Is positive cashflow an end in itself or is acheiving adequate capital growth also a neccassary determinant of good property investing. I am doing research in mining communities at the moment and have found some sound +CF porperties with good rental yields. However, capital appreciation on these properties are dismal – in some areas zero and even negative growth. I am also concerned about the volatility of such markets, for example, if major mining operations cease in the area it may become difficult to sell let alone rent.
Any comments is appreciated!
Regards
Teeksthe eternal argument, and it’s been discussed ad nauseum… if you do some searches you’ll find previous discussion
If you want +cash flow then you can forget major capital growth.
I want capital growth properties. Sure there are short term pains with negative cashflow then over time they grow and become cash flow positive.
As property investing is a long term proposition – I prefer capital gains.
But there is nothing wrong with a portfolio of both.
Hi Teeks,
Nothing wrong with just +CF properties but that is what they have to be. If you are concerned that the life of the positive cashflow is too short and that you may even take a hit when selling then it’s probably not that positive.The combination of +CF and any capital gains or losses until you exit your investment must be positive.
Sounds like you need to build time constraints into you calculations. You can also check out the expected lifespan of the particular mine which may help.
Cheers
JeffMy opinion is that if you can find property that has good cash flow and no capital gain then that is ok as long as,
– The cash flow will continue. That is the town is not turning into a ghost town
– A principal and interest loan is taken, if you have a longer term view (I know some will not agree with me on this). For me I think if the debt is going down and my cash flow is going up and its cash flow positive from day one. Then my net worth position is getting stronger daily.– There is a fair chance of renting it
– The property is not going to fall down any time soonEvery bit of cash flow can be put to good use in other places.
I do not agree that in order to get cash flow you need to forget about capital gain. I know a few people who have managed it.
MarkyMark
Thanks everyone for your responses!
Jeff, in relation to your statement:
“The combination of +CF and any capital gains or losses until you exit your investment must be positive.”
How positive is positive? I guess what i’m really asking is what kind of hurdle rate (%) +CF investors use to evluate a worthwhile investment (8%? 10%?). I know much of this depends on the investor’s goals (preference for risk, competing investment alternatives, etc…) but is there a benchmark return that is generally accepted as a minimum required rate of return on +CF propertives? I think Steve McKnight in his book uses a CoCR of 15%… however, to pick up on the point you made in your statement Jeff, this is a somewhat limited decision tool as it ignores what is happening on the capital side of the investing equation. Obvioiusly, if the property declines in value, the IRR of the investment would be less than 15%.
Shouldn’t any investment decision be made taking into account all future expected cashflows (ie. the IRR) and not just the annual yield on the initial cash contributed? I am wondering if any one out there would like to share with me what kind of finanicial analysis tool they use for evaluating a property investment (especially one that is positively geared) and what kind of hurdle rate they apply to his end.
Regards
TeeksI think it is pointless to purchase a property if there is not likelyhood of capital growth.
Getting a few dollars per week, even $50 per week, is not much money in the long run. (And you will have to pay tax on this). This is eating into your borrowing capacity as well. I would be especially wary of buying in small country towns at the moment.
It is possible to get cashflow positive property with the potential for high capital gains. I have recently seen someone buy something like this in Sydney.
Terryw
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“The combination of +CF and any capital gains or losses until you exit your investment must be positive.”How positive is positive? I guess what i’m really asking is what kind of hurdle rate (%) +CF investors use to evluate a worthwhile investment (8%? 10%?).
Teeks, this would depend on how much you put in yourself. Firstly you want a good return on your own money and secondly you don’t want to be left with a debt that cannot be serviced by the rent.
Trying to guess a rate of capital gain is a bit like crystal ball gazing.Population growth in any town is an important denominator on both rental growth and capital gains. It should be a factor in researching locations to invest in. Having determined those locations you can then apply the rules.
As suggested earlier, you would need to do some research on the mines to see how long they will be around
Cheers
JeffThanks again for your responses they have been very helpful.
However, what i’m really trying to determine is an acceptable IRR for a property over its investment life. This rate of return should take into consideraiton all forms of before tax cashflow such as the annual gross rental income and net proceeds from the eventual sale. I am hoping that i’ll be able to use this required return as a hurdle rate to determine whether investing in particular property is worthwhile or not. The other benefit of knowing what to use as a hurdle rate is that based on a predictable annual CoCR i would be able to calculate how much, in annual % terms, a positively geared property would have to fall in value for the investment to be undesirable.
Any thoughts??[buz2]
Capital growth is the key element of obtaining “wealth” – I am not referring to passive income.
If there is limited or no upside in a CF+ property, then in my book, there is no point acquiring it.
Real estate investment is all about risk management and your acquisition and exit strategies.
An investment strategy focused on capital growth – versus CF+, is not necessarily a higher risk strategy if approached correctly.
— Michael
“i’m really trying to determine is an acceptable IRR for a property over its investment life.”
This is a very subjective question and you should not proceed on the basis of someone else’s preferred IRR [internal rate of return].
For many reasons an investors IRR target can be quite different, i.e. leverage, interest rates, market conditions.
— Michael
Maybe you could think about not relying on the market for capital gorwth but adding value to the property yourself. We have a +CF property in a regional town and spetn alittle on paint/carpet etc and added another $10K to the value after costs.
Cheers
skippygirl
)The property is not going to be eating away at borrowing capacity if,
– it is still positive at 80% of the rent
– it is still positive at 1.5% above the standard variable interest rateCorrect me if I am wrong
So if this is the case AND it also adheres to the other points mentioned then for me its ok.
I am not against capital gain, in fact I think that its the way to go. If you can double your money in 7-10 years then great. But why would you walk away from a deal that could potentially generate the cash needed to support a high capital gain neg geared property?
I just think its a different sort of investment that has it ups (no money from my pocket (bar entry and exit costs), no erosion of lending power) and downs (no capital gain)
What do you think?
MarkyMark
Michael, i agree with your thoughts on arriving at a preferred IRR. It is very subjective and i realise this now..
MarkyMark, that’s a great idea about using a +CF property to generate the cash needed to support a negatively geared property with high capital gain… a “cash neutral” investment strategy – i like it! Given your experiance, how many +CF properties are generally required to support one neg geared property?
Thanks everyone for your comments. For someone just starting out i have definitely gained some valuable insights! [buz2]
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