Capital Gains vs Positive Cashflow Advice

[Mulpsy]

My situation is that I am in a position to buy my first investment property, and sooner the better really.

Due to my deposit of around $20k (and about $150k equity in my own home), if I buy a property around my home town - Napier and Hastings - the mortgage required will be too high to give the property a positive income. If I'm lucky it may just sustain itself.

I started looking at places such as Wairoa, Waipukurau and Dannevirk? where according to the property press I can make $30 - $50 per week profit as the house prices are lower and I wont have a very high mortgage (thats going by the rents stated in the property press - I read in another post that they may not be accurate?). However these places surely wouldn't have the same capital gains as Napeir or Hastings. And I would imagine the tenants would be of a lower standard.

So I'm stuck between getting a negative cashflow property that wont make money for a few years but has better capital gains, or a positive cashflow pad that has low capital gains. Whats the general preferance?

Any advice will be appreciated - I have a lot to learn!

Scott.

[Dean@Massiveaction]

Hi Mulpsy. Your question is a bit like asking what sort of dog you should buy or what sort of car to get. There are so many questions you need to answer before you or anyone else can suggest what to buy for your first IP.
What are your investing goals? How quickly do you want to achieve whatever it is you want to achieve?
You need to decide exactly what you want, timeframe it, then set buying rules. None of us can answer your question for you except to say that there is nearly always a trade off between cashflow and capital growth.
The real money in investing is always in capital growth, but if you don't manage your cashflow you can get stuck. Also buying in small towns is not a good capital gain strategy for the next couple of years. Hope this helps a bit!!

[spaceman]

Short answer

As Poomba said there is perhaps a lot more questions to be asked and thinking to do.

But in answer to your question.

I would go for the Napier/Hastings neg've geared, hi capital gain option.

Thats not to say that perhaps I wouldn't change my mind if other varibles were considered.

Also don't rule out getting both (pos've cashflow and hi cpital gain).... remember the deal of the century comes along about once a month.


good luck

Cheers
Spaceman

[BarryWilliams]

Hi Mulpsie

Why not stick to Napier/Hastings and try and find something that you can add value to. a 2 beddie that perhaps can be turned to a 3, or a sleepout that can be modified to a stand alone property will amenities for that extra income. I agree with the others in being careful about selecting a regional property where the returns may be greater, but the cap growth may be different, and also the rental pool is smaller, with a potential higher vacancy rate in the vent that the market heads south rapidly.

In my opinion stick with the recognised centres, find something that you can turn from slightly negative cashflow into positive through a value add.

cheers

Barry

[McDuck]

So I'm stuck between getting a negative cashflow property that wont make money for a few years but has better capital gains, or a positive cashflow pad that has low capital gains.
Scott.

Hi Scott.

Of the two options, The neg cashflow offers you a bigger set of possible buyers and renters.

in the bad times...this is a very desirable quality.

[NZGEMS]

Hi Mulpsy
Why not do both? I have a mix of nicer houses and some that people would call dogs!!! But the dogs certainly top up any of the negativity on the others some of the seminar gurus suggest buying 4 or 5 cashflow properties and one capital growth that way you personally dont need to put money in. This is what I have always done even before I heard the message for the first time, so when i did hear it I felt good as I was on the right track.

But it comes down as others have said to your goals, if you only ever want say 5-10 houses and are prepared to keep working in a job you love you could go for the negative cashflow then you would save a bit on your tax.

It is not my stratergy but. You will get many different views on here but we dont know your position and what is right for you all we can suggest is our own ideas.

One thing I would say though if you were starting with the high cashflow ones make sure they are tidy and in good streets so you always have tenants and start with them, once you have 2 or 3 or 4 then you could buy your capital gain property as you will have the income to cover it. I think in the market at present you would be safe doing that as we have had the main capital gain for a while now, even the small towns have had huge gains, on a percentage basis many have gone up more than the larger cities.

Interesting times but just remember what spaceman said, the deal of the decade comes along about once a month, I prefer to say the deal of the decade comes along about once a week, (or even every single day) so when you beleive that and are out looking you will find it every time.

best of luck with your investing future.
Robyn

[Propoholic]

Hi Mulpsy

I will highlight some of the home truths about +ve cashflow properties that arent promoted by seminar presenters, property finders or even property investors who havent experienced their properties performance beyond the boom phase of one property cycle.

A property purchase that is 100% financed will not perform as some magic cash cow over a 5 - 10 year period. In reality, an increased nett cashflow (at purchase) will only be created from adding value, renovation and development.

Investors that have amassed (in recent years) a supposedly large portfolio of +ve cashflow properties are slowly coming to the realisation that these at best will break even. Why is this? because they have discovered that real maintenance costs are ~ $4000 per year, damage will come along at $5000 - $10,000 per hit and tenant changeover is 6 - 12 monthly. A 10% gross yielding property looked great on paper with a $600 maintenance allowance and two weeks vacancy per annum. In addition, investors start to realise that there is a considerable difference in tenant quality between good and low socioeconomic areas. Properties sold from small town NZ or South Auckland have 9 - 12% yields because they are a higher risk. They do not have a higher yield to assist the next investor to cashflow the deal....is this a surprise?

Over the last four years there has been a plethora of promotions encouraging new investors to buy positive cashflow properties, this is often wrapped up with the following statements attached:-

"Buy positive cashflow"
"Buy high yielding properties"
"Buy properties that put money in your pocket"
"I've retired because I've purchased positive cashflow properties"
and then "Take action and bank the results"

Why has there been such an abundance of this type of property being marketed - because simply it is great business. Create a seminar business that sources properties from low socioeconomic areas and then promote the investing strategy (+ve cahflow properties) as desirable & one that will alow you to retire in the short term. Amongst the back drop of eager new investors, this business strategy is a no brainer. Unfortunately these promoters dont project any reality about +ve cashflow property ie that gross yield is determined by risk & hence geographical location.

We have been experiencing a flourishing property seminar/products industry that always rears its head during the boom phase of a property market. Seminar presenters, buyers agents and book/magazine publishers all make hay while the sun shines, they did in the 80's, 90's & as they are all doing now. Unfortunately, the majority of these businesses do not survive passed one property cycle.

As an investor, you have to survive through a number of property cycles, this will not be achieved by following the latest religious mantra. Get some advice from investors that have seen more than one property cycle and dont have a commercial agenda attached.

[MJU]

What type of investor are you??

Can I suggest you get hold of a copy of Andrew King's book Planning for Property success and pick through the basic types of investors there.


I also suggest you do some extensive (but simple) modelling of where your "portfolio" is going to go in the medium term. If you want to keep things real simple ignore tax altogether - your results will be just as illuminating, and esier to understand.

Your analysis needs to include your cashflow and your equity (LVR). See what a marked difference it has when you choose to (say) buy cashflow positive properties "at a discount" compared to cashflow negative properties that have shown capital gains in the past.

Throw in your view on where we are in the property cycle and you should have enough to reach some good decisions. Keiran Trass at www.hybridgroup.co.nz has written the book on the property cycle if you are not familiar with the term.

[Julian]

Another thought might be to pool resources with one, two or several others and buy a commercial property, or buy into a commercially syndicated property. Some people do very well with residential property, but I'm sure there are quite a few that get taken for a real nasty ride with bad tenants and the like. No investments are without risks, but there many ways to invest in property and it is important to find a way that suits your temperament.
Every so often I think I should spread my risk by having a few residential properties in the mix and then I get on this forum and quickly realise my temperament is not suited. I take my hat off to those whose is.
Julian