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Cashflow vs. capital gain - why not have both?

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  • Cashflow vs. capital gain - why not have both?

    The age old myth of capital gain areas vs. high yield/cash flow areas is once again being challenged.

    While there is no argument against some areas having more likelihood of Capital Gain over a long time horizon this is not the case for the broad majority of locations.

    It is wise to ensure you have the right cashflow FIRST because while you might hold an asset that is growing in value, if you can't pay the bills you may find you have a distressed sale on your hands meaning any gain you had on paper disappears.

    Reports of strong rent increases driving improved cashflows in Wellington on the back of 20ish % capital growth... CG is a paper gain, rent increases are cold hard cash!!

    Good to see healthy rent rises

  • #2
    It's not a myth Hype. More and more areas and towns have no cashflow so you have to learn to manage both. Except for the USA I can't think of a comparable market where rents keep pace with values.


    • #3
      The myth is that you can't have both... It's not that CG and rents rise in unison.

      There are markets all round the country that are high cashflow and are experiencing good CGs.

      As far as a time managment strategy, I'd rather have strong rent growth so I can use the cash now than have high CG and low/no rent growth that I either need to borrow against to release funds to use now in turn causing my cash flow to go backwards due to higher repayments. This means I'm free to use my time for whatever i choose... The downside to this is I can't claim my assets have doubled in value in 4 - 5 years... It might take 7-10 years... Which doesn't matter cause the the value is irrelevant - I'm quite happy not to have my name in the papers talking about the value of my assets.


      • #4
        The thought that 'cashflow properties' never go up in value, or go up in value slower than 'capital gain' properties can't possibly be true in the long term.

        I've said it before, but there's a case-in-point in my first rental, bought in Clendon Park in 2012 at more than 8% yield. Was told I'd never get any capital gain, but it's worth 110-150% more since purchase. Rents have also gone up 33% in that time.

        If some houses grow in value faster than others, it's just a matter of time before they start to look unreasonably expensive, and the 'others' start to look unreasonably cheap. Then the money starts pouring in a different direction.
        AAT Accounting Services - Property Specialist - [email protected]
        Fixed price fees and quick knowledgeable service for property investors & traders!


        • #5
          The myth is that you can't have both
          Well you can't have both in the same property anymore if that's what you mean yes. Of course all property increases in value almost anywhere but markets like Auckland with a much higher base value have a perception of higher gains because the dollar amounts are larger.


          • #6
            Originally posted by Bobsyouruncle View Post
            Well you can't have both in the same property anymore if that's what you mean yes.
            You can have both in the same property, it's just a matter of degree. Several provincial centres have markets with cashflow positive properties and are showing good growth. Not the same type of growth as Auckland, admittedly. But the statement was that you can/can't have both, not that you can/can't maximise both.

            So I guess it's a matter of weighing up no cashflow/high growth vs. ok cashflow/ok growth and which is best for you.
            My blog. From personal experience.


            • #7
              Of course the unknown is the future CG.
              Looking specifically at one property that Colliers marketed to us late last year
              4343 Great North Rd Glendene Auckland
              The general concensus (from people I passed the details to) has been a poorer Auckland area that will never get growth and that investment in Mt Eden / Remurea on a 2.2 net yield is the way to go
              My mate purchased at a 10pc net yield but (with self management almost 11pc)
              Personally I am not convinced going forward (low term) low yield propertie's CG can compensate for the lack of cash flow.


              • #8
                In some cases good above average cashflow properties will have less capital gains than average: just look at many apartments (who don't get much in the way of the land value portion of capital gains increases)


                • #9
                  People buy cashflow when they buy a property and in a boom market folks will pay more for it because (perceived) risk is lower so you certainly can have your cake and eat it too. Commercial changes hand at yields (cap rates), while residential is a bit different with other drivers.
                  Free online Property Investment Course from iFindProperty, a residential investment property agency.