create equity and capital gain by buying well in the first instance and adding value to the property. You can sit down with a good broker and come up with a plan for your first year of investment and what cashflow etc is needed. Depending on your particular income situation, the need for cashflow may not actually be as important as the need to get gains. Capital gains without working on a property come when there are strong fundamental drivers in place. The main ones being population growth and a shortage of land or development. ie. Supply and Demand issues. The places with that continuing to happen are Auckland and Christchurch. With interest rates rising over the next couple of years, investing in areas without strong fundamental drivers for capital growth is pointless. Unless of course you are buying incredibly well and adding value. Expert investors know what they need to do in regards to a balance of capital gain vs high returns based on their own investment strategy. The first thing I would do is to clarify that. You can then make a clear plan. I'm sure that experts on here will be happy to give their opinions as you come closer to your particular personal strategy for building a strong portfolio. I personally, if you are just starting out. Would focus on making sure the first property is a win for you and it does not restrict you from investing further. Ie. It's cashflow is reasonable enough to service or nearly service itself and you either through purchasing well or improving, create a positive equity position from the beginning. Then. You can move to your second. Matt


            • #7
              Too solid a lump of text to read, sorry.
              Short sharp sentences much easier to read.
              "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


              • #8
                Sure. Ok. Will do.


                • #9
                  A lot comes down to affordability.
                  With capital gain property you will eventually hit a wall where you don't have enough income to pay the mortgage shortfall.
                  If you mix cash flow and capital gain you can continue buying for longer.
                  If you have enough income you can forgo some cash flow properties if that is your want.


                  • #10
                    ^ Along the same lines.

                    Some borrow too much in the first place.
                    They start to panic with a short vacancy period due to cashflow worries.
                    They then accept a higher risk tenant.
                    They end up with large costs when problems surface.


                    • #11
                      seems interesting the downside to capital gains property is if you get too many youll go broke but on the flip side you can never have to many property's returning high yields?


                      • #12
                        Have a look at this thread, http://www.propertytalk.com/forum/sh...r-capital-gain

                        Most high yielding properties still struggle to make a positive cashflow, once true r&m is put in and interest rates at reasonable levels. Unless you have large equity, but then a low yielding property would be positive with no mortgage too!

                        If the property is not making cash, and you need capital gain to make it work. If you don't expect capital gain, and you don't get cash from your rental then why hold?

                        I think number 1, you need a property in a good location that will go up in value.

                        Number 2, you need reasonable cashflow overall (and secure cashflow - could be work or business too), so that you can hold it for 20 years. For most this will mean break even.

                        Long term I think it makes sense to pay down the mortgage quickly, so that then you start to gain income. But with full mortgages, even high yielding properties struggle.

                        Unfortunately most investors want get rich quick schemes, and for most property is a 10 year plus investment, to slowly pay down the mortgage, slowly get gain in value and for rents to slowly go up.

                        Book a free chat here
                        Ross Barnett - Property Accountant